By Scott Barrett, VP Global Client Services
As we think about 2018, we can reflect upon the past two years as a benchmark for how things will change. Too long of a timeline, and you won't see the current dynamics of today's political and economic climate; too short, and you won't see a trend.
What trends and themes have we seen over the past several years? First and foremost, acquisitions.
1. Acquisitions Show no Sign of Slowing
The overarching theme in our industry, as we are sure you have noted, is acquisitions. Expect acquisitions to continue robustly. Along with acquisition and the spending mindset that must accompany it comes a call for rationalization: When a chain buys another chain or a group of convenience stores, gas stations or assets, there is always a group of stores/stations/assets that are loved and lauded, and a group that acts as the "ball and chain." Some of the factors that separate these two groups are subtle, yet powerful.
For instance, you may have some ball-and-chain stores that are under-performing assets, unprofitable from an EBITDA basis. This factor, on its own, makes them a drag — but then think about how these stores can also drive down brand perception. The leading fuel and convenience brands portray consistency, lest consumers become confused or distrusting. The effects of ball-and-chain stores can damage the brand value of your entire network.
If you purchase 500 stores, you can reasonably expect that about 100 of these (80/20 rule) will not help your brand position. Therefore, acquisitions require you to make judgments about what really fits your overall network and brand best, from both a geography and strength standpoint. It comes down to identifying the "keepers" and separating these from assets that need improvement (either in the form of a sale or a closure) to maintain your brand concept. Through rationalization, you can remove the blurriness from your retail network and create an overall stronger brand. We know that acquisitions are going to continue in 2018 because cost of capital is low, multiples are high, and if you aren't growing, then you're dying. And because acquisitions will continue with the new year, so too will rationalization.
2. The Strong get Stronger
Closely tied to the idea of acquisitions and rationalization is the idea of market separation, which will be more pronounced as the strong get stronger and the weak get weaker. Take Florida as an example: Full of attractive growth, with new stores being built regularly, Florida's market is ripe for increasing customer count, volumes, etc. — just because of the demographics. Consequently, an influx of new competitors will enter the space via acquisition and new-to-industry growth, which will lead to what I'm calling the "Great Nozzle Rationalization." The Florida market isn't going to get weaker because of more entrants. Indeed, its stores will become more thoroughly rationalized, meaning they will become more geared for profit and brand health, and the market will remain strong. Unworthy stations will die out.
3. The Continuation of Margin Management
Margin management and how marketers manage fuel margin in 2018 will be critical. We're coming off the back of very successful fuel margin years in 2015 and 2016, and the reasons are simple: Oil used to be $100 a barrel, and today, it’s trading in the $50 to $55 range. Cost has come down, so it’s been easier to make a healthy margin. Oil bottomed out. But economic growth is starting to show recovery globally, which puts more pressure on the demand for oil (industry projections would indicate oil will be trading in the $60 range).
As your cost of goods increases, your retail prices may be affected, leading to margin degradation. If we are being blunt, you are going to make a lower number in 2018 per gallon if you do things the same way you have been doing them. Kalibrate's fuel pricing solution helps marketers manage the margin across the network, to know exactly where and when you need to gain volume as the opportunity arises, and where you don't need to chase gallons because they aren't available to still make the desired margin. Chasing gallons where the volume demand doesn't exist may cause even further degradation of your margins; management is paramount.
Importantly, margin management is a bit of an umbrella topic. All retailers will want to factor in the growth of electric vehicles and alternative fuels. When these areas grow, pressure on fuel category management rises. It's no longer an option to just think of fuel as three grades of gasoline, plus diesel. Instead, you have to think about different ethanol blends, electric charging stations, etc. Balancing all of the demands in the fuel category falls under margin management. How do you properly price your site knowing oil prices are increasing? How do you manage fuel as a category? These questions will continue to demand answers in 2018.
4. Building Destination Locations is Still Key
Creating destination locations is another area of margin management, but important enough that we'll discuss it as a distinct trend. Our prediction for 2018: Every network will push harder and harder here. Just think of all that we saw at the 2017 NACS Show — more new products and offerings than ever before. Fresh-made-you-name-its are taking over the typical convenience store, and larger seating areas, along with televisions, clean restrooms, well-groomed appearances and well-trained employees are becoming more commonplace. All of these combined efforts work toward keeping the strong networks growing stronger by setting their stores apart.
All fuel and convenience retailers are looking to build destination locations. And that's not just for 2018, but from here on out. Fortunately, you can couple this endeavor with learning how to approach category management in fuel; electric vehicle stations are often high quality destination stops.
In order to discover what areas of your business demand upgrades as you work toward these goals, consider a 7E analysis. Find out which aspects of your site are thriving and which might be holding you back. Could it be that you simply don't see enough traffic at your location? Could a facility upgrade bring more customers to your site? In which areas of the seven elements are you stronger than your competitors? Are there elements where you can turn weaknesses into strengths?
Specifically, if you're looking to combine all the trends of 2018, how do you acquire destination locations, or how do you find the dirt strength necessary to create one?
And What About Your Own Network?
We predict 2018 will be a year of growth, as evidenced by the trends and ideas outlined above. What does your growth look like, and how can you ensure you are achieving ROI with every move? Kalibrate's location solutions can help keep you informed about high potential sites and about what you can do to improve the sites you already have. We can also project the impact changes will have on fuel volume and store revenue. If you know, for example, that you want to change facility layout in order to increase destination traffic, we can tell you if that idea really makes sense. What-if scenarios can tell you what would happen to your volume if you increased the number of pumps by just one, or by two. Similarly, these scenarios can help you choose the right piece of dirt for purchase, if you're looking to expand.
Ultimately, 2018 will have you trying to maintain your piece of the pie. But bear this truth in mind: the pie gets bigger when you add to it. So become better. Ten years ago, few customers would have stopped at a convenience store when in need of a fresh meal, but today, the market has changed. Demand has been created and responded to with supply. By becoming better all around, performing well in all seven elements, you add to the pie, and therefore, get your slice.