Fuel Prices the Big News in 2006
by Bob Swanson

Spring arrives in March, and along with that annual promise of rebirth, retailers can expect a slew of new metrics to measure their performance. Of course, the NACS State of the Industry Summit in partnership with CSP, which will take place April 10 to 12 in New Orleans, offers operators an unbeatable mix of benchmarks, analysis and networking by which they can ponder the newly released results and how they may influence the future. Given the vast amount of new data that will be unveiled at the summit and in the 2007 NACS State of the Industry (SOI) report, retailers will have ample opportunity to compare their results to the industry as a whole.

Survival of Inside Sales
Let us review some key metrics from last year and speculate on how they affected the industry in 2006. Clearly, the biggest story was motor fuels prices and how they affected sales and profitability. For 2005, a 29 percent increase drove industry motor fuels sales up 31.1 percent.

With so much of the consumer dollar going toward motor fuels purchases, retailer concerns about in-store sales were justified. In spite of the huge price increases spurred by worldwide demand for motor fuels and short-term distortions brought about by Hurricane Katrina, total industry in-store sales jumped 14.4 percent, as consumers were unwilling to forgo their normal shopping behavior at convenience stores.

Diminished Demand
What about 2006? Once again, motor fuels demand was high but had diminished by mid-year as inventories accelerated enough to lower crude oil prices. According to the U.S. Energy Information Administration (EIA), the price of motor fuels (all grades) rose 13.1 percent over 2005. Prices peaked in July 2006 at $3.025 per gallon and fell for most of the remainder of the year.

Motor fuels is a volatile commodity price-wise, but motor fuels margins are perhaps even more so. According to the OPIS Retail Fuel Watch, margins averaged 13.75 cents per gallon during 2006. Margins averaged 10.9 cents in the first quarter, 12.3 cents in the second quarter, 19.8 cents in the third quarter, and 12.0 cents in the fourth quarter.

It is no surprise that the third-quarter margins bulged as the price of motor fuels peaked in July and fell thereafter. Traditionally, motor fuels margins expand when prices fall as retailers are able to hold prices or reduce them slowly as wholesale costs drop. If this margin picture reflects results for NACS retailers reporting into the SOI survey, it means that retailers' margin as a percent of sales suffered a substantial drop during 2006.

Fewer Shopping Trips
On the merchandise and foodservice side, convenience retailers coped with fewer shopping trips by consumers, according to recent data sourced from Retail Forward ShopperScape. The data shows that weekly merchandise shoppers dropped 3.4 percentage points in 2006, while monthly shoppers fell by 5.3 percentage points.

Driving these drops in shopping trips was the significant rise in motor fuels prices. Shoppers were more likely to pass on impulse shopping trips and combine shopping trips, when possible. Higher motor fuels prices are more likely to increase usage of credit and debit cards at the pump and result in fewer trips inside the store.

All these factors made it more difficult to increase inside sales during 2006. One way to get an early look at the 2007 SOI metrics is to attend the SOI Summit. Hope to see you there!