How Branded Stations Operate | NACS Online – Your Business – NACS Retail Fuels Reports – 2013 NACS Retail Fuels Report
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The Association for Convenience & Fuel Retailing

 

 How Branded Stations Operate

While major oil companies have essentially left the retail fuels business, it still appears as if the major oil companies dominate the retail landscape. About half of the fueling stations in the country sell a brand of fuel from one of the 15 major refiners/suppliers and their signage certainly makes them look like they are owned by the refining or supply company. But instead the contractual relationship for fuels is much like that inside the store, such as where soda companies often have branded fountain dispensers.

Why Retailers Might Want to be Branded
For one, a station owner signs a supply contract to have instant brand recognition. More than 58% of stores selling fuels are one-store operations. Signing a branded contract instantly gives them a recognized brand for their number-one product, motor fuels. It also gives them a brand sought out by some customers. While price is still the number-one determinant in where someone shops for gas, about one in seven drivers consider fuel brand to be the top factor in their fuel purchasing decision. A branded contract also guarantees fuel supply, especially when supplies are tight. Supply guarantees can also smooth out extreme price volatility seen in the wholesale gas markets.

Operators also can benefit from the expertise provided by an oil company, which provides intelligence to the retailer on best practices, techniques to attract customers and training for operating a fuel retailing business. And as oil companies redefine what the brand is — whether the convenience of Speedpass or loyalty programs tied to grocery purchases offered by companies like Shell — there may be other non-fuel benefits to branding. For instance, a retailer may receive financial support such as an imaging allowance (loan) to improve the look of the store.

Why Major Oil Companies Might Want Branded Locations
The major oil companies have largely left the retail segment of the business because they can better deploy their assets in upstream production — that is, refining and/or production of oil. Instead of tying up resources on real estate and making a few cents a gallon selling fuel, they can put resources into larger-scale, long-term projects. But there is value in having your company name in front of millions of drivers every day. That's why the major oil companies continue to brand stations that they don't own or operate. A second reason is that branded relationships give oil companies a guaranteed customer for their product, at predictable volumes. The same holds true for other refiners or supply companies.

Typical Terms of the Contracts
So what are the typical terms of these branded contacts? While every contract differs, here is a broad overview:

Length: A typical contract is for 10 years, although contracts may be as long as 20 years or as short as 3 years for renewed contracts.

Volume requirements: Contracts typically set forth a certain amount of fuel each month that retailers must sell. Usually they can sell more than the agreed-to amount, but when supply disruptions exist, they may be put on allocation and only be given a percentage of what they historically receive in a given time period. This enables the supplier to more efficiently manage the distribution of fuels to all branded outlets in an equitable fashion.

Image requirements: Branded retailers receive marketing muscle from the oil companies, and that may include broad advertising to encourage in-store sales. Also, oil companies often provide financial incentives to display their brands. This also depends on who operates the station and the store owner's access to capital. In exchange, the oil company expects that the store adhere to certain imaging requirements, including specific colors, logos and signage, standards of cleanliness and service. The oil company often employs mystery shopping programs to assess compliance.

Wholesale price requirements: Branded retailers must purchase fuel from a branded supplier or distributor. Branded contracts benchmark the wholesale price to common fuels indexes like Platt's, plus a premium of a few cents for brand/marketing support. Some branded contracts also stipulate the retail markup on the fuel through a "consignment agreement," whereby the supplier or distributor retains ownership of the fuel until it is sold and pays the retailer a commission.

Types of Branded Owners
There are a few different ownership structures within the branded station universe.

Regional company or chain operated: A chain of convenience stores with a common name operates the branded locations. In many cases, a chain may sell different brands at different stores, based on the needs of the marketplace and terms of contracts that may have been carried forward from stores that were acquired from other operators. Many operations of this kind serve as distributors to themselves and maintain supply agreements with the branded oil companies.

Lessee dealers: The dealer/retailer owns the business. A major or regional oil company or a distributor owns the land and building and leases it to a dealer. The dealer operates the location and pays rent to the owner; as opposed to an open dealer who owns the property.

This arrangement gives the oil company or distributor a guaranteed supply outlet for its petroleum products, pursuant to a supply contract. A typical lessee dealer may operate more than one facility and does not wholesale gasoline or sell to other dealers.

Open dealer operated: The independent dealer purchases fuel from the oil company or a distributor, supplies fuel to the station — and possibly others — owns the business and owns or leases the building/facility independent from any supply agreement. The dealer may contract with a manager to run the business or run it himself.

Company operated: A "salary operation," where a major or regional oil company or distributor owns the building/facility and business. The company pays a salary to the managers/proprietors and supplies petroleum products to the location. This is also known as company-operated and direct operating retail.​

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