Developing a Fuel Strategy Amid Soaring Costs

High gas prices mean more headaches for retailers. Experts weigh in on the best ways to survive the market volatility.

By Erin Rigik, Associate Editor.

With gas prices skyrocketing, retailers are feeling the squeeze from every angle. But there are unique opportunities for savvy retailers to reduce fuel expenditures, which will afford them a better margin while remaining competitive on street pricing.

These strategies include shipping on the pipeline in order to avoid volatile rack pricing, or dabbling in the spot market to gauge when prices are set to dip or climb. Many chains are also adding price optimizing software that clues them in to where the competition is setting prices. The bottom line is the more prices rise, the more retailers are hurting.

“The higher the gas price, the more our members are paying in credit swipe fees. If gas is at $3 a gallon, we’re getting charged seven cents and when it goes to $4 a gallon we’re getting charged nine cents,” said Ned Bowman, executive director of the Florida Petroleum Marketers and Convenience Store Association. “Plus, as the price hits $4 a gallon, whatever disposable income people have to buy a cup of coffee or a sandwich inside the c-store has been spent on gas, so we’re not getting the additional sales.”

Making Sense of the Market
What’s more, prices are fluctuating intensely, making it more difficult to know how to plan gas purchases so operating capital is tied up in underground inventory, especially since recent price hikes are being driven by impulse reactions to unrest in the Middle East, rather than supply and demand. “We’d like to see the speculators get out of the market in New York,” Bowman said, echoing the sentiment of many retailers.

As prices trend upward, retailers are struggling to stay competitive on price while protecting their margin.

“We’re completely at the mercy of what suppliers put out there,” said John Maling, director of procurement for Ace Energy, which does all the wholesale fuel buying for The Spinx Cos. Spinx operates more than 65 c-stores in South Carolina and North Carolina. “We have some ability to raise our prices, but not much, so if prices are rising quickly like they have the last few months, that squeezes our margins because we’re not able to move our street prices as fast as our costs are being affected by the wholesale prices,”

Spinx, which offers its own gas under the Spinx brand, doesn’t have the luxury of a contract through a major gas brand, so it must face the challenge of buying for its stores on days with strong upswings in prices.

“That’s why we try to stay away from the rack as much as possible,” Maling said. He recommended gaining a general idea of what the trend is and then setting a one-year plan. “Once you’ve determined if the market is heading higher or lower, you want to put a plan together to give yourself the ability to capture some of that upward movement.”

The market is particularly trying for chains that aren’t high-volume retailers—those that aren’t getting loads on a daily basis. “A lot of times what they have in storage is priced at a certain price, and they have to sell it at the market price, which is basically what their competitors are doing. So if wholesale prices have gone up and they want to charge more at retail, but the competitors around them haven’t raised their prices, it’s difficult to do that because they’re going to lose volume and inside sales,” said Fred Rozell, director of retail pricing for the Oil Price Information Service (OPIS), which offers a fuel price benchmark for supply contracts and competitive positioning.

This reality means that in the current environment, more retailers are monitoring wholesale prices. If they see the stock prices have increased, they know terminal prices will go up the following day.

“They might bring a load in ahead of that to get a cheaper price before the impending increase on wholesale costs and vice versa. If the same prices go down, they might want to hold on until the rack prices go lower,” Rozell said. “Retailers really need to watch the whole market and see what is going on upstream because that is eventually going to trickle down to their stations. Anyone who owns and operates a station or is buying fuel at the rack really needs to also monitor what is going on in the futures and spot market.”

But for companies with the resources to avoid it, it’s best not to try to day trade the market. “You will get into problems that way,” warned Maling. How companies set their purchasing strategy, however, depends on their risk tolerance.

“Every company is going to be different as far as what risks they’re willing to take, but unless you want to go to the rack and take whatever price is at the rack that day—which these days has not been a very profitable way to do business—you’ll want to have a plan,” Maling said. “The best way is to look at the total volumes that you’re going to be purchasing and divide it up percentage wise so that you have a supply contract backup you can pull off of when the market moves up.”

If companies have the ability to ship on the pipeline they can gain increased price advantages. But where in the country a chain is located and whether they have the transportation options to access that supply factors into how advantageous this might be.

“Retailers should also consider spot deals, where they have a guaranteed price below the low rack price by locking in a certain percentage of gallons with the supplier,” Mauling said. “The key to making it work is having good communication with your transportation department, so that they know when the markets are going in a certain direction and what type of source they need to be pulling from.”

Price Optimization
With prices fluctuating, retailers are turning to price optimizing software and services that show where the market is heading and how the competition is pricing gas. OPIS, for example, provides a service that shows current retail prices as well as real time fuel pricing at stores within a 1-10-mile radius around each of a chain’s sites.

Truenorth Energy last month added FuelQuest’s Fuel Management System (FMS) and ForeSite. Truenorth supplies petroleum to more than 320 stores throughout Illinois, Ohio and Michigan through its trucking subsidiary. The company plans to use FMS and ForeSite to automate its fuel inventory forecasting, planning and dispatching to reduce operating costs, increase fuel margins in real time and improve truck utilization.

Salt Lake City-based Sinclair Oil Corp., which supplies more than 2,000 Sinclair branded gas stations in 22 states, earlier this year selected RackPrice from KSS Fuels for its fuel price management solution. RackPrice automatically generates price recommendations based on up-to-the-minute data and then prioritizes them according to the chain’s needs and rules. It includes modules for price generation automation, reporting/analysis, competitive price prediction, price-volume modeling and price optimization that should help improve rack margins by optimizing prices across channels and automatically adjusting Sinclair’s street prices as needed.

“Chains need to have software in place that helps do the calculations,” Maling said. “There are a number of them out there, and the larger jobbers can design their own. They need to have not just prediction price modeling tools, but also the ability to compare their racks with other racks and those types of software make it much easier to do that.”

  • Arnacortez

    Some great advice here… Seems like every industry is feeling the crunch. I also got some great insight from this Forbes article: http://onforb.es/jB8jxj

  • NG Logistics

    Natural gas alternative fuels and conversion of existing fleet vehicles in the mix with a total fuel strategy is the way to get control.  Long term  NG fuel contracts can be negotiated which will help add some stability to your decisions and bottom line.

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