Controlling Fuel Volatility

With gasoline prices again soaring, convenience store and petroleum retailers are investing in software solutions that can help them manage the business more effectively.

By Howard Riell, Associate Editor.

Convenience store operators are feeling the pinch from skyrocketing gas prices, which makes fuel inventory controls even more critical in helping retailers reduce costs and bolster margins while remaining competitive on pricing.

Pressure is undoubtedly building. In mid-September, gas prices, which had been down overall since April, turned up again due to the Midwest drought. The national average for regular gas hit $3.837 on Sept. 9, an increase of nearly 33 cents since July 27, according to the Lundberg Survey.

From shipping on the pipeline in order to avoid volatile rack pricing and dabbling in the spot market to gauge when prices are set to dip or climb to price-optimizing software that indicates where the competition is setting prices, the tools are in place to gain a competitive advantage. Operators need to learn how to use them more effectively.

Explore New Options
But with all the things they could do, the critical item is what they must not do—nothing.

“The biggest thing to remember is that inactivity is not an option,” said Bob Lee, president of Roady’s Truck Stops in New Plymouth, Idaho, the largest branded network of independently-owned truck stops in the U.S. “If you feel you can get away without even an internal investment of time and people, you could lose your shirt. This is a game of pennies—fractions of pennies. You can’t afford to leave pennies on the table.”

As it looked at fuel management services, Roady’s was quick to recognize that a common problem retailers face with manual operations is that they do truck rolls too soon or too late and, depending on which way the cost of fuel is going, that could be a costly mistake. The goal is to top off tanks when prices are increasing and let levels fall when prices are retreating.

Fuel management is a day-to-day activity. According to Lee, fuel managers either need to outsource or allocate assets to the fuel business. “Ignoring it and hoping the market goes your way is the way to bankruptcy,” he said.

When it comes to setting up purchasing programs, fuel has always been one of the most difficult categories to manage. “For starters, there are such large dollar volumes to control, then there is such low margin,” Lee said. “The savings come in when fuel managers can look at an individual rack and utilize some combination of contracted and spot volumes. We’re able to save in the neighborhood of 2-4 cents per gallon for a particular truck stop out there.”

Lee has been working with FuelQuest, which provides fuel management, tax automation and compliance solutions for retailers and distributors of petroleum products to control fuel costs.

Strength in Numbers
Thanks to the partnership with FuelQuest, Roady’s aims to leverage the buying power of its nearly 300 truck stops in 43 states to give them the same fuel purchasing power and fuel management capabilities employed by larger company-operated chains.

Lee estimated that the programs put in place by Roady’s management can lead to as much as six cents per gallon of total savings.
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. When stock prices increase, they know terminal prices will go up as well.

“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.”

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 year 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,” Lee 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.”

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.

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 could 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. 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.

“There are a lot of tools at your disposal. Find what works and use it,” Lee said.

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