Dirty little secret

Big-box retailers are using savvy purchasing practices to make a profit selling fuel

By Brian Reynolds

Company: The Pinnacle Corporation Title: Director, Fuel Solutions Years in the industry: 30 years First job: At the family business, Gardenhire Oil Company in Cisco, Texas, sticking tanks and taking meter readings Family: Lives in Fort Worth, Texas, with wife Linda and teenage sons Jake and Joey Hobbies and/or Activities: Flying and restoring airplanes, riding trail and dirt bikes with sons, and playing golf and tennis How long have you been reading NPN? 30 years

Two recurring themes within the petroleum industry are that the “Big Boys” always get the best fuel deals and high-volume retailers always use fuel as a loss leader. For grins, let’s assume that all things are equal, and everybody has the same volume, access to the same deals and sells fuel at cost.

Now, let’s define the term “cost.” Cost is the laid-in delivered price of fuel that includes price of the product, freight, taxes and fees. If all things are equal, how come the big boxers can sell their fuel so cheap? Could it be they look harder in order to pay less per load? Not withstanding an occasional hedging deal or some other contractual arrangement, the majority of HVRs do it like this:

Unbranded Supply
With little exception, the big-box retailers have all gone unbranded. By shopping the open market, contractual restrictions of buying fuel have been removed. In order to get the best deals available, HVRs use numerous suppliers along with numerous racks. Suppliers come in many varieties, from refiners, brokers, jobbers, large truck stop chains and convenience stores. Any company that contracts for fuel may want to sell off what they don’t need for their own uses. It may pay to pick up the phone and ask.

Common Carriers
Freight is a commodity. The big-box retailers, for the most part, have negotiated great freight rates and have memorialized their point-to-point mileage using software such as AAA rather than relying on a truck odometer reading.

Dispatching
The majority of the HVRs dispatch and monitor their on-locations. HVR operations are fast-paced. As a rule of thumb, a single HVR will sell approximately 10 percent of total store sales in gallons. A store that has inside sales of $500,000 a week can expect 50,000 gallons of fuel sales.

HVR dispatchers get busy after 5 p.m. Looking at the next day’s prices has nothing to do with cutting deals. If prices are going down after midnight, then wait until after midnight to load.

Information, Exploration and Automation
A by-product of having numerous suppliers is having large volumes of information to process. A single HVR may receive thousands of prices each day. With thousands of prices and the demands of operating high-volume fuel facilities, the only way to stay on top of the information game is to automate.

So if all things are equal, what’s the secret to HVR fuel buying? The answer is: there are no secrets, just efficient buying practices that depend on information and automation. Now, let’s add a third component that historically hasn’t been part of the fuel buyer’s lexicon: exploration.

It may seem unreasonable to go further than the nearest rack to purchase fuel. A hundred miles away from any particular location, there may be hundreds of potential rack choices. Out of hundreds of racks to choose from, the likelihood of finding a better deal than what a local rack is charging is increased.

In the past, where jobbers have been fixated on rack-pricing information, HVRs have adopted the concept of delivered pricing information. After factoring in freight, taxes and all fees, the lowest available price is the only one that matters. Obviously, in order to take advantage of the best available prices, automation is a must.

It is probably heresy to suggest that the HVRs are actually making money selling fuel, but sometimes the truth hurts. By using better buying practices, HVRs are more than likely making money rather than losing money in marketing fuel. This is accomplished by utilizing sophisticated automated buying technology and then acting on the information that historically had been difficult to glean. These tools are available to any petroleum marketer that is serious about profits and reliable supply.

While it is true that many big-box retailers hold the street price down or use vendor-funded loyalty programs, the dirty secret is that most are actually making a profit selling fuel.