- 19 Aug
Fuel Price Management Requires Constant Adjusting In Order To Optimize Retail Fuel Prices
Author: John Keller
It is the job of Fuel Managers to figure out the optimized retail fuel pricing strategy for each of their stores, in each of their markets, in order to maximize their fuel profit contribution to the bottom line. This job has become a daunting task for many, as the retail fuel pricing market has become increasingly complex and is constantly changing.
For example, Fuel Managers who compete against BP dealers report that BP dealers historically have priced their fuel at the high end of the market. The BP strategy has always been to emphasize the quality of their brand name fuel, and even the “green-ness” of their company as they promoted the morphing of their acronym from British Petroleum to Beyond Petroleum.
But in the months following the gulf oil spill in April 2010, BP dealers suddenly experienced fuel sales declines in the range of 10-40%. These dealers had to react quickly. So they reversed their fuel pricing strategy, and began pricing their fuel as the lowest in their markets. A competitor who was once at the high end of the retail fuel price market suddenly became a low price leader.
To further this trend, in June 2010, BP announced they would begin offering fuel rebates of $.01-.02 per gallon to their dealers. Many dealers used these rebates to lower their fuel prices even further, with the hope that price-sensitive customers will be willing to start fueling up at BP stations again when BP has the lowest fuel prices in town.
When competing against BP dealers, Fuel Managers have had to react quickly to this sudden reversal in their competitor’s strategy. They must carefully monitor the daily impact of the BP dealer’s new pricing. Do brands other than BP need to be priced the lowest in town? Are consumers in individual markets willing to pay a few more cents per gallon of fuel in order to avoid the BP brand? If non-BP brands are priced at the same level as BP brands, will consumers opt to buy fuel from non-BP brands in order to avoid BP? Only by carefully monitoring the daily performance of individual store sales, and the relative store pricing in each market, will Fuel Managers be able to answer these questions and find the fuel pricing strategy that works best for each of their stores.
BP and the gulf oil spill is only one example of the dynamic nature of retail fuel markets. The c-store industry as a whole is going through rapid consolidation, where larger c-store chains are gobbling up competitor stores, and expanding to more and more locations. That means the competitive landscape in each market continues to change as store brands come and go. A store next door may be a Shell brand one day, and unbranded the next. A c-store may have three pumps at the beginning of the year, and by the end of the year have 10-12. Small, unassuming manual fuel price signs one day may be replaced by bright electronic LED signs the next. These kinds of market dynamics force Fuel Managers to keep a careful watch on what is happening in each of their markets, and respond quickly with new fuel pricing strategies when the competitive landscape changes.
A third way Fuel Managers may see their markets change overnight is through the adaption of rewards programs. One Fuel Manager recently reported results of a grocery reward program he was piloting with a few of his stores. After only one month of implementing the rewards program at his pilot stores, he was seeing fuel sales volume increases of up to 100% year over year measured by gallons sold. And this was with no changes in his fuel pricing strategy – the relative prices at his stores remained unchanged in those markets. He was almost giddy as he said he knew he was taking market share away from his neighboring competitors, and they didn’t even know what hit them.
These market shifts require Fuel Managers to be diligent in monitoring and measuring the fuel sales performance at each of their stores, looking for sales trends, and quickly adapting to changes in competitive pressures. It may be tempting to some Fuel Managers to blindly follow the guidance of an algorithm that automatically provides optimized fuel prices based on historical data, leaving the human guesswork behind. No doubt, these fuel price optimization equations can be valuable in turning up statistical correlations that may otherwise go unnoticed. But with the reality of how dynamic the competitive pressures are in each market, there is no substitute for the human touch of the Fuel Manager.
Fuel pricing software solutions such as PriceAdvantage from Skyline Products (www.fuelpricingsoftware.com) make it possible to track the constant shifting of the competition in each market. Daily sales data imports from PDI display fuel volume sales trends for each store. And the historical street price trend at each store, along with the price at each competitor, can overlay the fuel volume trend. This view makes it easy to identify a sudden shift in how a specific competitor positions itself relative to others in the market, and whether or not that shift is impacting store fuel sales. Fuel Managers can compare competitor prices reported by Store Managers in the field to the competitor prices reported by OPIS. According to many Fuel Managers, these OPIS reports provide a critical validation check. If Fuel Managers notice a discrepancy between what the field is reporting as the competitor price, and what OPIS reports, they can quickly request a re-survey from the Store manager and get the right information into the system right away.
Without a doubt, the game of fuel price management has grown increasingly complex over the last few years, and increasingly competitive. Annual retail fuel price margins are at an all-time low. But Fuel Managers no longer need to view finding the optimal fuel pricing strategy at each c-store as a daunting task. By using the right kind of fuel pricing software solution, Fuel Managers can have all the information they need in one central command and control location, easy to access, and ready to respond to every competitor’s move.
About the Author: John Keller is the Sr. Product Manager of the PriceAdvantage fuel pricing software division of Skyline Products in Colorado Springs, CO. John is the author of the Fuel Pricing blog at www.fuelpricingsoftware.com.