Why measuring capacity utilization is essential for fuel retailers

Despite the outsized costs for these assets, few station owners track or measure how effectively they’re utilized on a daily basis.

August 18, 2022
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Why measuring capacity utilization is essential for fuel retailers
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Why measuring capacity utilization is essential for fuel retailers

The most expensive assets on all fuel retailers' books are their land and equipment. The cost to build or acquire a station can range anywhere from $2 million in smaller markets to more than $10 million for higher traffic areas. Retailers often end up spending more than half of their gross profits (fuel retail prices depending) to pay off these assets through mortgages, interest, rent, and other long-term capital expenditures.

Despite the outsized costs for these assets, few station owners track or measure how effectively they’re utilized on a daily basis. Every minute a pump stays empty is a minute you’re not using your land and equipment to its full capacity, effectively leaving additional operating income on the table.

We call this capacity utilization. It’s a fundamentally different way to think about your business. When capacity utilization is increased, the financial results speak for themselves.

Measuring Capacity Utilization

“Capacity utilization” is the measurement of how many transactions or gallons are pumped during a specific time frame, compared against the transactions or gallons that could have been pumped during the same time frame if the pumps were continuously used. In other words, it’s how much of a potential “pump hour” is spent actively pumping gas.

This number can be hard to get to. Many station owners manually count the number of cars that come through a station in any given hour or hire an outside consultant to do it. These methods are expensive, laborious, and only show a momentary snapshot of what your utilization looks like on-site. 

For a more holistic view, we measure capacity utilization by taking a look at your time-stamped historical transaction data going back a full year. 

  • To calculate average utilization, we look across 12 months and identify the single hour with the highest number of transactions or gallons and use that as the benchmark for that station’s max capacity. Then we take a look at every other hour that the station is open and record the number of transactions or gallons sold. When we divide the total number by the max capacity, we find the retailer’s average capacity utilization. 
  • To calculate utilization at the busiest times, we take the three busiest hours (most transactions or gallons per hour) on any given day (rush hour, for example) and calculate a separate average to see whether utilization reaches its full potential during those momentary spikes in traffic.

In an analysis of 30,000 gas stations nationwide — about 20% of all U.S. locations — we found that the average station’s pumps are only being utilized at 24% pump capacity. When stations see the most traffic during peak hours, utilization jumps to 41%. This means pump capacity sits idle anywhere from 59% to 76% of the time, and that unused capacity represents a huge gap between what stations are earning and what they could be earning.

The gaps between high-performing (top 20%) and low-performing (bottom 20%) stations expose this lost opportunity even further, showing how many gallons stations are leaving on the table:

  • Highest utilization stations = 30% on average with 53% during busiest times.
  • Lowest utilization stations = 15% on average with 25% during busiest times.

As clear a gap as this is, the obvious solutions for fuel retailers just don’t cut it.

Common Approaches for Increasing Capacity Utilization

Let’s say you lower the sign price. As soon as one price in an area drops, stations nearby will move to match or beat it. All those same stations are still competing for the same customers and selling the same gross amount of fuel but for less — leaving the capacity utilization basically unchanged while profits decrease.

Unfortunately in-house loyalty programs don't change capacity utilization either. They're effective at engaging the existing customers who have signed up, but do little to attract new customers. So utilization stays the same and no new gallons are being sold. Plus an analysis like the one we've done here already proactively captures the impact of in-house loyalty, since the majority of stations already run those programs on-site.

Financial Impact of Increasing Capacity Utilization

When retailers crack the code on increasing their capacity utilization, they unlock bottom line profit.   

For illustrative purposes, let’s take a look at an abbreviated monthly profit and loss statement from fuel transactions at an East Coast gas station.

The station is making $332,120 in monthly revenue, and their Cost of Goods Sold (COGS) — every expense that goes into filling and maintaining fuel inventory — over the same period comes out to $310,871. With approximate operational expenses included, the final equation provides an earnings before interest, taxes, depreciation, and amortization (EBITDA) figure of $6,649 for the month:

What does capacity utilization have to do with all this?

There’s a saying in the grocery industry: If you can get each person to put just one more thing in their shopping cart, it would fall straight to the bottom line. Why? Because it doesn’t cost a retailer anything (beyond the cost good itself) to sell one more item — not in additional staffing, lighting, or inventory because the grocer has unutilized capacity that the sale of one additional item helps fill.

The same applies to fuel.

 Doing so requires identifying the customers you don't have today (since they are not using any of your available capacity) and getting them to your site profitably (i.e., within your after credit card and tax margins).

This is a problem I work on every day at Upside. The Upside app:

  • Expands your station’s reach, identifying untapped customers that have yet to use your station and utilize capacity (i.e., your competitors’ customers).
  • Measurably changes consumer behavior to bring new, incremental transactions in a way that’s profitable for you, the retailer.
  • Drives consistent incremental gallons on-site through higher capacity utilization over time by making ourselves — and your business — part of consumers’ routine.

Because Upside uses your spare capacity by filling it with profitable, incremental transactions from this larger draw of customers, there are no extra operating costs. That incremental profit that Upside drives funnels directly into EBITDA.

Upside currently provides our merchants on average a 4-7% lift in gallons sold, which in the case of the East Coast station elevates the EBITDA after incremental promotion costs to $7,356. That’s an additional 10% directly to the bottom line.

Upside aims to utilize 20% or more of each station's capacity in our network. In the same example, this would maximize average gross profits to highs of $54,747 and EBITDA of $22,324 (compared to $6,649) — a 330% increase from the pre-Upside average.

This explosion of EBITDA growth shows that its relationship with consistent capacity utilization is non-linear because the operating income from utilizing spare capacity drops directly to the bottom line. This approach drives new levels of financial growth just by using what stations already have in front of them.

The last two years have hammered home that the world is an unpredictable place, and things can change overnight — particularly in the volatile fuel industry. Staying in business, let alone staying competitive, is going to take creative, thoughtful, solutions. When fuel retailers think and act differently with their businesses, the results wildly exceed expectations.

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Why measuring capacity utilization is essential for fuel retailers

Alex Kinnier

Linkedin - Upside

As co-founder and CEO of Upside, Alex Kinnier is working to transform brick-and-mortar commerce. His success in growing Upside into a company driving $5B+ in commerce annually was informed by his years of experience leading product development teams at Opower, Google, and Procter & Gamble. Outside the office, Alex is an ardent technologist and investor, always on the cutting edge of products with the potential to change the world.

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