How do you price fuel at your stores? You likely have a strategy that is one of the following three options:
- Lead the street. Due to brand recognition, a superior site, or exceptional service, you price above your nearest competitors.
- Meet the street. You try to stay even with your closest competitors.
- Undercut the street. You try to be the lowest price in your area.
No matter which strategy you employ, it’s often handy to know the lowest price you could sell fuel for and still breakeven at your site. This month, we’ll share with you a fuel pricing model which will also provide you with an excellent measure of efficiency at each site. The sites with the lowest required fuel profits, or at best, zero fuel profits are your best sites.
To perform breakeven analysis by site, you will need the following information for each store:
1) Fuel volume.
2) Gross profit dollars from all sources other than fuel.
3) Total income statement operating expenses.
4) Non-income-statement costs – typically loan principal and/or interest and any administrative expenses not currently allocated to the site.
The time period you select for this analysis should be the one that provides you with the best accuracy and forecast for the future. For some stores, one month’s most recent information may be the best indicator. For seasonal sites, you may need to select alternative period(s). Just be sure to use the same period for all of the data listed in numbers one through four above.
First, we’ll determine the store costs that must be covered by your fuel profits. Add together the income statement operating costs, the loan costs and any administrative costs not currently on your individual store income statements. Now subtract from that total gross profit from all non-fuel sales. This amount is the total cost that must be covered by your fuel sales.
If you find that all your store costs are already covered without fuel sales, congratulations! This is a truly profitable position and means you don’t need any fuel profits to breakeven. (Some retailers will tell you this is the way they think all sites will need to operate in the future.)
If, like most marketers, you have some costs left over that must be covered by fuel profits, divide those costs by the store’s current fuel volume. This will give you the cents-per-gallon fuel profit that must be achieved for your store to breakeven. For example:
Non-fuel Gross Profit $25,000
Operating Expenses $23,000
Other Costs $4,000
The costs that need to be covered by fuel profits are $23,000 + $4,000 = $27,000. Currently, $25,000 of these expense are covered by non-fuel profits which leaves $2,000 to come from fuel profits. We divide the $2,000 by 45,000 gallons for result of 4.5 cents per gallon that we must make on every gallon of fuel to breakeven at that store.
To reduce the amount of per-gallon profit we need to make on our fuel, we have three choices:
1. Increase volume – If we need to cover $2,000 with fuel profits and we can develop an additional 10,000 gallons of volume each month, the breakeven price drops from 4.5 cents to only 3.6 cents. With a total 55,000 gallon volume, we calculate the new breakeven fuel price as $2,000 divided by 55,000 or 3.6 cents. This is almost a penny reduction.
This is also where price sensitivity analysis is needed. You have just determined that your breakeven price drops by 0.9 cents per gallon if you do an extra 10,000 gallons. The question now becomes, if you drop the price by say, one penny, will it increase your volume enough to make the same or more money? And what would that extra volume do to your inside sales profit? To determine the answers, there are no magic formulas. You must keep careful data on your pricing and results day by day, week by week and month by month.
2. Increase non-fuel gross profit – If, for instance, you can increase your store profits by $1,000, this would cut your required profit in half to only 2.3 cents! In our example, you would need only a 4% increase in store profit to cut your fuel profit requirement in half. This could be achieved through merchandising, margin management, or addition of new profit centers such as an ATM.
3. Cut operating expenses – You can achieve the same reduction in fuel profits needed by reducing your operating costs by $1,000.
Conduct this analysis on each site you own. It’s a great technique to identify the most and least efficient sites in your chain. Then, work hard to bring your least efficient sites up to standard.