Retail Marketing

Lesson Overview

The Retail Marketing Lesson consists of the following topics:

Retail Marketing Definition
Co-branding Format
Class of Trade – Retailers
Managing the Dealer Network
Retail Site Formats
Managing the Retail Site
Retail Fuel Pricing Structure
Determinants of Street Price – Global
Retail Zone Pricing

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Retail Marketing Definition

Retail marketing of motor fuels primarily involves the sale of gasoline, diesel fuel (and now convenience store merchandise) through a network of branded and unbranded gasoline stations. Service stations, which first appeared in the US around 1910, remain the predominant outlet for marketing gasoline around the world.

Managing a retail network involves:

Acquiring land and facilities at prime retail locations.
Designing and maintaining a facility that attracts and keeps customers.
Excelling at customer service across all product and service offerings.
Efficiently controlling fuel and merchandise inventories.

In 1973, the US Congress adopted corporate average fuel economy (CAFE) standards to moderate consumer demand, reduce pollution and minimize US dependence on foreign oil. Also, as vehicles became more reliable, service bay revenues declined, and branded service stations changed their retail site format. They began competing on price, and shifted focus from automotive needs to driver needs. Full service gasoline islands gave way to self-service pumps, while mechanics gave way to convenience store clerks.

US Automobile Fuel Consumption

Over the past sixty years the growth in US demand for motor gasoline has resulted largely from increases in the number of automobiles on the road. Had there not been major improvements in automobile fuel efficiency, the growth in US gasoline demand would be far greater.

CAFE legislation called for a fuel economy standard of 18 miles per gallon (mpg) across an automaker’s 1978 fleet of passenger vehicle offerings; and 27.5 mpg across its 1985 fleet. In the 9 years from 1978 to 1987, the average mpg for passenger automobiles in the United States increased 40%. Fuel economy improvement has slowed as more trucks and large vehicles have been added to the US fleet.

Under the new law passed in 2007, the US automobile fleet will be required to meet a 35 mpg standard by 2020, a sizable 27% increase in a twelve year period.

Co-branding Format

Co-branding is a fancy marketing term for co-locating two or more different types of merchandise at one retail site. The biggest move affecting US gasoline C-stores is the integration of a branded chain offering foodservices, such as McDonalds, Subway, Churches Fried Chicken or other regional fast food offerings.

Convenience stores are implementing foodservice for three reasons:

Higher Margins – Gross margins in branded foodservice can run 60 percent higher than almost any other convenience store merchandise. Although the labor percentage for a fast food restaurant is far higher than the average convenience store, the profit after labor and cost of goods sold can be 30-40% versus 12-13% percent for combined gasoline-convenience store formats.

Diversified Risk – Foodservice can reduce reliance on such at-risk merchandise categories such as alcohol and tobacco and help cushion the volatility in gasoline margins.

Image Enhancement – A well-run, credible foodservice operation can enhance a site’s overall image and market position.

It will be interesting to see if this trend moves to other global markets and in what form.

Types of Retail Arrangements

Most refiner branded retailers are organized around three major classes-of-trade with specific types of commercial arrangements as follows:

Company Owned-Company Operated (COCO)

The refiner owns the real estate and operates the site with salaried or commissioned staff. Company-operated stations can be supplied directly or by a a branded reseller supplying transport services. The COCO personnel are often on a different payroll structure than the oil company staff.

Company Owned-Dealer Operated (CODO)

The refiner owns the site, but it is operated by an independent dealer. The Dealer leases the station and land, including tanks, pumps, signs and other equipment from the refiner. The dealer contract includes the lease terms for the facility, and the requirement to buy gasoline at the “dealer tank wagon” (DTW) price set by the refiner.

Dealer Owned-Dealer Operated (DODO or Open Dealer)

The dealer owns the site, but the refiner keeps control of the tanks, pumps, signs, and other equipment. These dealers may have a supply agreement with a refiner or may be supplied by a branded reseller. They may, upon expiration of a contract, switch to another source of supply, including a different brand.

Most independent marketers operate their network of retail gasoline stations under comparable company-dealer arrangements. Oil company sales to Independent Marketers are treated as sales of unbranded product under a term contract.

Managing the Dealer Network

A strong retail gasoline network depends on mutually beneficial long-term contractual relationships with strong dealers.

Refiners and independent marketers that own the facilities (as landlords) and supply the fuel want to maximize return on their investment in the form of rents and wholesale fuel margins.

Dealers, in contrast, want to maximize retail margins – i.e., minimize rents and working capital tied up in fuel and merchandise inventories – while maximizing supply security.

Both want to optimize site revenues.

In determining what to charge dealers for leasing a retail site, the landlord attempts to achieve an economic rent. The economic rent is the return on investment that the landlord would receive if the site is put to its highest and best use today -not the historical cost of the asset.

Once the rent is established, sophisticated incentive formulas based on the site format are used to encourage the dealer to optimize site revenues. As new site formats evolve, and the cost of developing sites increase, dealer fees become complex and more difficult for marketing and accounting departments to manage.

Retail Site Formats

Refiners and independent marketers use a variety of formats to attract and efficiently supply their customers. These formats include:

Mom and Pop sites are older facilities selling low volumes which may have ancillary services such as a convenience store, car wash or service bays.

Classic service stations have a building with one or more service bays for routine maintenance attached, a few shelves of convenience merchandise, or both.

Convenience store facilities have at least 600 sq. ft. of retail space for their primary business – selling food and merchandise – and one or two pump islands with no more than six nozzles total.

Pumper facilities are large service stations with more than six nozzles which may have ancillary services such as a convenience store, car wash or remote service bays.

Hypermarkets are supermarkets or other large retail stores with one or more pump islands in their parking lots from which they sell gasoline at a discount.

Managing the Retail Site

Typically, dealers are responsible for presenting and operating their gasoline stations in accordance with their contract with the station owner or branded supplier.

They are also responsible for managing the day-to-day operations of an increasingly complex array of products and services offered at their stations. These may include:

Gasoline and diesel fuel sales
Car wash services
Routine maintenance services
Merchandise sales
Fast food services
Local promotions and community involvement

Retail Fuel Pricing Structure

The system of US retail or street fuel prices has evolved through the actions of hundreds of thousands of players over almost a century. Retail price varies in response to local competition — with some consideration of underlying costs.

This is why the blue arrow in the chart starts at the street price which drives the consumer pump price more than any other factor in the price tiers.

The other tiers are defined as follows:

Branded retailers purchase gasoline from refiners at the dealer tank wagon (DTW) price, which generally reflects the rack price plus the refiner’s costs for secure supplies, special additives, trademarks, credit cards and advertising.
Unbranded retailers typically purchase gasoline at the rack price, which usually is lower than the DTW price. However, branded dealers have first call on supplies when markets are tight. So as volumes available to unbranded retailers diminish, the rack price can rise above the DTW price.
Retail customers purchase gasoline from the retail station dealer at the street price, which ideally reflects the DTW or rack price, plus station operating costs, state and federal taxes and a reasonable margin. But retail prices are set at the street level. So dealers can get squeezed between the high DTW or rack prices they pay and the low street prices they charge to remain competitive.

Determinants of Street Price

Global

Since the mid-1980s, most governments around the world have taxed crude oil imports and gasoline sales to generate revenues and encourage conservation.

The chart shows the three components of gasoline street price (in US$/litre) and the variation in tax policy for a representative set of counties.

Some, like Belgium, France, Germany, Italy, the Netherlands and the United Kingdom assess taxes of more than $2 per gallon ($0.50 per litre) – much more than the taxes on transportation fuels in the US.

The difference is reflected not only in the relative street prices for gasoline, but also in the volatility of those prices. Since crude oil cost represents a higher proportion of the street price in the US, and crude oil prices are much more volatile than fuel taxes, US retail prices are comparatively more volatile than other parts of the world.

A comprehensive 2001 study of fuel tax policy around the world done by the Australian government is available.

US – Domestic

As shown in the chart, the cost components of US retail gasoline prices include:

Crude oil costs
Federal and state taxes
Refining costs and margins
Distribution and marketing costs and margins

US retail prices are approaching the high pump prices paid in other countries. However, dealer margin – a subcomponent of the distribution and marketing component – decrease substantially as crude oil prices increase, as illustrated in the chart.

Retail Zone Pricing

Most refiners group retail outlets into geographic or market zones and charge their branded dealers in different zones a different delivered (DTW) price for the same brand and grade of gasoline. This practice is called zone pricing. Zones pricing enable retailers not only to be competitive with nearby stations, but also to maximize prices and revenues at each station.

Each refiner has its own zone pricing system. The number of outlets in a zone, the shape of a zone and the number of zones in a particular area vary from company to company, and sophisticated computer models are often used to help manage this activity.