The retail portion of the fuel chain is the most visible to the general public and likely the most complex to navigate.

Who Comes Up With Retail Gasoline Prices?

If you ask the average person who sets the price of gasoline at their local station, they might tell you that the station owner slaps the price tag on the pump, while shaking their head at how much their fuel bill eats into their monthly budget.

But that’s not really the case.

A station wants its market share to be as big as possible for its location, so it’s about maximizing its gallons with the highest possible profit against its competitors.

It’s a complex process to ensure that the station’s price matches the “value” the brand offers in a market in terms of customer perception, while ensuring that the station sells as many gallons as possible and makes as much money on those gallons as possible.

Elasticity of demand comes into play here, as some stations have very elastic volumes (meaning if they lower their price, they increase their gallons), while many stations have very little elasticity, so lowering their price against competition doesn’t actually gain them gallons, therefore just costing themselves profits. It’s VERY complicated.

Competition on the Street

Remember how we said earlier that spot and rack prices could change daily?

That’s not the case with retail. Most retailers change their prices 3-4 times per week. Very few do dynamic pricing where they change their prices more than once a day, unless markets are going haywire.

Retailers are trying to strike a balance with margin and volumes to maximize their profits, while keeping their brand positioned as they want it to be for customers compared to other competitor stations nearby.

The retailer always must be mindful of what his competition is charging, especially if he or she is competing against a “hypermarketer.”

A hypermarketer is someone like a Wawa, or a Costco, who sells fuel to get the customer into the big-box store to buy items other than gasoline. Many times, those hypermarketers give up some of their margin on fuel for the sake of increased inside sales.

As you can see, competition is fierce and owners need to be aware of what their competitors are charging, so they can attract repeat business and sell more fuel.

Do Brands Operate Retail Stations Anymore?

Two decades ago, most U.S. gasoline stations were branded under a major flag, like Exxon, Mobil, Chevron, Shell or Texaco. Chances are, you probably even had a brand-specific gas card.

But, in just the past 20 years, the retail marketplace transformed. That gas card is probably long gone from your wallet, replaced by Visa, AMEX and debit cards. And that’s just one of many changes…

The majors consolidated among each other to create larger conglomerates, a.k.a. “Super Oil Companies.”

A huge portion of the gasoline stations that used to be owned by popular fuel brands got sold off. The playing field got much more competitive.

Those hypermarketers we just talked about are adding to the competitive landscape. Wawa, Costco, Wal-Mart, Sam’s Club, Safeway and BJ’s Wholesale, just to name a few, started selling fuel.

Also, we can’t forget that the majors have decided that they don’t love owning the “real estate.” They don’t want the headache of operating service stations—staffing and maintaining them—and would rather focus on supplying fuel through their branded distributors or spending more time on oil exploration.

However, there are signs that this cycle may be coming to an end and a new one is beginning, where majors are starting to get back into retail operations once again. Due to better fuel economy of vehicles and the shift, accelerated by the COVID-19 pandemic, of many workers now working remotely full time or in a hybrid work environment, gasoline demand has been on a slow and steady decline. With recent acquisitions such as BP’s purchase of Thornton’s and Travelcenters of America, and Shell’s purchase of a large portion of the Timewise Food Stores in Texas, there are signs emerging that majors may want back in on operating retail stations once again.

The Company-Operated Station

Who Are They?

Owned and operated by a major refiner, the company-run station was, until recently, a diminishing breed in the U.S. as majors focused on other areas of their business. But lately, majors are exploring a re-entry into retail so that they have guaranteed places to sell their supply as demand diminishes slowly over time due to the energy transition and sustainability initiatives.

In the case of the “company-op,” the refiner owns the land, pumps and any above-ground structures (such as a carwash or convenience stores). The oil company hires the staff to run the retail site.

How Do They Buy Their Fuel?

The refiner supplies the station directly via its own delivery network, and the prices the station charges are set exclusively by the company. This is what is commonly known as a dealer tankwagon or DTW price. The price is usually tied back to a rack and includes delivery, since the major delivers the fuel itself.

The Lessee Dealer

Who Are They?

A lessee dealer does not actually own the real estate or the equipment. They lease or rent the space and absorb the costs of operating the station.

Usually—but not always—the lessee dealer enters into the brand relationship via a branded distributor, which is known in the business as a branded jobber. Essentially, the lessee dealer leases the real estate and, through the jobber, pays a fee to use the brand name. They are usually locked into long-term contracts with the branded jobber and, by default, with the major oil company.

How Do They Buy Their Fuel?

The lessee dealer typically buys fuel directly from the major via the branded jobber. The price they pay is still the same basic formula: rack price + transportation to deliver into the station.

Here’s a big advantage for these guys – the lessee dealers often receive benefits from their major in the form of rebates and incentives, especially in markets that feature tight margins and stiff competition. These benefits often come in the form of “temporary voluntary allowances” or TVAs, which incentivize the dealer to push the fuel in times of oversupply.

The Jobber/Dealer

Who Are They?

“Jobbers” resell fuel—it’s a revenue center for their business. Their customer base is varied. It’s not just retailers; jobbers also resell fuel to end users such as municipalities and government entities.

If a jobber/dealer has the storage capacity to buy bulk volumes, they buy at the rack or on the spot market. They then own a variety of stations, many of which may carry their own brand (e.g., “Sam the Jobber’s Gas”). This is considered an “unbranded” outlet.

They may also operate branded stations, meaning that those stations fly the flag of a traditional major brand.

Large resellers are among the most sophisticated fuel buyers. They are, in essence, oil companies without the “hardware” (i.e., the refinery) with supply, trading and marketing arms. They are frequently called “super jobbers.”

How Do They Buy Their Fuel?

Jobbers and dealers buy fuel based on rack indices and on the spot market, which sets the basis for their retail price levels.

The Open Dealer

Who Are They?

This type of retailer, typically, is a private, independent station owner.

Sometimes, they become jobbers and redistribute fuel, but most of the time, they are just retailers who own their own real estate. They own everything—the land, the pumps, everything.

Most times, they get supplied from local resellers and do not pull their own fuel at the rack. They usually have a contractual supply agreement with the local jobber, but unlike the jobber or the lessee dealer, their contract terms are usually shorter in length.

How Do They Buy Their Fuel?

The open dealer usually buys fuel from a jobber, who charges a “delivered” price to get it from the rack to the station. The open dealer will use that delivered cost as their basis and add in their own margin. A big challenge for these retailers is that they usually do not get help from their supplier in times of tight supply or when margins contract the way a retailer with a branded supply deal might. So, for them, competition is EVERYTHING!

Chain Retailers

Who Are They?

Chain retailers are companies such as Kroger, Wal-Mart, Sam’s Club, Wawa, Costco and Safeway.

These retailers have become among the newest and most influential players in the U.S. retail fuel landscape.

Chain retailers construct the stations on their own sites, so they own the entire station. Their stations also usually fly their own brand flag.

How Do They Buy Their Fuel?

Chain retailers buy an enormous amount of fuel, usually on a rack basis but also on a spot basis. Remember—they are huge fuel buyers and most often aggressive negotiators with their suppliers. Their fuel-buying operations are among the most sophisticated in the industry. They leave nothing on the table!

On the street, they often feature the most competitive prices in the market, making lower margins on fuel to attract customers to the store, where they will buy higher-margin items.

Looking Ahead

The trends that shaped the current retail landscape are here to stay, and OPIS market watchers fully anticipate:

• M&A activity is going to continue to accelerate, particularly as majors look to get back into retail operations.
• Hypermarketers are going to continue to expand at a rapid pace, entering new markets, leading to increased competition.
• Jobbers are going to buy more stations and probably other jobberships, thus creating more superjobbers.

Conclusion

Above all, the price influence chain will continue to ripple volatility down from the NYMEX to the spot market, to racks and to the retail level.
Buying fuel can be confusing—it’s not like stocking pencils, pens, or paper cups. And with a rapidly changing market, it can be daunting to make the right decisions.