Shrinking Fuel Distributor Margins a Problem for the Industry

Do you know where all the money in the cost of a gallon of gasoline goes? We've blogged about this before and the answers surprise a lot of people.

As expected, the biggest chunk of the gallon's cost goes pay for the crude oil it's made from. The next biggest slice goes to local, state, and Federal government taxes. After that, the refining costs take a chunk, followed by marketing costs.

After accounting for various expenses and deductions from the revenue generated by fuel sales, the profit margins left for two critical stakeholders—the fuel station retailers and the fuel distributors—are notably meager.

Fuel station retailers find themselves in a particularly tight spot financially, with profit margins on fuel sales frequently hovering around a mere 2 cents per gallon. This slim margin can be further eroded by credit card processing fees levied on transactions, which are commonplace due to the convenience of debit and credit card payments at pumps. That's why you often see different prices for cash vs. credit at the pump.

These margins can be so narrow that fuel sales often operate as a "loss leader" for many stations, meaning they sell fuel at a loss to attract customers to their convenience stores, where sales of higher-margin items like snacks and beverages can offset losses on fuel and help sustain the business.

Fuel distributors, the intermediaries who purchase fuel from refineries or oil companies and supply it to fueling stations, also face challenging financial circumstances. Their earnings are typically around 1% per transaction, translating to a profit of about 3-4 cents per gallon of fuel distributed—occasionally reaching up to 6 cents, though such instances are rare.

The competitive nature of gasoline and diesel pricing severely restricts the ability of fuel distributors to increase their margins. The industry operates on thin profit margins, reliant on minor price advantages to remain viable. Both fuel distributors and gas station retailers must navigate these narrow financial pathways to sustain their operations, underscoring the high degree of economic pressure within the fuel supply chain.

HOw do they stay in business?

Facing these kind of operating challenges, fuel distributors have found innovative strategies to remain viable and competitive.

One effective approach involves diversifying their offerings by integrating problem-solving fuel treatments into their product lineup. Ethanol and diesel fuels, for instance, are susceptible to specific issues like phase separation in ethanol and microbial contamination in diesel. By providing solutions to these common problems, fuel distributors can not only enhance their service value but also create additional revenue streams, thus bolstering their slender profit margins.

The opportunity for differentiation and added value doesn't stop with the sale of fuel treatments. A significant portion of the market remains unaware of the potential issues lurking in their fuel tanks. This gap in knowledge presents a golden opportunity for fuel distributors to distinguish themselves from competitors through customer education. By informing customers about fuel-related problems and offering effective solutions, distributors can build trust and credibility.

In today's market, the relationship between businesses and their customers has evolved. Customers now expect more than just transactions; they seek relationships with businesses that offer added value and genuine solutions to their problems. With the wealth of information readily available, customer loyalty has become more fluid, with many willing to switch providers for better service or value.

Thus, fuel distributors are compelled to reposition themselves not just as suppliers, but as knowledgeable partners in their customers' success. By addressing customer needs with effective solutions and educating them about preventive measures, distributors can foster loyalty and create "raving fans." This strategy of adding value beyond the basic supply of fuel, coupled with a commitment to customer education and support, enables fuel distributors to thrive despite the inherently narrow profit margins of the industry. These efforts to go beyond the expected, solving real-world issues for their clients, lay the foundation for long-term customer relationships and, ultimately, a sustainable business model.

Just imagine. Wouldn't you want to do business with a company like that?

You may be interested in these related posts:

• Gone again - the biodiesel tax credit
• Steps to Prevent Fuel Contamination
• Treating infected fuel - where do the fuel bugs go?