LAS VEGAS – What’s the difference between a petroleum retailer who “gets it” and one who doesn’t?

About two cents a gallon.

That observation, though made in Las Vegas, Nevada, wasn’t from a smarmy hotel lobby comedian, but from John Melo, most recently president of U.S. Fuels for BP. Melo’s presentation on Tuesday at the NACS Show 2006 was part of Business Strategy Day, an entire day of programming dedicated to the convenience and petroleum retailing industry.

Melo’s point was that many petroleum retailers are leaving money on the table – even in a volatile market – because they don’t have the understanding they need to squeeze every cent from their fuel offering.

Specifically, Melo told petroleum retailers that the way to recover that two cents is to understand the supply chain. “It’s no longer the U.S. supply chain,” said Melo. Rather, it’s a global and local supply chain.

“The way the United States balances itself is dependent on the global marketplace. What happens in your local market depends on your supply envelope,” he said, because the margin available to suppliers in each of the 15 supply envelopes, or terminal areas, is unique. Contributing to the cost structure are factors such as:

• Where and how product enters the United States
• Who owns the supply
• Time it takes to procure supply

First, volatility is here to stay. “Structurally, the U.S. has a longer re-supply curve and is more dependent [on the rest of the world],” said Melo. As long as there are varied specs – more than 100 different specs by Melo’s count – it will be impossible to balance supply with demand.

Second, making better decisions is all about understanding supply envelopes. “The last thing you want is one national supplier,” Melo said. “As suppliers, there are places where we’re advantaged and places where we’re not.” That’s because national suppliers structure deals based on a weighted average of margins over all supply envelopes. That’s where retailers who actively manage supply contracts based on an understanding of local market dynamics have an opportunity to do better. But that doesn’t mean petroleum retailers need hundreds of supply contracts. “You can probably cover the country with three or four,” he said.

Third, security of supply is a national strategic issue, but it’s not about independence. It’s about interdependence and conservation.

For petroleum retailers, Melo advised a three-part strategy:

Think about supply sources as a portfolio. Probably the most important strategic question is about channel mix. How much unbranded versus branded, and how much contract versus spot should you have?

While the answer depends on the supply envelope you’re in – how liquid your market is – a best practice benchmark is 70 percent contract and 30 percent spot with local variations ranging up to 80 percent contract and 20 percent spot.

Collaboration in the supplier mix – don’t keep all your eggs in one basket – is another important element to retailer strategy. Melo said this is one element convenience and petroleum retailers “get” really well, but for the wrong reasons. He advised retailers to talk to potential suppliers about their supply situation and growth strategies to identify where it makes sense to collaborate.

Finally, take advantage of the “natural hedge” by understanding how to use different contract terms and indexes (Platts and Opus) to ensure you’re not exposed to the negative side of the market every time.

Melo’s bottom line message? You can’t go wrong. If you decide to get out of the business because market conditions are insurmountable, you’re right. If you decide to learn about the market to make challenging market conditions an opportunity, you’re right. Regardless of volatility and other challenges in the market, “you’ll achieve whatever you decide to achieve.”