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A Wild Ride for Petroleum Marketers

INDIANAPOLIS -- Attendees at the Midwest Petroleum and Convenience Tradeshow in Indianapolis, a regional event for petroleum marketers and convenience store operators from Illinois, Indiana, Ohio and Kentucky, received insight with their meal at the Industry Luncheon featuring BP's John Melo, president, U.S. Fuels Operations.

“As an entrepreneur that accidentally ended up in the oil industry, I feel really privileged to be here,” Melo said. “There's nothing better than being among customers and hearing what we can do to improve our business.” BP's Fuels operating unit sells more than 23 billion gallons of fuel across the continental United States to BP convenience customers, jobbers, and key account customers.

While Melo may have spent the bulk of the conference learning from customers, he spent the luncheon sharing his own perspective with attendees about the future of the industry, emerging themes in petroleum marketing and how to thrive in a changing market. He led off by showing the audience a photo of a roller coaster called the “Top Thrill Dragster,” asking if the name was reminiscent for anyone of how it felt to sell gasoline in the first quarter of 2005. “It's been a wild ride,” he said. “It's like someone left off the brake.”

While many people assumed at first that the rapidly increasing fuel prices of 2004 must be an anomaly, he said, the first quarter of 2005 has given no indication that prices will return to historical averages. The absolute price was higher 45 cents higher in the first quarter than the highest absolute in 2004, he pointed out, while 2005 has also shown more consecutive days with price increases than 2004. Even worse, with the price moving so quickly, passing the increases down becomes more challenging.

“What's Happening Here?”
Melo outlined four factors that have led to the increase in oil prices: the surge in demand, the weakening dollar, uncertainty and the influence of banks and hedge funds. In regard to demand, he pointed out, it's nearly impossible to predict what will drive demand. For example, the SARS outbreak in China led to an increase in car purchases as consumers decided that it was unsafe to take public transportation with people who could be infected -- a side effect of the virus that no one could have predicted. The weak dollar is another major factor, as countries producing crude oil raise their dollar prices rather than lose buying power due to the weakness of our currency.

None of these are factors that will change in the immediate future, Melo explains; in fact, he added, “I would expect to see more of the same.” He believes that five to seven years of increased demand will exacerbate shortages of gasoline. “While I can't predict the future, I think the absolute price we're seeing today is the price we'll be seeing in the future, with a 35 to 40 cent window.”

Petroleum marketers, then, have to ask themselves how they will manage the relationship between supply and demand; in Melo's view, under these new circumstances, being a great trader and importer is as important as being a great refiner. Gasoline is now a global market, and as demand keeps growing, Melo anticipates that half of that demand will be met by imports and half by expanding refining capacity. Success will depend on who has the best logistic access to move product, and owning and operating the right terminal in the right location becomes an important strategic asset.

Based on this picture, Melo outlines three emerging themes in the industry:

Consolidation. Volatility and higher absolute prices have resulted in consolidation in the industry and in success for the companies that do consolidate. In 2004, Melo said, 60 percent of branded volume growth came from a few customers who are consolidators; in the first quarter of 2005, 30 percent of growth came from consolidators.

Bifurcation. Melo predicts that most markets will become split between branded and private label marketers, as consumers opt for either the cheapest possible private-label gasoline or the quality and convenience of branded gasoline. His estimate is that most markets will split 70 percent branded and 30 percent private label. The good news? After these transformations shake out, he explained, margins usually improve.

Supply to demand focus. “If we get demand right, pleasing customers, we'll figure out how to supply and make money,” Melo said. He anticipates more focus on what marketers need and less focus on what supply is going to get to market.

The retailers that will succeed in the coming years, Melo said, are those who, among other things, have store sales growth that's above market, look at total site economics instead of just fuel volume and build collaborative relationships with suppliers based on accountability. For example, he said, for BP's marketers, the most important measures of accountability are brand performance, supply reliability and price framework.

There will be two camps reacting in different ways to today's circumstances: those that wait it out and hope things will go back to normal, and those that believe things have changed fundamentally and decide to look at how to operate their businesses differently for the future. To some degree, both camps will be right, Melo concluded. The key for retailers is deciding which camp to join and partnering with peers and suppliers to follow the strategy they've chosen.

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