Navigating thin margins in fuel and avoiding the 'vicious cycle' of cost-cutting

When fuel margins are low, retailers make less profit. But industry executives say cutting costs can make pre-existing pressures worse.

May 6, 2024
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Navigating thin margins in fuel and avoiding the 'vicious cycle' of cost-cutting
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Navigating thin margins in fuel and avoiding the 'vicious cycle' of cost-cutting

We know that retail fuel is a cyclical, ever-changing business. 

Sign prices fluctuate based on changes in supply and demand. Those changes can occur for a variety of reasons, from upstream decisions from OPEC+ to weather-related emergencies. When those changes occur, there’s nothing retailers can do to prevent them; they can only manage how they respond.  

“We knew there were good times and bad times,” said Jeff Rubin, a veteran fuel operations executive for Motiva and Shell. “You weathered the storm through the bad times, and you just had to be in the business when the good times came.”

When fuel margins are low, as they have been for the last several months, retailers earn less profit — and for retailers who invested significantly during high-margin times, affording all of those investments could become a big problem. But cutting the wrong costs can lead to reductions in revenue, which in turn necessitate further cost cuts. How can retailers grow their business during low-margin times and avoid that “vicious cycle”?

The context for fuel margins

Consider the chart below that depicts the cyclical nature of those high- and low-margin times for fuel retailers. You’ll see average sign price for regular grade gas alongside average gross profit margins for retailers from 2022 to the present. You’ll see that 2022 saw abnormally high sign prices when Russia’s invasion of Ukraine threatened fuel supply.

This graph makes it clear that there are times when margins are so thin that retailers sell at a loss, and so high that retailers are able to recoup their losses to maintain their business.

Doing business in these high- and low-margin environments  

When retailers have high margins and are earning comfortable profit on each gallon of fuel they sell, they can play offense and spend money to acquire new customers with the additional revenue they’ve generated. During sustained high-margin times in 2022, a lot of retailers invested in growing their business by building new locations and hiring more employees. 

However, you can see that the market has been in a sustained low-margin period since the end of 2023. It’s a situation that doesn’t appear to be changing soon. In these environments, retailers usually play defense rather than offense — it’s about “weathering the storm,” as Rubin said, and staying in business to see the good times come around again. 

Further complicating the current situation is a fast-approaching period of high sign prices. As winter thaws and the weather gets warmer across the country, stations roll out their more expensive “summer blend” and margins get even tighter. 

How will consumer behavior change when prices increase? Since fuel is an inelastic good that most people need, demand won’t change too much in the short run. People will still fill up their tanks, because they have to. From January 2022 to April 2024, held relatively constant, even as sign prices fluctuated (including that surge in the summer of 2022): 

What will change, however, are the locations that consumers decide to purchase from, because they’ll be chasing value. 

“In high-price environments, we saw people trade down to lower grades or look for lower prices at other stations,” Rubin said.

During the period of elevated prices from June 2021 to June 2022, data showed there was a 5.7% increase in consumers shopping around at different stations

In order to navigate the uncertainty and keep their business running during low-margin times, retailers have to either increase revenue or decrease costs.

When to cut costs 

In general, it’s always a good idea to evaluate your programming on a regular basis to make sure those investments are generating a profitable return. If they aren’t, then removing those line items should be a habit. 

But what we’re talking about here is more generalized cost-cutting — when retailers proactively seek out line items to cut in order to bring topline expenses down. In low-margin environments, many retailers may have the gut reaction to cut costs. It’s an understandable feeling; there’s less money coming in to pay the bills, so bringing top-line costs down can ease the burden. 

It makes sense to do that if:  

  • You’re already operating at full capacity (i.e.: no empty pumps or idle staff members).
  • You can’t increase profits with your existing customer base (i.e.: your current customers are buying all their fuel and c-store items from you).

But if that is not your situation, then general cost-cutting might make low-margin pressures worse. 

When not to cut costs 

Not all line items should be on your chopping block. Removing key items from the retailer’s toolkit could result in further decreases in revenue, which would necessitate further cuts, causing further decreases in revenue — and the cut→loss→cut “vicious cycle” has taken over.

“You’re cutting your nose to spite your face,” Rubin said.

Instead, he advises retailers to see which expenses provide the highest return on investment and safeguard them — they might be the only things keeping the business afloat during those tough low-margin periods.

“When you’re in low-margin environments, you need sales, and as long as an investment is helping you cover your fixed costs, it’s a good thing,” Rubin said.

Ultimately, Rubin cautions that retailers should be careful to not fall victim to the boom-bust nature of margins. Not only does that jeopardize much-needed revenue, but it also jeopardizes customer relationships. 

“In low-margin environments, you're subject to take drastic measures to secure your business. But when you cut investments that deliver customers, you're literally telling those customers that you don't want them to come to your store anymore,” he said.

So if cutting costs won’t solve for low-margin pressures, what will?

Retailers have to find transactions, as Rubin stressed, and increase their revenue. That means identifying the investments that give you a return, and doubling down on them.  

What to expect from the line items you keep 

What are the hallmarks of a tool worth keeping? The following three factors are strong indicators of an investment that’s more than just an expense. 

  • Positive return on investment: Ultimately, the investment has to boost your bottom line. Opportunities for profit are limited during low-margin periods, so prioritize investments that deliver a positive ROI above all.  
  • Positive customer sentiment: Does the investment impact your customer base? Do you risk eroding trust (or even pushing customers away to a competitor) by cutting something that they appreciate using at your station? If so, that kind of investment might be worth keeping.
  • Little-to-no operational costs, maintenance costs, or resource lift: Even when an investment delivers a positive ROI and makes customers happy, take a look at whether it creates an undue burden for your operations. Oftentimes low margin periods are accompanied by staffing shortages, so ideally the investments you keep should operate in the background, with minimal intervention required.   

Small margins, big opportunity

Retailers expecting relief from low margins might be waiting a while, as they’re about to get tighter. The typical reaction to a low-margin environment is to cut costs across the board, but the situation requires more thoughtful and decisive action. 

Cutting budget during low-margin periods will hurt your business. Rather than risking further reduction in revenue, renew your commitment to your investments that deliver returns.

Whether margins are healthy or razor-thin, Upside can help grow your fuel business. 

Navigating thin margins in fuel and avoiding the 'vicious cycle' of cost-cutting

David Poulnot

Linkedin - Upside

David is a results-driven sales executive with a demonstrated history of success within enterprise relationship management and business development. At Upside, David serves as the Vice President of Multi-Vertical Sales where he is a key stakeholder in defining Upside’s merchant acquisition strategy along with leading the team that executes on the strategy nationwide.

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