Wholesale Marketing
Lesson Overview
The Wholesale Marketing Lesson consists of the following topics
- Wholesale Marketing Definition
- Classes of Trade – Resellers
- US Reseller Scope & Strength
- Classes of Trade – End Users
- Managing the Reseller Network
- Wholesale Success Factors
- Wholesale Site Types
- Classes of Product – Specialties
- Wholesale Fuel Pricing Structure
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Wholesale Marketing Definition
In contrast to retail marketing, wholesale marketing involves long-term relationships with a few customers to sell bulk quantities of product at low margins. There are two types-of-sale in the wholesale channel:
- Sales to resellers, or middlemen, who distribute product to their own end user customers or retail sites.
- Sales directly to end users – i.e., gasoline and diesel to commercial fleets, or fuel oil to power stations.
The challenge for wholesale marketers is reliable outlet for their products or demand. Refiners want to retain customers in a competitive market where some customers will switch suppliers for a quarter of a cent per gallon price differential.
The challenge for wholesale customers is reliable supply – i.e., receiving product when and where they need it, with the flexibility to change demand up or down when problems arise. Weather, supply surplus or disturbances, seasons and international prices affect both sides of the wholesale relationship.
In the latter half of the 20th century, refiners began outsourcing their distribution function by selling off segments of their distribution network to resellers. This trend has continued because the refiners want to:
- concentrate their capital and resources on needed refining investments
- continue to keep the branded network strong as they divested the real assets associated with the site
Refiners compete for access to the strongest resellers. In some cases, refiners and branded resellers have even entered into agreements by which they jointly own a network of retail outlets in a given market.
Resellers
Wholesale marketing departments typically are organized around classes of trade – i.e., customers with similar contracting, credit and technical needs.
Resellers typically are classified as follows:
- Branded resellers deliver tanker loads of branded gasoline or diesel fuel from the refiner to retail stations owned and/or operated by the refiner.
- Unbranded resellers deliver tanker loads of unbranded gasoline, diesel fuel or heating oil from the refiner to their own terminals before distributing it to their own or other retail sites. These resellers may also be independent marketers who have their own chain of branded (or unbranded) retail stations. Today, many unbranded resellers have their own sophisticated distribution networks and do not purchase product directly from a refiner, but on the open spot market.
- LPG and heating oil retailers distribute branded or unbranded LPG and heating oil to homes, farms and small industrial users.
US Reseller Scope and Strength
In the US, SIGMA (Society of Independent Gasoline Marketers of America) is the industry association representing a substantial set of the motor fuels reseller population.
SIGMA membership is open to all motor fuel resellers and independent marketers that do not share common ownership with a refinery. The association represents a substantial portion of US wholesale fuels volume and SIGMA members:
- Sell about 30% of the USA motor fuels, through 35,300 sites
- Have annual C-Store sales of $31 billion
- Employee over 300,000 staff
End Users
End users typically are classified as follows:
- National Accounts purchase product in bulk for delivery at multiple sites across the country. In the US, National Accounts usually include the railroads and interstate trucking fleets.
- Commercial and Industrial (C&I) Accounts purchase product in bulk for delivery at one site or to one region. To serve a municipality, for example, the supplier often must maintain storage capacity near the city.
- International Aviation and Marine Accounts purchase product in bulk for fleets of airplanes or ships across the globe. Most refiners maintain marketing operations in many countries to service airlines and vessel fleets because they pick up fuel across the globe. Different (and complex) supply, pricing, duty and tax structures exist in every country. With continued high jet fuel prices, many international airlines are required to use a pre-payment invoicing system to ensure there is no credit risk.
Managing the Reseller Network
Branded network retention is a critical focus in marketing, whether operated by a refiner or a branded reseller. So refiners compete for contracts with the best reseller operators to increase their brand presence and market share.
In a given region, refiners want to increase sales of their branded product. Resellers want to ensure stable supplies for their end users in an environment of consolidating refiners that decreases their supply sourcing options.
To retain strong resellers and encourage sales of their branded gasoline, refiners will offer resellers incentive money to be used for new signage, equipment and other items related to updating the presentation at resellers’ branded retail stations. Incentive money is regarded as a quasi-loan with the reseller earning credit based on gallons of branded gasoline sold at retail, or gallons of unbranded gasoline sold to other outlets.
Through incentive money loans, resellers are provided with badly needed capital and have a partner in the competition for marker share. The supplier gains controlled market share with no operational responsibilities at a much lower cost than company-operated or dealer-operated locations.
Wholesale Success Factors
Numerous surveys of thousands of resellers and end users have identified the following factors as being most important in selecting or working with a refiner or supplier, in order of importance:
- Supply stability
- Price competitiveness
- Product quality
- Supplier communications
- Credit card programs
- Brand programs
- Credit terms
To stay competitive, the most successful refiners survey their wholesale customers often to make sure their supply offering is satisfactory,
Wholesale Site Types
Resellers own and operate storage, handling and transportation infrastructures that have the capacity to handle the bulk quantities of petroleum product they buy from refiners. These include:
- product tanks for storing bulk quantities purchased from the refiners;
- loading racks – i.e., superstructures of pipes, hoses and manifolds used to deliver product into a tank truck – similar to those at a refinery or refiner-owned marketing terminal;
- fleets of tank trucks to deliver product to their customers; and
- specialized equipment and vehicles to handle other types of packaging such as LPG tanks or kerosene drums; and
- service stations for selling the bulk supplies they receive from refiners to retail customers.
Class of Products
The market for each specialty product has its own terminology, supply chain and industry drivers. So most specialty product marketing departments are organized around the class-of-product, rather than the class-of-trade.
Unlike other petroleum products, specialties are sold not only in bulk, but often in a variety of packages to large and small end users, and retailers, and at much higher margins.
Although lubricants and specialty products may represent the smallest sales volume. For most refiners, specialties is one of the most profitable markets as measured in margin on sales and return on capital employed.
Specialty Products
Three examples of specialty products are as follows:
- Lube oil blending, packaging and branding is highly fragmented, with refiners competing vigorously in this market. Most lubricants are sold in drums to quick lube chains and industrial end users. Truckloads of lubricants, packaged in the familiar plastic bottles, are sold through retail gasoline stations, convenience stores, mass merchandisers and auto parts chain stores.
- LPG is manufactured in a refinery or an upstream separation gas plant. In global markets, additional LPG is often imported in bulk. The next stage of LPG delivery is very high cost and bulk plants are often scattered throughout the countryside to fill and deliver the pressurized tanks to homes and industrial users –while minimizing transportation costs.
- Petroleum coke is a byproduct of the coking and cracking process. High-sulfur coke is a waste product that must be carefully disposed of to minimize environmental impacts. Low-sulfur coke has a wide set of industry applications, from anodes to make aluminum to the graphite in pencils
Wholesale Fuel Pricing Structure
Wholesale prices differ by brand, grade, location, stage of distribution, participants and terms of sale. For most petroleum products, they are set in the highly competitive market fluctuating primarily in response to changes in supply and demand, not to changes in the cost of manufacturing or distribution.
Supply and demand factors include the weather, economic conditions, production levels, refining capacity, import-export restrictions, conservation practices and other market conditions.
Wholesale pricing generally takes one of two forms:
Bulk Price
The bulk price is the price paid for purchases of 40,000 gallons or more. Generally, these are based on spot (auction) prices at a specific producing or import center.
Rack Price
The rack price is the daily posted price a refiners loading rack paid for a tanker truck load of product i.e., 8,000 to 9,000 gallons. Rack prices are based on spot prices, but with a premium added for smaller loads and additives input at the terminal. Rack prices for branded products usually reflect a premium over rack prices for unbranded products, and are slightly less sensitive to spot prices.
As shown in the blue arrow in diagram, the wholesale pricing structure is first driven by perceptions of future price from the futures market, such as the CME. The reason for this dominance, is that every day the futures market participants (numbering thousands around the world) trade volumes many times the actual supply-demand volumes sold.
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