Marketing Trends
Lesson Overview
The Marketing Trends Lesson consists of the following topics:
- Alternative Fuels – US
- Alternative Fuels – Europe
- Product Price Drivers – Global
- Global Hypermarket Trends
- Branding – Advertising Trends
- US Class of Trade Shift
- US Outlet Count Trend
- Convenience Stores – Gasoline Sales Growth
- US Convenience Stores Growth
- Site investment – Efficiency Challenge
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Alternative Fuels – US
As gasoline prices soar and environmental concerns grow, alternative transportation fuels are attracting greater attention in the US.
The new CAFE standards include a mandate for 35 billion gallons of renewable and other alternative fuels by 2017. The alternative fuels being considered include:
- Corn-based ethanol
- Bio-diesel
- Compressed natural gas (CNG)
- Liquefied natural gas (LNG)
- Liquefied petroleum gas (LPG)
Multi-fuel stations are much more complex to operate than pure gasoline facilities. The quickening pace of fuel service technology developments also is forcing gasoline retailers to address such issues as:
- The positioning of underground tanks
- Whether to use aboveground tanks, and if so, which type
- How to deal with fuel vapors safely
- How to prevent contamination
Alternative Fuels – Europe
The European Union (EU) has a different approach to encourage the development of lower-carbon fuels and biofuels than the US government. EU policies include:
- Requiring suppliers to reduce greenhouse gas emissions from the production, transport and use of their fuels by 10% between 2011 and 2020.
- Establishing a new fuel blend with a higher content of ethanol.
- Mandating the installation of vapor recovery equipment at retail gasoline stations to handle the higher level of vapor emissions from ethanol.
- Requiring reductions in sulfur levels in diesel and gasoil to reduce emissions of soot and dust particles.
It is relatively easy to accommodate changes in product specifications, but compliance with higher-ethanol-content requirements will require substantial capital investment.
Global Product Price Drivers
Supply imbalances are one of the major causes of price volatility in tight markets.
A key factor that helps to reduce price volatility is the adherence to a common set of global product specifications. This allows product to be easily be moved from one market to another to cover a shortage or dispose of a surplus.
This chart shows a product price comparison between the US Gulf Coast and Rotterdam – the large European refining center, for the last 15 years. Notice how closely the product pricing has moved in the two markets. This is because a large quantity of US imports come from Rotterdam and US product often move to Europe.
The European-US supply marketplace is efficient and the future and spot prices in both Rotterdam and the US Gulf Coast are reported on a real time basis.
The question in the future is whether this tightly coupled pricing relationship will hold as:
- More of the new refining capacity in Europe is being built to produce diesel fuel – reducing the amount of spare European gasoline for export to the US,
- US refining capacity may not keep up with a potential increase in future gasoline demand.
Global Hypermarket Trends
The hypermarket is the term used for a supermarket, other traditional retail store, or discounter (such as Wal-Mart or Costco in the US, Tesco and Auchan in Europe) with discounted gasoline sold from pump islands in the parking lot.
In France, 65% of the retail gasoline is sold through hypermarkets and in the UK it is 33%. The US market is approaching 10-12% and oil companies and retailers are watching the growth of this format carefully.
Hypermarkets have rapidly developed a competitive presence in the US due to their low cost of entry. The cost for a large retail chains to add a few gasoline pumps and tanks to their existing parking lots is relatively low.
Anticipated continued growth in US hypermarkets will result in substantial changes in the composition of the retail fuels marketplace. Even the most efficient stations with a traditional format require a higher margin than a hypermarket just to break even.
In Asia-Pacific, hypermarket formats are growing rapidly but are currently limited to food and merchandise. None of the Asia Pac hypermarkets currently have gasoline as part of the merchandise offering.
Branding
The industry branding and advertising programs have always had long cycles that reflect the major issues and consumer sentiment of the time.
They have come a long way from the early days of television where the singing men of Texaco encouraged post-war motorists to come to a station for a full service experience. The 60-70’s campaigns to encourage consumption were brought to an abrupt halt with the oil shocks of the mid-70’s, and image advertising became the norm.
Current programs are as varied as the companies themselves, including::
- BP’s “Beyond Petroleum” alternative energy emphasis,
- Chevron’s full page ads to encourage conservation,
- Shell’s global focus on the retail experience and “V-power” fuels and
- ExxonMobil presenting strength in the upstream.
A new goal of US advertising, sponsored by the API, is to persuade policy makers that today’s high energy prices are the result of the thinning cushion between global energy supply and demand — not of any conspiracy by oil companies.
In parallel with the API initiative, a number of industry executives have conducted town hall meetings across the country to help educate the public.
Only time will tell if this campaign has any impact.
Shift in Class of Trade
The chart shows the change in the way that retail fuels have been marketed in the US over the last decade.
Resellers, who were 42% of the mix in 1995, have grown to 55%. This shows that reseller relationships continue to be very important, as they increasingly serve as the industry’s form of outsourcing.
As the reseller percentage has increased, company owned-company operated share has dropped from 15% to 13%, as refiners continue to shift assets away from sites characterized by sizeable real estate investments and high operating costs. This change in the mix will continue for the foreseeable future.
US Outlet Count Trend
The changes in US retail marketing since the 70’s, have been substantial. As one example, total retail outlets numbered more than 340,000 at the highest point, and are now half of that number, as is shown in the chart.
High gasoline volume at a site is no longer the only retailer goal. Today important factors are return on investment and efficient use of resources. Many stations have been converted to other uses and the industry has closed tens of thousands of sites.
Most refiners and independent marketers have added convenience stores (“C-stores”) to increase sales volume and improve margin. As the convenience stores attached to gasoline stations continued to grow in size and range of offerings, gasoline retailers now derive as much (or more) of their margin from merchandise as from gasoline.
Increasingly, refiners have a real challenge because of the high cost of building and maintaining a retail site that now has a car wash, convenience store coolers and food service preparation items. So unlike the Dodo bird, which is now extinct, branded DODO (dealer owned and dealer operated) sites are becoming more prevalent as refiners reduce capital invested in retail. And an increasing number of the stations in the industry are owned by independent marketers, who face the same challenge as the refiners.
C-Store Gasoline Sales Growth
Gasoline has accounted for a growing portion of total C-store sales. Originally, C-stores were convenience stores with no gasoline — brands like Circle K in the USA and 7-Eleven in Japan.
But now, 70% of USA C-stores sales are related to gasoline – the most volatile factor in determining site profitability. This creates a huge marketing challenge — how best to integrate a gasoline format (which is smelly stuff) that you pump – with the clean food/convenience items inside the store. The merchandising concept becomes even more complicated when convenience, speed and pay at the pump is the preference of most gasoline shoppers.
Many USA independent marketers, specifically WaWa and Quik-Trip have done the best job of integrating formats.. The most successful US C-store operators have a grocery/merchandising perspective – not oil company heritage.
The convenience store industry continues to take fuels market share from traditional service stations
The US convenience store industry is growing rapidly, as shown in the chart. The most significant retail challenge to refiner-retailers is the rise of independent marketers. The number of convenience store chains and hypermarkets offering gasoline has increased rapidly as they picked up the prime retail locations divested by refiners.
Major oil companies have combined convenience stores (C-stores) with retail sites starting in 1977. Since then this concept has grown to be a major trend in motor fuels marketing. Gasoline sites with convenience stores have increased steadily over the past twenty years, with a growth of over 40% in the past decade.
This trend will continue as consumer lifestyles place a premium on convenient shopping alternatives, and the oil industry makes a concerted effort to upgrade the quality of its stores, operations, and management to remove shopping barriers and broaden consumer appeal.
There is now increasing emphasis paid to the C-store with its retail merchandising format vs. the traditional wholesale, bulk, price format for gasoline. There could be a shakeout in US convenience stores as future gasoline demand drops with the new passenger car fuel economy standards legislation passed in 2007.
Site Investment – Efficiency Challenge
The US oil companies and other retail site developers have faced increased costs to develop their prime locations over the last 15 years, as shown in the chart. The increase in cost has been a counter trend to the decline in sites- and there are reasons for the (negative) correlation.
Today slim gasoline margins force developers to more complex formats – especially C-stores and food service items – to support the investment at coveted corner sites.
Also, as the number of gasoline sites have decreased, other franchise operators (fast food, quick lube, auto parts, etc.) have moved into prime locations driving up the cost of land – which is over 25% of development cost.
Today all retailers (both refiners and independent marketers) are looking at their properties more like real estate developers – determining the “highest and best use” of each and every corner.
Thus, as investment in traditional service stations decrease, convenience stores retailers continue to upgrade the quality of the facilities, services and management at the sites they own or operate, investing between $2 and $3 million per site in newer and larger stores.
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