The World's Unsexiest Business
adding a little sizzle to the convenience store industry
Not too long ago, our beloved country (United States of America) was engaged in an arms race of rather epic proportions. And we're definitely not talking about one borne of blood, sweat, and hernias demonstrated by sweaty lululemon types flipping monster tires down Melrose Avenue. In case there was any confusion, that's the one both showcased and witnessed at your local cross-fit gym. The indisputable serious kind of race is the one that had the potential consequence of being 'game over for humanity'. And while it may have seemed to be more of a competition over who wields the biggest stick rather than what that big stick could actually destroy, it definitely was not not be taken lightly. Because back then, a contingent of influential social media users weren't able to poke fun at it.
And then meme it to death.
But back in the height of 'race', was the buildup all just simply predicated on a series of idle threats? While I'm not very well versed in political history or strategy, I'd like to think about it from another perspective. It's no secret that defense contractors were making out like bandits and while the (nuclear) weapons that were being allegedly built at breakneck speed were well 'tested', they were never actually intended to be launched. And that very well could have been the entire purpose of the race itself.
Follow the money trail to other industries such as oil and gas and the sphere of monetary gain grows even further. So it shouldn't come as a shock that many industries indirectly profited from the frequent geopolitical stability shocks occurring during this period. Some historians have referred to this phenomenon as war profiteering. For some not- so-light bedside reading check this book out on the history of war profits.
Where am I going with this? Uncertainty warrants a price premium.
As we entered the digital era, the speed of information to the general public rapidly accelerated. So now those former shocks were met with dampened price volatility.
An Enrichwise graphical timeline below sums it up pretty nicely. Pay close attention to the time of the Arab Spring/Japanese tsunami. Even in a period of marked economic, political, and social instability where "strong demand [and] stagnant supply" were witnessed, the price continued to head lower.
So what does all of that have to do with realizing more profit per gallon at the pump?
With every geopolitical conflict, oil conglomerate price manipulation tactic, government supply report, refinery outage, or even just a run-of-the-mill supply and demand equilibrium adjustment, some version of price warfare ensues.
Let's focus on the supplier before we go the street level.
A couple of years ago, a Southern California refinery outage occurred quickly resulting in a large spike in prices at the pump. According to the US Energy Information Administration:
"On February 18, an explosion and fire occurred at ExxonMobil's refinery in Torrance, California. The Torrance refinery, the third-largest refinery in Southern California, has about 20% of the region's fluid catalytic cracking capacity and is an important source of gasoline and distillate fuel oil supply for Southern California."
20%? Large but not crippling. And how long until the refinery comes back online? It may last hours, days, weeks, months, etc. But that's all just noise.
The skeptic in me doesn't want to believe the stated reason for the outage. Looks to me like refiners are acting like state run stalwarts in a supposedly 'de-regulated' environment. But unless you have exclusive access to another refinery's product, the price being handed down to you is final. You're the prisoner here but there's only a dilemma if you haven't reasonably anticipated this. Factor it in to the cost of doing business and move on.
With that being said, I'm far less concerned with the how and why and more with the what should happen next.
Plotting out a logarithmic standardized chart of unleaded (87 grade) fuel purchase prices (average of major oil refiners), we see an upward trajectory occurring nearly a month prior to the outage and then accelerating until just over a week at which point it starts to taper. By no means could you have really predicted the shock. Sure you could have seen a rising moving average trend or other borrowed stock market indicator, but you're not exactly running a hedge fund here. So keep the betting to a minimum.
Data Source: Internal (Prices are logarithmic adjusted)
Now for the good stuff -- how do you react?
Now that you've figured out how to deal with the oil companies, how do you deal with that a-hole across the street who just doesn't want to cooperate? And by cooperation, I'm not suggesting you engage in any FTC eyebrow raising measures.
Trying to collude or price fix is illegal. That also goes for selling unbranded gas at branded sites.
So you've got three options to choose from with what appears to be a form of prisoner's dilemma. Indirectly these options might even be considered measures of brand equity.
Low: High throughput, low margin
Pros: You've literally got hundreds if not thousands of visits a day. Be creative with what you can do with that kind of traffic (promotions can do especially well here). Perhaps consider starting a political or social movement with those impressions? Just kidding.
Cons: Drive-offs galore, maintenance cost is significantly higher, consumer is most likely looking for a dirt cheap deal with little to no spend inside the store or the purchase is restricted to tobacco/OTP products. When a huge price spike occurs and your historically high price competitors undercut you (rack price jumps above DTW) forcing you to operate at razor thin to negative margins.
Mid: Medium throughput, midpoint margin
Pros and cons are a combination of the Low and High tiers
High: Low throughput, high margin
Pros: Fewer drive-offs, less maintenance
Cons: C-Store sales are proportionate to number of customers (if located in a non-pedestrian friendly area). You have managed to secure a reputation for being ballsy and sometimes the hateful admiration/envy of your peers,
Now consider the following set of prisoner's dilemma matrices.
The above study (conducted by data services firm Nexgence) encompasses a two year period (2014-2016) at 20 locations with one competitor at the same intersection (or within 1000 feet). All locations are located in the greater Los Angeles area. Some competitor data was furnished while the rest was extrapolated based upon estimated fuel deliveries.
The best bottom line outcome results in both 'prisoners' going with a High (100) strategy while the worst occurs when both engage in a Low (40) one. Given that gas station owners seem to prefer undercutting each other*, the likelihood of the latter is much more common than the former.
*Of the 20 locations analyzed, 12 exhibited Low strategy tendencies
If you are able to set the rules of engagement and correspondingly make the first move, then go with a Mid strategy. It's not only more sustainable, but can also help you weather price shocks and an 'inverse' pricing (DTW over/under rack) scenario. But that's not to rule out special *temporary* situations where you might need to adopt a polarizing strategy just to capture any lost throughput (or profit).
For a prisoner's dilemma analysis of more than two locations in very close proximity, stay tuned to this channel.
And how about what consumers think as they approach a pair of competitors?
8% Drive on by
This came about with a perception of either being too greedy or totally neglected.
Like you literally are thinking to yourself 'no way in hell man'!
8% Neglected Business
Dumpy place that's also dirt cheap but possibly risk getting a little water along with a whole lot of low quality gasoline.
Split decision. Maybe you will. Maybe you won't.
20% Masked Profiteers
Looks like these guys are out to make some money but have made you feel that you should throw 'em a little cheese.
20% Cattle Herding
Come one. Come all. The low price point gets 'em in the door and keeps 'em coming.
28% (7) Brand Speaks for Itself
The major branded sites that adopt a Mid pricing strategy.
Price is one thing.
But, when all variables are considered to the consumer, branding appears to be the most important!