Gasoline retailers are currently facing an unstablemarket, where prices are in aconstant flux and the slightest miscalculation can cost them dearly. Tostay on top of their game, retailers areinvesting in new price optimization software technologies to help manage fuelpricing and sales to better protect a potentially elusive margin. Despite the costsand transition times that come with theimplementation of any new technology,retailers are beginning to reap the benefitsfrom this new form of fuel analysis.
To save a company’s fuel analyst fromthe time and trouble of surveying day-today cost situations as well as ordering andpricing volume to a store’s specific needs,companies like KSS are offering softwareservices like its PriceNet product. The product is a Web-based solution hosted at thehead office that is designed to support theday-to-day fuel pricing process and takesinto account varying factors such the area’s competitive landscape, local consumerdemand, as well as a retailer’s particularvolume goals and margin targets.
San Angelo, Texas-based Town &Country Food Stores is one of the manyretailers incorporating new techniquesand technology into its fuel pricing routine. The 168-store chain felt that theunsteady pace of the market was making it difficult to keep a secure fix on retailprices, which led it to seek other optionsfor its pricing methods.
“We needed to better manage ourretails,” said Robert Eggleston, seniordirector of petroleum marketing for Town& Country. “We needed a process tostreamline our management.”
Town & Country first used the KSSsoftware in November 2006 with a limited amount of stores—testing 30 sites—beingsure to take into account different variables such as the size and population ofthe market. By January, the chain hadachieved the desired results and beganimplementing the technology chainwideas early as February. Since then, all but11 stores have adapted to the new system,with those final stores coming online bythe end of the summer.
“We are spread out quite vastly throughout the country and because of that it’sdifficult to have an effective decentralizedpricing system,” said Eggleston. Beforethe chain tried the software, it used itsown internal written strategies and reliedheavily on its area managers to analyzeand implement survey data—a processthat worked well for the company, butopened an opportunity to miss constantlyshifting prices.
“The market is as volatile as ever. Oneweek a fuel retailer could see margins ofeighteen cents, the next week four cents,”said Bob Stein, chief executive of the KSSFuels Division. Prior to joining KSS, Steinnot only spent time as a consultant inthe c-store industry, but also spent eighteen years at Dairy Mart ConvenienceStores Inc., where he was the chairman,president and CEO. With his heavy retailbackground, Stein empathizes with retailers when it comes to the changing priceclimate in a market.
“The volatility of the market has led to a need for retailers to react very quickly to changes,” Stein said. “Price optimization software helps retailers by adding speed and automation to the process, but also works as a support tool to help analystsmake more educated decisions.”
Using past for the future
Price optimization software worksby reviewing a retailer ‘s sales andprice records. When implementing thenew system, daily records for the lastsix months are loaded into the software along with competitor ‘s pricedata for the same time period. Thisdata is used to produce granular price elasticities of demand that help determine optimal pricing based on market conditions, taking into consideration a retailer ‘s predeterminedgoals regarding the balance of margins and volume.
Along with being a decision-supporttool, software systems like this take a lotof burden off a chain’s fuel analysts bydoing the data gathering and evaluating.Many retailers are also testing this newform of pricing because of the speed itdelivers—a survey request typically generates results in under three minutes and,if a retailer chooses, instantly updates theprice throughout the store—compared totraditional price setting.
One of the priorities for Town &Country’s fuel category was to bettermanage its volume control, a task difficultenough without having to worry aboutthe potential margins being earned oneach gallon. One of the perks about investing in a centralized system is the ability tooptimize pricing on gallons with a consideration to margins.
“It’s difficult to balance gallons andmargins in any market. But, if you canmaintain historical gallon growth andgrow margins, you’re in a great place,”said Eggleston.
Stein agrees with Eggleston’s concept.”At Dairy Mart, there was always someconcern regarding what we were goingto do about margins,” said Stein. “Thereare a lot of factors that go into pricing and,these days, it’s harder than ever for retailers to keep abreast of all their individualsites and how they should be reacting.Retailers could benefit with data and decision tools to be sure that they are pricinggasoline at the best prices to meet volumeand margin objectives and be compliantwith regulations.”
Investment in growing
One of the main obstacles Town &Country faced when bringing in the newtechnology was the financial risk involvedwith outfitting chainwide. The companyonly began implementing this softwareafter determining a return on investmentwould require less than 18 months.
At this point, it’s too early for Egglestonand Town & Country to offer the immediate payoff that the new price optimizationsoftware has brought, but the chain is satisfied with the results thus far. “The systemhas given me the ability to have personalcontrol over all the stores and their retails,”he said. “Having a central system like thisallows us to make sure that our stores arepriced where they need to be to be competitive in all markets at all times.”
As Town & Country continues to watchand learn new ways to take advantage ofthe market with a centralized price optimization system, Eggleston feels that hischain is far from being the last to implement this technology.
“It’s just like with televisions whenLCD and plasma screens came on the market,” Eggleston observed. “I thinkeventually, like with all technology, priceswill go down as more sites come online.As companies expand, they are going tohave a greater need to have centralizedpricing methods to keep track of theirgallons, secure their margins and staycompetitive.”
A chain’s growth is integral when itcomes to determining whether a priceoptimization system will enable storesto free up more capital. Both larger andsmaller chains have implemented fuelprice optimization during the past fewyears to create a more disciplined processin pricing as well improve profitabilityAnd while the technology may save timeand labor, it’s not a cure all. Stein addedthat even though the system is automated,it is simply a tool to aid retailers, not areplacement for their instincts.
“The technology simply adds science tothe art of pricing,” said Stein. “We neversay that you push a button and walk away.There’s still a part of the fuel pricing business where experience and knowledge ofthe marketplace are very important.”
