fuel marketing

Miller Oil nets higher fuel margins

Three years ago Miller Oil Co. had been taking a beating at the pumps. The market had inverted for nearly three months and Miller's fuel volume was, pardon the pun, in the tank—a 10% to 15% decline per year over a three-year period—due to competitors pricing below cost. The company needed to find a way to stem the declining volume while still hitting margin targets.

Jeff Miller, president of Miller Oil (Norfolk, VA), turned the focus to the inside of the store while searching for a better way to handle his persistent fuel marketing challenges. Eighteen months ago, a colleague directed him to pricing solutions provider KSS (www.kssg.com). KSS introduced Miller to PriceNet, a technology that allows the company to remain more nimble in its pricing strategies. Thanks to its ability to make smarter and quicker pricing decisions, Miller Oil finished the fiscal year exceeding its own fuel volume budget by 4.5% and hitting its gross margin target.

The PriceNet software is designed to support all aspects of daily retail fuels pricing and performance management. The system tracks relationships between prices and volumes by location and by grade, and provides operations support by streamlining the data-gathering, decision-making and price-implementation processes. With the program's "rules-based" pricing capability, PriceNet applies documented pricing rules consistently to meet a retailer's existing pricing policy goals. Retailers can set volume goals by store, zone and/or network, and PriceNet will recommend prices to steer toward those goals while maximizing profit. High levels of data and process automation enable retailers to manage their network by exception—focusing attention only on the sites that need it. The result: more margin, achieved volume targets, a more consistent price image and no costly pricing errors. And PriceNet is designed to integrate with retailers' existing systems, requiring no additional resources or extensive training.

When Miller Oil purchased the software, it provided three to four months' worth of price surveys to build a history and backloaded it into the system. It then went forward on a daily basis, having managers input price surveys as part of their daily duties. With data automatically uploaded every 10 minutes, PriceNet matches surveys, prices, inventory costs, budgeted volumes and margins by grade, and then makes recommendations for pricing.

"The software lets you set priorities; ours happens to be volume," says Miller. "You can put ranges in, for both volume and margins. Ours is volume first, so we price aggressively to gain volume. Once we're close to our volume target, then we work toward margin."

It used to take Miller Oil four hours to analyze its data before making price changes on gas. The process has since dropped to half an hour—and that quick response assures the retailer an edge.

"Now we're responding much quicker to market changes and competition," says Miller. "We're pricing much more accurately and consistently with our goals, and it's a great time-savings, eliminating a lot of the internal process. Before it was all manual and very cumbersome. We weren't staying on top of anything; we were getting bogged down in the process.

"And we really exploded some myths," he continues. "We no longer have to price as a block of stores or hold fast to specific deltas from one grade to another. Each store can stand on its own for pricing. So if we hit our target on regular but not premium, we can recommend a lower delta from regular to premium, and give premium a lift in volume." KB

Cover your assets

Setting pre-authorization credit limits at the pump was designed as a convenience for the customer and as a safeguard for retailers—but the system has its flaws. If a customer's account drops below the $35 pre-authorization limit, for example, and he wants to pump $10, it's a no-go— even though he has the money in his account to cover $10. And with gas prices now above the $2 a gallon mark in some markets, the $35 limit isn't sufficient for some customers to fill their tanks. So retailers bump the limit to $50 to accommodate those customers, but end up alienating patrons who want less than $50 in gas and don't have enough to cover the pre-authorization.

Oistein Andreassen, a systems analyst for 165-store USA Petroleum (Thousand Oaks, CA), is no stranger to this problem, but he's found a solution with the help of electronic-payment processor, Paymentech (www.paymentech.com). As of spring 2003, Paymentech has made available new software that allows gas customers to be authorized for whatever amount they have available in their accounts and automatically locks the pump at that level.

"We were going to have to drop our pre-authorization level to $35 again because too many of our customers were being declined, but now we're able to keep it at $50 and we're accommodating everyone," says Andreassen. "No one knows how much gas a customer is going to need. If they're using a card at the dispenser, they're paying in advance, but even the customer doesn't necessarily know how much it will take to fill their tank. We have to look at the potential for what they could buy. With the Paymentech technology in place, we can cover our bases and decline fewer customers."

The software was introduced in 2003 for VeriFone Ruby POS systems (versions 104 and higher), which sends a request for authorization back to a host system that verifies funds and sends approval back to the POS to communicate with the gas pump.

Andreassen says that, as of summer 2003, 140 of his chain's stores inherited the partial debit capability when they converted to Ruby systems. In six months, Paymentech anticipates other POS systems will support the function.

With its partial debit capabilities well underway and the use of debit/check cards on the rise, USA Petroleum is pursuing plans to convert more of its credit customers to debit transactions, which would help the chain save on credit card fees. The chain has programmed its pumps to prompt customers for their PIN if a customer ignores the prompt for debit or credit when they insert their credit card. (Previously the pump would default to a credit card function.) Just a day after introducing the prompt, the chain saw its debit transactions almost triple.

"The difference between credit and debit is huge for a retailer," says Andreassen. "We went from just 1,000 PIN-less debit transactions a day to about 4,500 PIN transactions. The prompt promotes a sense of security for our customers and it saves us a great deal on our credit card fees." KB

Low-cost loyalty

Customer loyalty comes at a price to the retailer, but that price doesn't have to be a second mortgage. For many years, Douglass Distributing Co. (Sherman, TX) successfully inched up its total fuel volume using a string of loyalty programs for less than $200 per campaign. These unsophisticated programs from Merit Industries (512-863-8541) helped stores increase fuel volume by as much as 40% in some instances, according to Douglass Distributing President Bill Douglass.

"Each time a customer made a purchase of at least eight gallons, we would notch their punchcard with a weird little punch nobody could duplicate," says Douglass. "When they filled up the card they would win a prize. We've given away everything from designer wristwatches and antique-looking radios to Polaroid-type cameras. We even did some 'win a second car' promotions, where we took old fleet cars, detailed them to look like new and gave those away." Douglass says the promotions were tremendously successful, even though they
did require a lot of employee interaction. His stores benefited from such loyalty programs for nearly 30 years. Then gas margins dried up.

"In Sherman today, I have a 5′ margin," Douglass says. "There just isn't much incentive to offer discounts on fuel purchases when there's no money to be made [on fuel sales]. These loyalty programs are very effective, but they should be reserved for markets with incentive— markets with a decent margin." BD

A fuel gateway

In one fell swoop Larry Kuykendall managed to nearly double his fuel volume and prevent a local grocery retailer from competing for his gallons. Kuykendall, who runs a single Marathon Mart in Robinson, IL, has seen as much as a 40% increase in fuel volume over the past three months. Inside sales have also increased, thanks to a cross-marketing program coordinated through the Robinson IGA supermarket, vendor CCISTech (www.ccistech.com) and a regional grocery wholesaler.

"The grocery store was landlocked and didn't really have the space to put in gas pumps, so they came to me with an idea to offer discounts on gas gallons for merchandise purchased at the grocery store," Kuykendall says. "I've only been doing it for a few months, but the response from the public has been 99% positive. Our volume increases are proof of that."

When customers purchase their groceries, the receipt tells them they saved so many cents per gallon based on select items in CCISTech's Rewards Gateway program. If Jell-O products, for instance, are "on special," a customer who buys one pack of Jell-O might earn a reward of 3′ off per gallon, which can then be redeemed at Kuykendall's store. If the customer buys enough Jell-O, he or she could realistically purchase gas at a retail price of a penny per gallon. Savings of more than $1 per gallon on fill-ups are not uncommon. At that price, the message really resonates with customers.

"We're in a small town of 7,000, so the word-of-mouth is really perpetuating the program," says Kuykendall, who once operated 11 stores but has since " semiretired" to run his single store. "I had a little bit of hardware to install—about $8,000 or $9,000 worth—but I saw the potential. I'll bet with all the extra volume I'm seeing I'll get a return on that investment by the end of the year."

Customers need an IGA loyalty card to collect the cents-off discount. Kuykendall says having scanners at the pumps would save a step, since customers currently have to enter a few numbers at a keypad, whereas a scanner would let them scan a bar code on the receipt. The newly installed hardware enables Kuykendall's store to communicate with CCISTech and the IGA. Once customers make their purchases at the grocery store, the data dumps onto Kuykendall's store PC to make sure customer discounts can be redeemed instantaneously.

Kuykendall invoices the gas discounts to IGA at the end of each month, but he says other retailers may choose to negotiate terms differently. All in all, he says both sides have been pretty happy with the early results.

"We're offering discounts on fuel no one else can match," Kuykendall says. "It's good for my business but it's also good for the supermarket. Customers perceive a much greater value getting 10′ off per gallon on a fill-up than they would for 75′ off on a can of beans." BD