When it comes to competing in the fuel business, convenience store retailers must fight to maintain their market share.
By Jim Callahan.
I received an inquiry from a small retailer in the Northeast recently who had lost a huge chunk of his fuel volume due to some fierce new competition. This is an issue that needs to be brought back to the forefront as small chains are still the backbone of the convenience store and petroleum industry.
Before QuikTrip began its aggressive retail expansion throughout Georgia, those of us who marketed in the Atlanta area were able to enjoy high volumes and strong margins that defied the fast nickels, slow dimes theory.
For many years Atlanta—and Georgia overall—sustained record business sales and population growth. Convenience store businesses were afforded some great margins with little loss of volume. When the growth slowed to a crawl, many operators failed to recognize it and held onto the slow dime theory of sacrificing fuel volume for a higher margin. They have, for the most part, lost fuel volumes that they will not be able to recover, and in many cases lost critical mass and viability as well.
Making Smart Choices
As business operators we get called on to make many critical decisions. To me, no decision is more important than deciding whether to implement the fast nickels theory or stay with slow dimes when faced with the challenge of going head-to-head with a fierce new competitor. My free and well-intended advice is to hold on to your fuel volume at all cost.
Historically, I know of a store that was doing 1.8 million gallons a year (150,000 a month) with a 15-cent pool margin. Inside, the store averaged $1.2 million ($100,000 per month) in merchandise sales with a gross margin of 30% producing $630,000 total gross (leaving out lottery and ATM fees.)
Over an eight-month period a high-volume fuel retailer stole one-third of the gas volume and 25% of inside sales simple because the owners decided not to protect their business. Using 20/20 hindsight and armed with the knowledge that the loss of business cost them a stunning $180,000 in gross profit, let’s go back and pretend we did what was necessary to protect the volume from day one.
Let’s say instead of losing one-third of the fuel volume we kept all but 10% of the volume and kept all of the inside business. Estimating that our 15-cent per gallon margin fell down to 10 cents per gallon, but in the process we increased our inside margin to 32% as customers are not nearly as sensitive to in-store prices as they are to fuel prices.
In doing the math you will see that instead of losing $180,000 in gross profits, the store would only lose $84,000 using the more aggressive fast nickels method, a savings of $96,000 a year. When you factor in the loss in lottery and ATM income that you would have suffered, that $84,000 loss will be reduced to right around $65,000—a new savings of $115,000 per year.
But even more importantly is that the business is much more alive and appealing to customers. In the process the company would have reinvented itself with a winning business model that is built for the long haul.
When I arrived in Georgia in 1984 there was a little company called Flash Foods with somewhere in the neighborhood of 25 stores. They made some acquisitions and reinvented themselves better than anyone I have ever witnessed. Today, they have close to 200 stores with an amazing image and do a fabulous job of keeping up with the big boys. In the process they have become one of the big boys themselves. Hats off to Flash Foods for showing us how to do things right.
Jim Callahan has more than 40 years of experience as a convenience store and petroleum marketer. His Convenience Store Solutions blog appears regularly on CSDecisions.com. He can be reached at (678) 485-4773 or via e-mail at [email protected].