The World's Unsexiest Business
adding a little sizzle to the convenience store industry
I’ve purposely omitted nearly all analysis on the gas station side of the CSGS economics equation because it’s been covered quite extensively by various industry publications among other internet media outlets. However, the reason I want to address fuel tank temperature correction is that for gas station operators in Southern California during the summer, depending on how high the mercury can soar, this can be a sizable (albeit somewhat predictable) windfall.
But how do you maximize its contribution to your bottom line?
For this narrow three month window, it may be more worthwhile to consider a more competitive pricing strategy which will enable to you to sell more gallons thereby increasing the potential for more temperature corrected fuel deliveries. But to be able to do so you’ll need to determine the most optimal reduction in margin which hinges on correctly forecasting price elasticity.
Simply stated, how many pennies of margin do you reduce for each daily thousand gallons that you’d like to sell more of?
Ideally, you want to be able to preserve as much penny margin (per gallon) as possible for each incremental gallon sold.
Mathematically, here are the variables you’ll need to optimize:
Plotting out a cross section of how a sample of 15 locations have performed over a two year period (2014 - 2016), notice how there isn’t a uniform drop in margin for each incremental 1k gallons. The reduction in penny per gallon margin starts to ease as we approach 10k gallons per day of throughput.
Assume the baseline temperature where no temperature correction exists (neither expansion nor contraction) to be the industry standardized level of 60 degrees Fahrenheit and then an average summer delivery to be adjusted to 100 degrees.
*** WAIT FOR IT ***
Why the pomp and circumstance? We truly thought we were going to be onto something. However, as it turns out, we’re better off adhering to the strategy we already had. In fact, higher throughput greatly increases the reliance on this heavily weather dependent windfall income.
At some point, since California seems to have adopted the practice of pushing punitive tax measures onto business owners, temperature correction may become regulated (as is the case in Canada) which means that low margin / high throughput retailers might start to pass those costs onto consumers in the form of higher prices at the pump. That also means it’s a zero sum game for everyone—lower throughput equals fewer deliveries which translates to lower temperature correction income which also means lower tax revenue to the state. Let’s just hope they’re doing the math every step of the way.