Marketing Business Drivers
Lesson Overview
The Marketing Business Drivers Lesson consists of the following topics
- Business & Profitability Drivers – Retail
- US Retail Network Market Share
- Retail Channel Efficiency
- Retail Site:Fuel Efficiency
- Retail Site: Merchandise Efficiency
- Retail C-Store Margin
- Retail Margin Calculation: US Gasoline Example
- Business & Profitability Drivers – Wholesale
- US Wholesale Market Share
- Wholesale Channel Efficiency
- Wholesale Margin Calculation: US Gasoline Example
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Retail Business and Profitability Drivers
The key business profitability drivers which measure the ultimate success of petroleum product marketing operations are:
Market share
The measure of sales volumemoved through the retail or wholesale channel, not only in absolute terms, but most importantly relative to the competition. The ratio of each company’s sales volume to the total industry sales is called market share, and it is measured by a refiner or retailer in each trading area where it operates.
Efficiency
The cost of operation per unit sold.
- For retail, the refiner or independent marketer has investment and expense associated with owning and operating retail sites, maintenance, taxes etc.,- as well as a regional sales force.
- For wholesale, the refiner has investment in credit and receivables and processes and systems to manage stock and the sales contracts – usually with a small, national sales force.
Margin
The difference between the cost paid for a product and the price received upon resale of the product. Both channels are driven by margin….
- The retail channel has lower volumes and higher margins, and the volumes are steady or ratable.
- The wholesale channel is characterized by high volumes and low margins, and the demand is more volatile.
Market share and margin are inversely related. A lower price (and reduced margin) can build sales volume – but overall profitability can deteriorate.
US Retail Network Market Share
Even considering the positives for branding, retail petroleum, for all practical purposes, is a commodity product. One measure of brand value is the size and scope of the brand’s service station network. This includes all sites where the brand logo is present – no matter who owns the real estate or operates the site.
The recent US ranking retail site numbers are shown in the chart. With the large number of sites owned by a refiner, the total site counts are quite stable from year-to-year unless a strategic decision is made to abandon a market or a merger occurs and sites are re-branded as part of the process.
In a specific market however, refiners are constantly reshuffling their branded retail site portfolio in response to supply and market changes – adding gasoline stations where they are more competitive, and closing stations where they are less so.
Retail Site Development
Gasoline retailers are faced with an ever-changing environment. To continue to balance their retail site networks, retailers have the following priorities.
Landbank
The most strategic decision in building a network is location. Refiners and independent marketers will acquire property simply to be held for long term (10-15 years) future development, or to prevent competitors from establishing a foothold nearby.
New Site Development
The goal is to maximize station sales with a minimal investment, while taking care not to cannibalize sales at nearby same-brand stores. Local demand rises with new home construction and business start-ups and relocations, so new real estate developments are often are the best locations for new stations.
Modernization
This phase is where most mature market retailers across the world are making investments today. A major mod is adding another format to a site, and a minor mod is simply painting and cleaning up the presentation.
Customer Targeting
Throughout the life cycle of the station, creative marketing programs incorporate the findings of customer research are used to attract targeted customer and outsmart competitors.
Retail Site Success Factors
The most successful oil companies survey their customers frequently, to make sure their supply offering is satisfactory to the retail customers, and that they stay competitive.
Numerous surveys of thousands of retail driveway customers have identified the eight factors listed on the chart as being most important in purchasing gasoline at a site (in order of importance).
A common survey tool used in the US is a Mystery Shopper technique where professional surveyors pose as customers to get data on the shopping and service experience at a particular site.
Retail Channel Efficiency
The retail business is low volume and high margin business, with a lot of capital needed to maintain and expand the branded service station network. For the refiner and independent marketer, efficiency means expense management and return on capital employed and concentrates on the following items:
- Site land acquisition and facility selection
- Site maintenance, often using regional maintenance and painting contracts
- When dealers own the real assets – the refiner still owns and manages some combination of tanks, pumps and signage
- Recruiting and running a local sales force
Success in managing retail marketing expense is complex. It is associated with owning, staffing and operating a branded service station or C-store network. Selecting and training the dealers is another high cost of marketing for branded sites.
Retail site operators must balance the different control issues and efficiencies needed between the (bulk) fuel and (packaged) merchandise inventories at each site.
Retail Site Fuel Efficiency
Retailers must manage both fuel and merchandise volumes and margins to maximize total revenues. Average fuel sales volume per month in a particular market is the most common and important indicator of retail station volume efficiency.
A higher throughput supports an outlet’s ability to spread its fixed costs over a higher volume of sales, as well as the ability to sustain low retail margins.
The chart shows the way fuel efficiency varies widely with retail format – where 1X equals 25-30,000 gallons/month in the US. The tradeoff is that site cost and investment increases rapidly with the more efficient formats.
As the chart shows, the best of the refiner formats cannot compete with hypermarket fuel volumes.
Retail Site Merchandise Efficiency
Merchandise efficiency in the retail convenience store format is measured similar to any other retail store operation. Three of the key factors are:
- Margin, which is measured as as a percentage of selling price
- Product sales turnover, measured in the number of times the inventory is sold in a year
- Reduce shrinkage or loss of merchandise from the site using efficient stock control processes and systems
Hypermarkets are well known for their success at managing merchandise – it is their core business, and they have internal processes and systems to be successful merchandisers. Refiners are new to managing merchandise and it is a high cost part of their operation.
Hypermarkets in the US and Europe price the fuel at their locations to build traffic into the store; and are willing to sell fuel at much lower prices than other retailers. This is the major reason that they continue to take fuel market share from refiners.
Retail C-Store Margin
In C-stores, the margin on the non-gasoline items is about 30%, and can supplement the lower gasoline margin at the site. The combined average site margin, even though it is substantially better than pure gasoline, has been deteriorating over time as more and more stores (and competing formats) have appeared in the marketplace.
It is important to note that C-store operations and profitability are measured using a different margin calculation. C-store margin is measured in percentage of selling price. This is the way that a retailer defines margin. This is not a motor fuels wholesale or retail (dealer) margin which is measured in cents-per-gallon.
As shown in the chart the gasoline margin has been decreasing. Two causes for this decrease are:
(1) there are a lot more C-stores today, and
(2) gasoline prices have been rising, and its margin as a percentage of the increasing sales price has been dropping.
Retail Margin Calculation
US Gasoline Example
This chart illustrates how retail pump prices affect retail margins. The Oil & Gas Journal tracks and reports these margins monthly for the US.
The street price a retailer will charge for gasoline on any given day will not be equal to the cost to manufacture, transport, and sell the gasoline at the station (with a reasonable return on investment).
Rather, the street price will be set based upon the prevailing market conditions. Most gas station dealers typically survey retail prices at nearby competitor stations or C-stores at least once a day.
The calculation in this chart shows how the street price translates to a retail (site) margin.
The retail margin is the difference between the street price (without taxes) and the wholesale DTW price (or delivered cost) for the product. This is also called the dealer margin and gives the site operator the needed revenue to run the retail station business.
Wholesale Business and Profitability Drivers
The key business profitability drivers which measure the ultimate success of petroleum product marketing operations are:
Market share
The measure of sales volume moved through the retail or wholesale channel, not only in absolute terms, but most importantly relative to the competition. The ratio of each company’s sales volume to the total industry sales is called market share, and it is measured by a refiner or retailer in each trading area where it operates.
Efficiency
The cost of operation per unit sold.
- For retail, the refiner or independent marketer has investment and expense associated with owning and operating retail sites, maintenance, taxes etc.,- as well as a regional sales force.
- For wholesale, the refiner has investment in credit and receivables and processes and systems to manage stock and the sales contracts – usually with a small, national sales force.
Margin
The difference between the cost paid for a product and the price received upon resale of the product. Both channels are driven by margin….
- The retail channel has lower volumes and higher margins, and the volumes are steady or ratable.
- The wholesale channel is characterized by high volumes and low margins, and the demand is more volatile.
Market share and margin are inversely related. A lower price (and reduced margin) can build sales volume – but overall profitability can deteriorate.
US Wholesale Market Share
The chart shows the wholesale market share in the US for 2006, where annual wholesale gasoline sales approach 140 billion gallons. One point of gasoline market share represents significant volume and margin potential.
Accurate market share information is not public information. Most companies have internal analysts that gather and generate more accurate market share data. It is difficult to obtain and the tools are often considered to be proprietary.
Market share dominance gives a twofold benefit to a refiner or reseller:
- Pricing power with end user customers, and
- Increased flow through its fixed infrastructure of terminals and tanker truck fleets to allow the refiner to spread its fixed costs over more volume, thereby decreasing unit operating costs.
As shown in the chart, ExxonMobil volume jumped 31% from 2005 to 2006. This sizable one year increase could be related to a new supply advantage or a major change in pricing or customer strategy.
Wholesale Channel Efficiency
In contrast with retail, the wholesale business is a high volume and low margin business. For the refiner, efficiency is about expense and capital control and concentrates on the following items:
- Credit worthiness and close attention to credit limits and receivables,
- Managing stock if some end user or reseller customers have a consignment stock arrangement,
- Negotiating and enforcing a (usually complex) contract and its pricing terms, and
- Recruiting and running a national sales force
Another factor in managing wholesale marketing expense consists of billing efficiency and accuracy.
Wholesale Margin Calculation
US Gasoline Example
This chart illustrates how retail pump prices affect retail and wholesale margins.
The calculation that this chart shows is how the street price translates to a wholesale margin.
The wholesale margin accrues to the refiner or reseller supplier. It is the difference between the DTW price to the dealer and the spot price that the refiner-supplier could have achieved in a bulk market sale of the product at a spot price.
Ideally, wholesale margins will cover the following costs for the refiner-supplier:
- competitive discounts
- credit terms
- the carrying costs of receivables
- the inevitable bad debts
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