Managing Through the Forces of Change
It is perhaps not a keen insight to say the number of convenience stores and retail fueling stations in the United States will shrink. This is, after all, an industry whose total United States site count was in excess of 320,000 as recently as 1973. Today that number is 165,000. While there was some evidence in the last decade of a slowing or leveling off in consolidation, it is almost certain that multiple market forces will exert an accelerated contraction in the number of sites. A strong case can be made that over the next seven years, site count almost certainly will decrease 15 percent and possibly as much as 25 percent.
Now no business likes to face the prospect of limited growth, nevermind contraction, but extreme forces of change do not mean reduced opportunity or reduced profitability for those that both understand the shifts and take advantage of the opportunities. No less an authority than Warren Buffet maintains that businesses at this stage of flux can present exceptional investment opportunity.
What are the factors affecting fueling? Start with the notion of peak oil; whether you believe in a practical geological peak or not (this author does not), there is little doubt we have a political peak being orchestrated by Washington. Corporate Average Fuel Economy will cut into total annual consumption by at least 20 billion gallons over the next 10 years. Combine that with some sort of carbon legislation that will surely add between 40 cents and $1 per gallon to the price of oil, and even the normal 2-percent growth in average annual mileage driven experienced in non-recessionary times will be overwhelmed by both mandated and price-induced rationing.
With natural gas currently less than $3 per million BTUS (equivalent to $19/barrel crude or gasoline at less than $1 a gallon) and more North American natural gas being discovered and drilled today through new technologies, there is little doubt natural gas will finally (and appropriately) find its way into the transportation sector. This could remove as much as 15 billion gallons from the petroleum pool per year within the next seven years.
Add in the current administration's ambitious (and probably unrealistic) goal of having 10 percent of the U.S. fleet made up of electric cars by 2020, there is little doubt that traditional liquid fuel petroleum volume is peaking.
Fuel retailers who look to survive and prosper will need to focus on several fronts to remain competitive:
Become fuel agnostic as they become proficient in understanding multiple fuel delivery processes. Bio-fuels, compressed natural gas and even an increasing emphasis on diesel (if we were designing our transportation fuel infrastructure from scratch, we surely would be more diesel-centric) will take an increasing share of a site's volume. It is not even a foregone conclusion that electric cars will eliminate site traffic, since one of the electric technologies that will survive involves standardized battery swapping quite like propane tank exchanges. Selecting and designing stations to handle multi-fuels from space requirements to tank design is critical.
Retailers who develop a vigorous loyalty program and are able to provide long-term supply contracts, including fixed-price contracts, will have an advantage over retailers who rely on "drive-up" business alone. In fact, the future of traditional gasoline retailers may look an awful lot like today's truck stop industry, where more than 50 percent of customers are contracted accounts.
If aggregate fuel volume is shrinking and margins remain flat, individual site volume will have to grow. Larger fuel stations have always had the cost advantage, and this advantage will be even more pronounced.
With multiple fuels, an activist government and no sign of the usual geopolitical disturbances abating, price volatility will remain and may be even more pronounced. Understanding and engaging in hedging, becoming more vertically integrated in fuel acquisitions or deleveraging the balance sheet offers the only protection against extreme volatility.
The ultimate protection to shrinking fuel volume and a more complex supply environment is less reliance on fuel and more on inside sales. Unfortunately for the convenience retailing industry, this comes at a time when the mainstay of the industry, tobacco, is rapidly disappearing. Reliance on traditional grocery items, except for a few well-positioned stores, is a flawed strategy in the face of superstore and hypermarket discounting.
Even for many retailers that have relied on a strong dairy presentation for many of their sites, the forces of change are against them (per capita milk consumption declined from almost 50 gallons per year in the late 1940s to less than 20 gallons per person currently). With an aging and less European-origin population, it is unlikely milk sales will recover.
The bright spot is quick-serve foodservice. It is here where the demographics and winds of change may be at the retailer's back and not, as in fuel, in their face. There seems to be no letup in the formation of two income households. The demand for time and convenience is not waning. Quick-serve food, fountain beverages and specialty drinks remain a growth sector.
The challenge for the majority of today's retailers is to take foodservice from the traditional sub-par offering often associated with the industry, and compete with the best in quick-service restaurant (QSR) delivery. Technology and market evolvement have made available to many retailers quality products at a competitive price. To complete the organizational process necessary to develop high-quality and consistent foodservice, today's retailer is going to have to:
-- Develop scale and concentration of sites (distribution- and marketing-driven).
-- Invest incremental capital in site development (a superior food offering is most often derailed by a substandard structure).
-- Select, train and provide incentives to personnel specifically focused on foodservice.
-- Develop a brand that is trusted and recognized for foodservice excellence.
These challenges are not easy, but an industry of entrepreneurs who have overcome past challenges can never be counted out.
Now no business likes to face the prospect of limited growth, nevermind contraction, but extreme forces of change do not mean reduced opportunity or reduced profitability for those that both understand the shifts and take advantage of the opportunities. No less an authority than Warren Buffet maintains that businesses at this stage of flux can present exceptional investment opportunity.
What are the factors affecting fueling? Start with the notion of peak oil; whether you believe in a practical geological peak or not (this author does not), there is little doubt we have a political peak being orchestrated by Washington. Corporate Average Fuel Economy will cut into total annual consumption by at least 20 billion gallons over the next 10 years. Combine that with some sort of carbon legislation that will surely add between 40 cents and $1 per gallon to the price of oil, and even the normal 2-percent growth in average annual mileage driven experienced in non-recessionary times will be overwhelmed by both mandated and price-induced rationing.
With natural gas currently less than $3 per million BTUS (equivalent to $19/barrel crude or gasoline at less than $1 a gallon) and more North American natural gas being discovered and drilled today through new technologies, there is little doubt natural gas will finally (and appropriately) find its way into the transportation sector. This could remove as much as 15 billion gallons from the petroleum pool per year within the next seven years.
Add in the current administration's ambitious (and probably unrealistic) goal of having 10 percent of the U.S. fleet made up of electric cars by 2020, there is little doubt that traditional liquid fuel petroleum volume is peaking.
Fuel retailers who look to survive and prosper will need to focus on several fronts to remain competitive:
Become fuel agnostic as they become proficient in understanding multiple fuel delivery processes. Bio-fuels, compressed natural gas and even an increasing emphasis on diesel (if we were designing our transportation fuel infrastructure from scratch, we surely would be more diesel-centric) will take an increasing share of a site's volume. It is not even a foregone conclusion that electric cars will eliminate site traffic, since one of the electric technologies that will survive involves standardized battery swapping quite like propane tank exchanges. Selecting and designing stations to handle multi-fuels from space requirements to tank design is critical.
Retailers who develop a vigorous loyalty program and are able to provide long-term supply contracts, including fixed-price contracts, will have an advantage over retailers who rely on "drive-up" business alone. In fact, the future of traditional gasoline retailers may look an awful lot like today's truck stop industry, where more than 50 percent of customers are contracted accounts.
If aggregate fuel volume is shrinking and margins remain flat, individual site volume will have to grow. Larger fuel stations have always had the cost advantage, and this advantage will be even more pronounced.
With multiple fuels, an activist government and no sign of the usual geopolitical disturbances abating, price volatility will remain and may be even more pronounced. Understanding and engaging in hedging, becoming more vertically integrated in fuel acquisitions or deleveraging the balance sheet offers the only protection against extreme volatility.
The ultimate protection to shrinking fuel volume and a more complex supply environment is less reliance on fuel and more on inside sales. Unfortunately for the convenience retailing industry, this comes at a time when the mainstay of the industry, tobacco, is rapidly disappearing. Reliance on traditional grocery items, except for a few well-positioned stores, is a flawed strategy in the face of superstore and hypermarket discounting.
Even for many retailers that have relied on a strong dairy presentation for many of their sites, the forces of change are against them (per capita milk consumption declined from almost 50 gallons per year in the late 1940s to less than 20 gallons per person currently). With an aging and less European-origin population, it is unlikely milk sales will recover.
The bright spot is quick-serve foodservice. It is here where the demographics and winds of change may be at the retailer's back and not, as in fuel, in their face. There seems to be no letup in the formation of two income households. The demand for time and convenience is not waning. Quick-serve food, fountain beverages and specialty drinks remain a growth sector.
The challenge for the majority of today's retailers is to take foodservice from the traditional sub-par offering often associated with the industry, and compete with the best in quick-service restaurant (QSR) delivery. Technology and market evolvement have made available to many retailers quality products at a competitive price. To complete the organizational process necessary to develop high-quality and consistent foodservice, today's retailer is going to have to:
-- Develop scale and concentration of sites (distribution- and marketing-driven).
-- Invest incremental capital in site development (a superior food offering is most often derailed by a substandard structure).
-- Select, train and provide incentives to personnel specifically focused on foodservice.
-- Develop a brand that is trusted and recognized for foodservice excellence.
These challenges are not easy, but an industry of entrepreneurs who have overcome past challenges can never be counted out.