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2020 Fuels 50: New Rules
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2020 Fuels 50: New Rules

Coronavirus and an oil price war have scrambled the conventions of fuel retailing–but for how long?,

CHICAGO — It’s been an unwritten rule of the past decade that retailers with large c-stores and sophisticated foodservice programs have enjoyed some of the highest fuel volumes and gained market share in an otherwise flat demand environment. Sub sandwiches and salads can be a powerful lure in picking a place to fill up, which has helped land regional operators such as Wawa, QuikTrip, Sheetz and RaceTrac in the top 10 of CSP’s Fuels 50 ranking for the past four years.

And based on full-year 2019 data, these brands again placed near the top in fuel volumes. The Fuels 50 ranks fuel brands by market efficiency, a metric developed by Oil Price Information Service (OPIS) that serves as a proxy for fuel volumes. It is calculated by dividing market share by outlet share.

  • Click here to view the Fuels 50 list.

This food-first strategy over the long term is sound: Fuel demand is expected to continue to decline as fuel economy standards ratchet up and the vehicle fleet gradually turns electric. Foodservice provides a ballast to help c-stores grow traffic and keep sales afloat.

But 2020 is set to scramble demand dynamics for every fuel retailer, and no one is quite certain for how long.

Three-Headed Monster

Tom Kloza, global head of energy analysis for OPIS, Rockville, Md., describes the chaotic forces at work in the fuel market as a “three-headed monster” composed of an oil price war, COVID-19 business restrictions and social distancing. In the first three months of the year, an oil price war between two of the world’s largest producers, Saudi Arabia and Russia, resulted in a wave of crude flooding the market, and it swiftly dragged crude-oil prices down with it. (An April deal may whack this head of the monster.) And the swelling COVID-19 pandemic, which as of press time in early April had infected more than 640,000 people in the U.S., had taken the legs out from under already flagging demand.

This spring, futures prices for West Texas Intermediate (WTI) crude momentarily slipped below $20 per barrel–a level not seen since 2002. And gasoline prices have fallen along with oil prices: In late March, the national average for regular-grade gasoline dropped below $2 per gallon for the first time in more than four years, according to GasBuddy.

In normal years, lowering gasoline prices can spur greater consumption. But not in 2020, when there are few people able to fill up. As of early April, at least 311 million people in more than 40 states were being advised to stay at home through shelter-in-place orders to fight the coronavirus pandemic, according to The New York Times. More than 40 million people could be unemployed by mid-April because of the economic fallout, estimates suggest.

Industry watchers say the financial strain facing the United States today varies vastly from previous economic events of recent memory.

“In the past, all our major recessions and the global drop in petroleum demand were driven by financial crises or disasters like 9/11,” says Joe Petrowski, senior adviser for Yesway, West Des Moines, Iowa, and former CEO of Cumberland Gulf Group. “But this is certainly unprecedented–they just slammed [the brakes] on the economy. To have 95 [million] to 100 million people working from home, and not commuting, is just enormous.” In a worst-case scenario, assuming the COVID-19 pandemic lasts through the year, Petrowski estimates that the average retailer could see a loss of 23,000 gallons per site per week.

“When margins normalize and when people are allowed to return to work, we will have to see the ultimate demand impact.”

IHS Markit, parent company of OPIS, predicts total gasoline demand in the United States could fall by 50%–or up to 4.1 million barrels per day–during the country’s COVID-19 response. This would be greater than the demand destruction seen during the Great Recession in 2008, and it could last even longer, depending on how effective the United States is at controlling the virus’ spread.

“What was once deemed to be hyperbole–a 50% drop in [fuel] sales–that’s what we’re looking at,” Kloza says. “The question is … does it go from 50% to 53% to 57% to 60% and then it stops?”

Every fuel brand will likely see volume declines compared to 2019. The timing and severity will depend not only on a retailer’s main traffic drivers but also the number of sites that are in areas that have enacted more aggressive social distancing measures.

“The type of retailer establishment matters a lot,” says Kloza. ” ‘New-era’ operators who were destinations because they had such great made-to-order sandwiches–they may probably be at a disadvantage. Some of the other places where you can aggregate your shopping–big box or a supermarket–may actually have an advantage. It really is a new game for now.”

Demand Destruction

For some of the top Fuels 50 brands, success means shouldering the short-term demand destruction from COVID-19 while staying focused on long-term growth opportunities.

Wawa, which ranks No. 1 among chains larger than 50 stores in the Fuels 50, had already been modeling a 1% to 2% decline in fuel volumes in the markets it operates from tighter fuel economy standards, fleet electrification and other long-term trends. The COVID-19 demand destruction has thrown off the curve for the short term.

“Our fuel volumes and customer visits inside the store have been dramatically impacted by the virus and the related stay-at-home mandates issued by our governments,” says Brian Schaller, senior vice president, chief real estate and fuel officer for the Wawa, Pa.-based chain. “We are modeling the same scenarios as are discussed daily: How long will the softness in demand last, are we at the bottom and how quickly will we recover?”

Wawa, which has one of the most ambitious foodservice programs in the industry, shut down its made-to-order foodservice operations in Philadelphia in March, and it suspended its self-service coffee and fountain programs in all sites in reaction to state and local health guidelines to prevent the spread of the coronavirus.

Over the longer term on the forecourt, Wawa is looking for growth in alternative fuels–specifically, electric vehicle (EV) charging stations. Six new stores will add Tesla Supercharger fast-charging stations in 2020, giving Wawa 23 sites serving EVs.

Sheetz Inc., which also suspended its self-service dispensed beverage and bakery programs in March, was seeing a “substantial” drop in fuel demand at the same time, according to Mike Lorenz, executive vice president of petroleum supply for the Altoona, Pa.-based chain of nearly 600 stores. “And with no one going anywhere, the big question is how far can it go?” he says. “We’re talking maybe as much as 50%.”

For this year’s Fuels 50 ranking, Sheetz placed fourth by market efficiency per full-year 2019 data. Notwithstanding the demand destruction from COVID-19, Lorenz believes the fundamentals of why people buy fuel–location and price–have not changed.

“Then you look at all the other factors that are table stakes with regard to having a clean and brightly lit forecourt, having enough MPDs so you have the capacity during peak periods,” Lorenz says. “The other key for us that we’ve found is having choices.”

“We will have margins much greater than 28 cents for a while, which will take a little bit of the sting off it.”

For Sheetz, that includes adding diesel to new locations and higher-ethanol gasoline blends such as E15 and E85, which typically are priced at a discount to E10. And now that fuel retailers can sell E15 year-round, “we’ve seen those sales grow steadily,” he says.

In Midland, Texas, near the Permian Basin oil fields, the forces of demand destruction are twofold for Kent Cos.: the oil price crash, which has shut down many local shale oil operators, and the unfolding coronavirus response in West Texas, which lagged other states.

Kent Cos.’s Kent Kwik brand ranked second among store brands by market efficiency, according to OPIS. In an interview in late March, CEO Bill Kent said he had seen volume off more than 20% compared to 2019 at his 47 stores. He expects declines to accelerate to about 35% year over year.

“We don’t think we’ll go back to what we were doing pre-coronavirus just because we think this will have flushed out a lot of activity and maybe a lot of people that were here on a transit basis,” Kent says. “You may have less people, less gas, less foot traffic, less everything.”

Kent Cos. is in its 64th year of business and has seen several boom-and-bust cycles in the oil patch. Kent credits the retailer’s clean stores and Chevron and Texaco branding for surviving the upheaval. The operator is diversified, with other businesses such as restaurants, quick lubes and a trucking company. But it’s also learned to be realistic.

“We probably expect 10% to 12% volume decline on fuel and maybe more than that on the inside once the coronavirus is behind us and we’re just dealing with oil prices,” Kent says. If oil prices trend at $20 per barrel or less for a year or more, the level of activity on the oil field will shrink to a fraction of its former size.

“There are a lot of us out here that have made investments and competitors that have made investments for … a totally different market,” Kent says. “That’s going to be the challenge. That’s going to be the deal.”

Big-Box Rally

Which stores are faring best in the midst of COVID-19 demand destruction? Anecdotal evidence suggests big-box clubs such as Costco, which can price gasoline aggressively and offer a one-stop shop for consumers eager to reduce their exposure to the coronavirus. The chain had a negative 24.7-cent-per-gallon (CPG) price differential from its direct competition in 2019, according to OPIS.

“Gasoline is magical for them,” Kloza of OPIS says. At one point in late March, he says, Costco was selling gasoline for 30 cents below the competition within a general radius.

“You’ve got to get away from the pricing side. It’s no longer the driver of traffic.”

See Also

“A lot of people might look at that data and go, ‘Oh, my God, they’re getting killed,’ ” Kloza says. “No. The wholesale prices are so cheap and there’s such pain associated with getting rid of your bulk gasoline as a refiner or a distributor that they’re making higher profits on every gallon they sell than they probably have before.”

That said, Costco has been on the forefront of panic buying, and it faced a tsunami of foot traffic from shoppers eager to stock up on staples at its competitive prices. By the end of March, it had introduced temporary shorter fueling hours, closing its gas stations at 7 p.m. This will put a minor throttle on its volumes, which have trended around 500,000 gallons per month in typical years, according to OPIS estimates.

BJ’s Wholesale Club, a Costco rival that had a price differential more than 12 CPG below its direct competition in 2019, is another brand that Kloza expects may have an edge during the pandemic. Suppliers for the Westborough, Mass.-based chain, which has more than 200 stores and 145 fueling sites along the East Coast, told Kloza that BJ’s was seeing the least amount of volume attrition in its markets. “They were down 13% or 15% in Miami, where I think traditional retailers were 35% or 40% lower,” he says.

Record Margins

One silver lining for most fuel retailers during the chaotic first quarter of 2020 was that fuel margins were breaking records, hitting 80 cents per gallon in mid-March, according to OPIS data, although they had since trended downward.

“Retailers are realizing with the drop in volume, they can’t steal more market share by going down–because there’s no market share to steal,” Petrowski of Yesway says. “We will have margins much greater than 28 cents for a while, which will take a little bit of the sting off it.”

Yesway has 419 stores in mainly rural areas in nine states, with the majority having a shelter-in-place order. Jeff Scarbrough, Yesway’s senior vice president and director of fuels, says volumes are down about 18%-20% across the company’s platform.

“That decline is starting to accelerate,” Scarbrough says. “The inertia of the healthy economy starts to slow down and governors tighten down screws on all different businesses out there. People have fewer places to go.”

In response to the COVID-19 crisis, Yesway has assigned hosts to open doors for customers and clean fuel nozzles and dispensers at its stores. It is also looking at expanding the fuel discount offered through its Yesway Rewards loyalty program. Beyond that, Petrowski sees opportunity in offering gasoline cards with a fuel price locked in; consumers could purchase gallons at the current below-$2 prices for use when the market turns. But one thing Yesway won’t do is engage in aggressive pricing.

“The best strategy is [to] get away from the price sign and either offer a loyalty card with a discount specific to your location or fixed-price gasoline,” Petrowski says. “But you’ve got to get away from the pricing side. It’s no longer the driver of traffic.”

Ken Shriber, managing director and CEO of Petroleum Equity Group (PEG), Chappaqua, N.Y., cautions against relying on fuel margins as a remedy for declining volumes.

“Eventually things are going to normalize, and you’re going to get back to pre-virus margins,” Shriber says. “When margins normalize and when people are allowed to return to work, we will have to see the ultimate demand impact. There are operational situations out there that are vulnerable to a sustained demand decline.”

He expects small-chain operators–those with less than 15 locations–to be especially exposed to the looming margin reversal, and he suggests they take a close look at the value of their business and adjust. Already he is observing more M&A-related inquiries, and PEG is currently working on deals for several fuel retailers at various stages, he says.

“M&A activity will pick up because there are many operators who, prior to COVID-19, were trying to pick a point to exit,” Shriber says.

That said, he considers the c-store industry overall to be “extremely resilient,” and he is closely watching a few developments to gauge when the economic clouds will lift.

“I’m looking for stay-at-home orders to be lifted and, beyond that, once people are back to work, the demand level,” Shriber says. “I’m also looking for increases in commodity prices influenced by the U.S. government’s intervention in the Saudi-Russia oil war … and, like everyone else, a vaccine.”

  • See the complete Fuels 50 report.

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