By David Zahn, Contributing Editor
The past year was full of surprises. The much hyped hurricane season didn’t live up to its billing, and gas prices that seemed to rise for months plummeted in the latter half of the year. What will 2014 have in store? Volatility along with fuel tax laws, a demand for predicative analytics and a surge in mergers and acquisitions will shape the convenience store industry over the next year.
Fuel prices will increase…and decrease. With retail gas prices this fall at their lowest ($3.17 per gallon) in three years, it is easy to become a complacent fuel buyer entering into the New Year. If there is one thing that is sure, as easily as prices fall, they can also rise. Fuel price volatility is the only constant in today’s market. Expect wholesale fuel price swings of three cents or more 49% of the time and five cents or more 25% of the time. Companies that recognize this reality and have moved away from spreadsheets and back-office systems to manage their fuel replenishment activities are poised to take advantage of this volatility. A price advantage at the pump will continue to separate the winners from the losers both at the forecourt and inside the store.
Mergers and acquisitions: The party continues. Although merger and acquisition (M&A) activity slowed a bit after the 2012 frenzy, there was significant M&A action starting in the second quarter of 2013. This activity is expected to continue into 2014 as the master limited partnership (MLP) craze continues to offer huge multiples. With the big getting bigger, expect increased completion as these companies double down in existing markets and enter new ones. Small- to mid-sized retailers lacking the operational best practices and systems found in these bigger companies will need to differentiate or automate to compete at the pump and inside the store.
More, not less government. As the federal fuel tax (standing at 18.4 cents a gallon since 1993) and many states’ fuel taxes no longer have the same buying power they once had to maintain and expand our infrastructure, states will continue to explore ways to increase revenue. They will look at increasing current excise taxes, tying existing taxes to inflation, and experiment with different revenue sources (e.g., Oregon’s vehicle mileage tax pilot). With California, Oregon, and Washington on the low carbon fuel standard bandwagon, more Obamacare taking hold nationwide, and Renewable Identification Numbers (RINs) continuing to exert influence at even lower requirements; governmental regulation will still drive cost within the downstream fuel industry.
With a D+ from the American Society of Civil Engineers on U.S. infrastructure and $3.6 trillion of investment needed by 2020, it is clear that no single solution will help states cover infrastructure funding gaps, so expect to see more toll roads, increased vehicle registration fees, and additional borrowing via bond amendments. The advent of electric vehicles, hybrids and natural gas fueled fleets will also spur many states to examine current rules and rates for these alternative fuels. Count on complexity and fluidity in fuel tax laws to remain.
Demand for predictive analytics for fuel management will increase. Fuel is a thin margin business when compared to in-store profit centers. Same as it ever was…but maybe not. As roughly 68% of revenue still comes from fuel, convenience stores will accelerate use of predictive analytics to eek out additional fuel margin. Using data and fuel management automation best practices will help companies not only understand, but ultimately influence their net landed cost of fuel. In 2014, retailers will learn that predictive analytics solutions can help them better compete through optimized purchasing and cash management.