getting the most out of fuel consumers

“High gasoline prices have not changed Americans’ driving habits but they have significantly changed their purchasing habits, as price is by far the No. 1 reason why drivers select a specificgas store. In fact, more than one out of four drivers say they change their behavior to save as little as one penny per gallon.” That was the surprising result of the National Association of Convenience Stores (NACS) 2007 Consumer Fuel Report.

The report, based on a nationwide survey of 1,238 drivers, is significant because convenience stores sell an estimated 80% of the gasoline in the U.S.The findings also represent a significantshift in consumer behavior over the pastseven years. In 1999, a NACS consumerstudy found that price ranked behindconvenient location as the primary reasonwhy consumers select a gas store.

With increased customer sensitivity tohigh fuel prices, there will be a wide-rangeof winners and losers who share one thingin common: they are desperately tryingto increase sales in other profit centers togenerate revenue streams.

To build that retail business, chains,even operators that are new to the convenience market, are embracing creativetechnologies to drive customers insidethe convenience store or to the car wash with the fundamentalunderstanding that fuelsales alone will not achieve the level ofprosperity most marketers aspire to.

At Home Depot, for example, videomarketing at the fuel pumps extendsthroughout the entire store and hasincrementally expanded business at thefoodservice counter and in the cold vault,said Marthe Souza, merchant directorfor The Home Depot’s fuel program inAtlanta. The video displays, a collaborative effort between EK3, Dresser Wayneand Microsoft, allows convenience storeoperators to customize promotions, offerprintable coupons, build brand loyaltyand engage in daypart marketing, suchas promoting coffee and breakfast foodsin the morning and soft drinks and snacksin the afternoon.

New to the fuel business, the homeimprovement chain enlisted Dresser Wayne to launch the fuel business. Itquickly learned that fuel sales account for70% of convenience store revenues, yet68% of the industry’s gross profit dollarscome from in-store sales. Because only53% of gas customers visit the c-store,Souza decided the chain needed a bighook to motivate consumers.

“The great thing about video at thepump is its ability to evoke that emotionthat’s capable of generating a visceralresponse from customers,” Souza said.”We want them to see the ice cold beerbeing poured into a frosted glass or thepizza coming right out of the over. That’sa powerful message for someone on theirlunch break or heading home for the evening. They instinctively think, ‘Hey, it’stime to get some dinner or a cold drink.’It’s a powerful message.”

So powerful that Home Depot’s convenience stores boast nine video displaysthroughout the stores, plus the displays atthe pumps. The locations include:

• One 40-inch screen over the grab-andgo foodservice area. It displays food itemsby daypart based on the time of the dayand communicates everything from foodprices to ingredients.

• One over the coffee area that includesa rolling menu of the items available inthe coffee bar.

• A hot foods display that, much likethe grab-and-go display, includes a rollingdaypart menu with price and ingredients.It is pre-programmed to switch over to different dayparts at the appropriate times.

• The cooler area features three 40-inchscreens for cold vault promotions, and

• Three additional wide screens promote specials at the bulk stack area onitems such as cases of beer and soda.

“The motivation for us to add this technology was recognition that fuel salesalone wouldn’t cut what we are trying toachieve, which is a complete convenienceoffering for customers,” Souza said. “Sowith that in mind, the next logical stepwas to invest in systems that will communicate an effective marketing message tofuel customers that stimulates their sensesand moves them into the conveniencestore.”

Investing for today
The extremely difficult challenge formarketers is that, as part of the previouslymentioned NACS Consumer Fuel report,consumer price sensitivity has intensifiedcompetition among retailers, resulting indeclining gasoline net margins over thepast few years to approximately a pennyper gallon.

NACS estimates that the break-evenmark-up for a gallon of gas was 13 cents in2006, and the Oil Price Information Service(OPIS) reports that in 2006 the nationalaverage gross margins on gasoline were13.76 cents per gallon. The typical fill-upat a convenience store ranges from 10 to 12gallons, according to NACS estimates.

Consumer price sensitivity alsoimpacts retailers, as one in four consumerssaid they buy less inside the store whengasoline prices are high. Compoundingthe bad news is that customers are muchmore likely to pay with plastic when gasoline prices are high. Nearly half (47%) ofall drivers said that they are much morelikely to use a debit or credit card whengasoline prices rise, leading to additionalcredit card interchange fees for retailers and potential increases in personal debtfor consumers. As it stands now, NACSestimates that more than 85% of all fuelcustomers use credit or debit cards eroding margin and industry profitability.Credit card processing in 2006 jumped astaggering 22%, rising $1.2 billion to reach$6.6 billion, and for the first time ever,topped overall industry profits. Creditcard fees now are the industry’s secondlargest expense, accounting for 8.3% ofindustry gross margin dollars, secondonly to total labor expenses, 33.5%.

Enhancing margins
But marketing alone may not be theanswer. Experts recommend a two-headedapproach to also protect the margins theyare getting now from falling any lower.One way fuel operators can boost profitability in this area is to protect themselvesagainst wild price swings by enrolling in amargin enhancement program (MEP).

Margin enhancement can help marketers shield themselves from thewholesale-to-retail margin squeeze asprices move higher. “C-store ownerstypically experience a squeeze in margins in sideways to higher markets, butonly experience improving retail gasoline or diesel margins when wholesaleprices decline,” said Darren Dohme, managing partner of Champaign, Ill.-basedPowerline Petroleum. “This is because thestreet price usually doesn’t move down asfast as the wholesale price.”

This is where margin enhancement isits most effective. Here’s how it works:Normally gasoline margin enhancementis put on the late winter seasonal low timeframe for the summer driving season. Lastyear, this program could have been executed at approximately $1.20 for the Aprilthrough September NYMEX price strip.The MEP has a 10-cent per gallon payoutas long as the gasoline market for each ofthose months, April through September,has an average price settlement at orabove $1.20 per gallon on the NYMEX.

This 10-cent payout enhances marginsin a sideways to higher market, when retailmargins shrink. Margin enhancement hasa declining payout penny for penny forthe first 10 cents down below $1.20. Thiswould give marketers a breakeven valueat $1.10. In one example, a marketer waswilling to accept the risk penny for pennyon any market settlement under the $1.10area. His assumption was that if gasolineprices are that low, their street marginswill be substantially higher and can affordthe loss on the hedge.

“The strategy has worked well all yearbecause of the continually trending higherprices,” Dohme said.

Two out of three drivers saidprice is the “most important” factor whenshopping for gasoline, while only 22%say location is most important. Combinedwith consumers’ “second most important” factor, price was important to 88%of consumers surveyed.
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