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If I were President – IIWP #4 – Retail Gasoline

December 17, 2007

I started thinking about this challenge some time ago, and in fact shared some of these ideas with an individual at a major Canadian gasoline retailer.

The retail gasoline sector is a text book case of a ‘commoditized’ business. There is little inherent differentiation between brands and customers don’t have any emotional connections – other than getting upset whenever gasoline breaks through some new record level. It’s a transactional relationship – go there, fill up and leave – what I would define as a Share of Wallet relationship. (see here)

Gasoline companies cope with this lack of ‘customer love’ by introducing various continuity programs; in the pre-point days it was glasses, cutlery and stickers and cards, but since everyone has a program – there is no differentiated advantage. To offset low retail gas margin profitability convenience stores and car washes were introduced to provide a higher margin revenue stream to support the channel’s profit objectives.

This sector does have one significant valuable advantage. While most other businesses operate in a price-based costing world, this sector does not – it largely passes cost increases to its end users. To be fair, internal cost inefficiencies do hurt their profitability but not crude oil which forms the bulk of their cost structure. Again to be fair, the petro’s do not have the power to force OPEC to back down from a product quota adjustment – even if they wanted to.

Over the years however, upstream refining has been consolidated to the point that the industry is running very close to full operational capacity and any ‘anomalies’ that merely threaten to pinch supply send prices higher. Refinery margins have seen steady increases and are more than triple the retail margin– in part to set aside funds for the eventual building of additional refinery capacity. See Natural Resources Canada

So with this compact situational overview – let’s explore some new ways (as impossible as it may seem at the moment) that can and would strengthen relationships between customers and the gasoline companies.

If I were President of a Retail Gasoline chain:

Creating new relationship bonds with customers:

The key to unlocking horns with customers is to elevate the relationship from its transactional footing to a “Share of Life” level. This will not appeal to everyone and will take time to establish – but at the end of the day will prove to be more powerful than any continuity program one could hope to implement.

The major goal of this initiative is to help customers understand and come to better manage their energy costs. These two factors are at the heart of the skepticism customers harbor for the petro retailers. Customers feel powerless and unappreciated – walking wallets to be picked clean.

The Share of Life relationship (see here) endeavors to create mutual bonds between the customer and the petro retailer by recognizing that each needs the other. Customers need a petro partner to help them manage their energy consumption and costs while the petro retailer needs customer support to help channel bottom line revenue toward the energy solutions of the future.

Sounds radical doesn’t it – customers helping the petro’s make money? At the end of the day – yes, but there’s more to the story.

Understanding:

At the outset there needs to be a deeper sharing of information and understanding of the energy market. How much it costs to produce, distribute, refine and distribute a litre of gas. Why/how prices fluctuate. What actions the petro takes to help soften the fluctuations. How taxes are calculated etc… Of course record profits at petro’s at the same time as fuel costs rise become a major disconnect, so that correlation needs to be explained or addressed.

PetroCanada has started to take the first tentative steps in beginning a dialogue with their customers; in fact I have made some of these comments/observations at their blog site.

Customer Commitment Credo:

But these are tentative steps, not the kind of leadership/initiative to transform a relationship. To accomplish that I would issue a public customer commitment – a credo that would define the expectations customers can have of the petro and hold all employees accountable to the same standard. Key to this document would be a policy statement on pricing. A good example of which is the United Airlines customer commitment document: http://www.united.com/page/article/1,,1505,00.html?navSource=Dropdown07&linkTitle=ourcustomer

A credo is actually not as radical as it might seem. It simply codifies the brand promise and with it becomes a powerful self-reporting Customer Experience Management tool for the petro.

Manage Energy Costs:

2006 constant dollar oil priceThe petro would implement some proactive programs to help its customers manage their energy costs by allowing customers to pre-purchase their gasoline – just as they do with natural gas and other utilities.

I envision a program where, customers would be able to pre-buy gas at that current street price (plus the cost of storage) and then draw down from that inventory within a set period of time.

Ex. Gas at $1/litre + 1cent/litre for storage – customer would pay $1.01 for up to 1000 litres

This is an up-front program, the customer pays for their purchase ($1010) – the petro gets the cash and the government gets its tax revenue. Over the next 6-12 months the customer is able to draw down from their inventory. If the street price is advantageous – the customer can buy gasoline at the street price – otherwise they draw from their ‘reserve’ as they see fit. If the customer hasn’t used up their inventory in time they would be charged a cost-related short-term storage fee.

So as not to confuse the operational logistics with upfront purchases and delayed consumption, the tracking system(s) would be reprogrammed to advise purchasing/production of the transaction in order to take that into operational account.

NOTE: There is a small scale (6 locations) independent program operating in St Cloud Minnesota – First Fuel Bank since 1982.

Addendum: Since this original post, Petro-Canada has implemented a point based equivalent of this fuel management control program. Their initiative allows consumers to trade in points for use toward a 5 cent per litre reduction at the pump. Kudos to them for a simple and elegant solution.

While price hedging is one way of gaining some control over price fluctuations – the other side of the equation is improving fuel efficiency and driving habits. A series of ongoing and high profile messaging would be the norm to ensure customers learn and take advantage of any and all fuel efficiency programs from the petro:

Messaging:

“Keep tires properly inflated saves x% fuel – that’s $y on this fill up alone.” the message being flashed at the beginning and at the end of the pumping process.

The portal would provide traffic and weather updates and retail pricing feeds – and bulletins posted to advise people of changes in the crude oil market that might impact the pump price – giving customers every reason to come to the petro site (real or virtual) because the petro is on their customer’s side.

Promotions:

To get older vehicles off the road by having older vehicles registered in a “Let’s retire Bessie” campaign – new cars to be won etc…

Addendum: seems the auto sector is actively promoting this idea in the UK and elsewhere to help manage its inventory backlog in the face of the worldwide economic slowdown

Margin:

I would expand the service capability of the convenience stores to include new LOB’s – take for example this emerging opportunity from PortoMedia which is field testing the ability to download full length video rentals onto a smart card inserted into a vending machine all within 30 seconds.

Data capture:

The web portal would be redesigned to allow customers to keep track of their mileage and fuel consumption by submitting their own information. Aside from the CRM data value for the petro, the customers would come to understand their fuel efficiency over time- compared to other similar cars driving similar distances etc… The petro would be able to monitor the reported mileage and issue email bulletins to notify motorists its time for an oil change, tune-up etc… all of which help with fuel efficiency and heighten cross promotional opportunities.

To the extent the petro has an in-house servicing capability (ie PetroCan’s Certiguard, Shell’s Jiffy Lube) it presents a natural cross selling opportunity – others would be able to form a network from the myriad of independent garages.

Leverage the Community:

All of these programs would help demonstrate to its customers that the petro is serious about its future with its customers and prepared to take proactive and interactive steps to continue to earn the relationship.

I look forward to hearing your comments on these ideas. As I mentioned the intent of these programs are to create a mature relationship between customers and petro retailers where both work together to help all of us better manage our fuel consumption.

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