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Royal Farms Case Study-Remote fuel price management
Introduction to the problem
Royal Farms is a Baltimore, MD based convenience retailer with 120 convenience stores in the states of Maryland, Delaware, Pennsylvania and Virginia. Of the 120 convenience stores, 85 sites sell fuel. Royal Farms has been in operation since 1959.
Like most convenience retailers, retail fuel constitutes the largest revenue for each location. At the same time, retail fuel can pose a tremendous challenge for companies like Royal Farms to maintain consistent profitability performance. It was Royal Farms’ goal to maximize retail fuel profitability. This is their story.
Discover and document your real problems
There are significant consequences to poor operational daily “blocking and tackling” within the fuel pricing process. Most companies seem to be apprehensive to challenge their inner-workings and areas of costly processes. At Royal Farms, their problems were quantified and calculated to have an enormous impact on their overall profitability as a company.
Rob Rinehart, Director of Retail Petroleum, will tell you that the number one place to begin is to, “Discover and document your real problems. What is real? Be honest with yourself; you have to discover what the truth really is. If you think that your stores are changing the prices when you call them, you are putting your head in the sand-you’re loosing money whether you like it or not.”
Royal Farms embarked on a crusade of truth to document their internal areas of operational weakness that were negatively impacting their overall fuel profitability. Most operators suspect deep in their gut that something is wrong with their current fuel pricing process, but very few have taken the time to begin to quantify the impact of the problems. In Rob Rinehart’s experience “The bigger the chain the bigger the challenge. If you have more than twenty to thirty stores then you are going to have a problem. We started with an internal company meeting to begin to detail every area of wasted time: unresponsive store managers, hours of delay in each price change. We began to calculate the cost of home office staff spending time tracking down competitive price surveys and calling out price changes one store at a time.”
At the time, Royal Farms was operating 80 convenience stores with fuel. Each day at the home office, they would receive competitive price surveys thru PDI’s competitor report. They would print out the report and begin circling stores in red ink that did not send in their competitive report. Then an executive admin would begin calling each delinquent store one by one asking for their surveys to be submitted. Like many stores, they normally perform their competitive survey work on the way in to work in the early hours of the morning. Once 8 am rolls around they are in the throws of the day and waiting on customers. So the phone calls from the corporate office can be a perceived nuisance.
“We would have stores hang up on us or have to call back three times to get a hold of the store manager. It was taking two of us, half a day, every day, to get through the whole fuel pricing process. When I was chasing 80 stores, between 20 and 40 of them had not performed their price change from the day before or had not done it correctly or completed it in a reasonable timeframe. We caught store managers doing a ‘friends and family hour’ of gas prices; and we would have no way of knowing this. We had to admit that we had a real problem with communication, tactical execution and with store managers taking advantage of us.”
Royal Farms knew that something had to change. There were so many areas that needed improvement. The very first step was to centralize all of their fuel pricing decisions. “We used to allow our stores to do their own pricing and it was a big culture shock when that changed. Since we centralized the pricing decisions to the home office, we have seen huge profitability increase and pricing consistency. When we had 80 stores setting their own price then we had 80 different strategies as well. Stores were making up imaginary competitors who were supposedly undercutting their volumes.”
There were other parts of the problem that Royal Farms starting calculating in real dollars and cents. “Here is the biggest thing we figured out: It was taking between one and two employees over thirty minutes-- to walk outside to the manual price sign, take the suction cups, the numbers would fall down and break, they had to put everything away, finish their cigarette, and then go back in and change the register. We were taking one and half employees away from taking care of customers.”
In addition they gained insight into the reality that they were loosing money from data entry errors as well. “Once a month a store would enter in a price like $0.25 and we’d be selling fuel at a quarter for half a day.” With their hands-on approach to price changes, they could not change prices after the store manager went home. Finally they put a stop watch to fuel price execution. They found that it was taking between 12-72 hrs before a store would change a price after receiving a new price change phone call. Oftentimes, if they announced new price changes on Friday night, the price would not be updated until Monday morning.
How did you quantify the cost of the problems?
“I used a simple formula to present to our ownership, half of one penny times total gallons sold annually at Royal Farms. I knew if I could control price changes from headquarters, then we could get a half a penny back in gross margin. Just by being nimble, and changing
prices immediately without being $.05 (a nickel) too high or too low at each store; taking employees away from handling customers was a big part of that equation as well. We calculated the time that we were paying store managers to change prices. When you have two people outside changing a gas price sign while people are inside waiting to be checked out, that is costing you money”.
The solution became to maximize overall gross profit on a per store basis by:
- Increasing speed to the street
- Becoming nimble: increasing and decreasing fuel prices anytime and having those changes completed within minutes, not hours
- Removing the store manager from the critical path of fuel price changes
- Knowing exactly where the competitors are priced and being able to react immediately to changes in the market
- Having immediate confirmation of price change completion or errors
- Managing by exception
Why PriceAdvantage software?
We started with electronic price signs
“The original plan was to experiment to see if we could justify the investment. Quite honestly the stores that did not have them started saying right away ’hey, why can’t we have an electronic sign‘- so there became a little bit of employee pressure as well. We did prove that they were supplementing our profitability. There is no doubt that if you use the system right that it is going to supplement your fuel profitability; it is debatable per company how much. We have to justify everything as a company. We have to prove everything mathematically. In hindsight, it was even better than we had hoped. The sign itself is a great start, but when you have the pricing software, then you really start seeing the returns.”
Now that you have implemented PriceAdvantage software and electronic price signs what has changed? Did you accomplish your desired goals?
“Speed to the street was the number one benefit. Within minutes we changed 80 store prices this morning. We now have market knowledge, a centralized strategy and confirmation that the prices were changed and we have the evidence to prove it. Now, to price all 80 stores takes less than an hour for one person. In 2008, Royal Farms experienced record fuel sales profitability. We attribute a large part of that increase to PriceAdvantage software and Skyline’s electronic price signs.
Originally, we forecasted it could take up to twenty-four (24) months for ROI payback. From our calculations it took about half the time, approximately twelve (12) months.”
With PriceAdvantage, we do not get any of the shenanigans, because they (store managers) know that this system works. The gasoline pricing is now a matter-of-fact thing. The compliance has increased exponentially. The culture has changed from ‘I don’t know if I want to do it or they will never know or I’ll do it on Monday’. Now the culture is ‘let’s just get it done’. It has taken the emotion out of it and they (store managers) know now that I know if they did not change it. And if they do not, then we call their DM and there is an enforceable consequence; before it was as if gas price changes were optional. My argument was always ‘why do we allow anyone to tinker with gas prices when it is our biggest revenue item within the company? We don’t let them change prices of coffee or sub sandwiches.’ I knew I would save the owners over a million dollars year one; just because we had a consistent centralized pricing theory and controlled all execution from headquarters.”
Were there other benefits of the system?
The other hidden benefit is that we got great feedback from our employees: ‘thank you for caring about us. The company cares about us and is taking care of us and cares about taking care of customers. They want to make the quality of life for us better.’ Before, we would have pregnant store managers out on a ladder with a suction cup changing prices. We actually had workers’ comp claims for using the plastic numbers. No serious injuries but these claims have also gone away 100%. The fact is that it is easy and no longer is a hassle for the store employees and it was a big improvement to the store employee goodwill. That was a bonus that became icing on the cake.
What about fuel pricing analysis?
“It is really pretty simple. Know where you are priced, where your competitors are priced, how much a replacement load will cost and how much volume you want to sell at each site. It is a ‘penny up and penny down’ game. PriceAdvantage presents this information to me in a simple and easy way so that I can review each store quickly to determine what price I want posted at the street in the next half an hour.”
How dynamic is your fuel pricing strategy for each store? “Maximize gross profit! Sometimes that means more volume and sometimes that means less volume with more margins. That is the reason that you need to be nimble. Some people talk about how many gallons they sell and some talk about how much money they make [in terms of] CPG. There is a maximum gross profit that is optimum”.
Why did Royal Farms not purchase an algorithm-based pricing system? “There has to be a little bit of a gut-feel and art [to pricing]. [Algorithm-based pricing systems] don’t take [that] into account. Being in the business 20 years, I think I have a pretty good feel on maximizing fuel profitability. For instance, in our smaller stores where there is not a lot of parking space I can over-burden that site with lowering the price too low to drive volume higher. You also alienate your good customers who won’t come into the store to buy
What about people who say “you can’t make money on fuel -- it’s just a loss leader to sell the more profitable items inside the store”?
“Maybe you are not making money on fuel because you don’t understand where your competition is priced, maybe you aren’t executing, and maybe you are not efficient. My suggestion is that they meet with people who are successful. We have been able to be profitable on gas year after year”.
What do you have to say to operators who say, “I have to have 100% automation or it’s not going to work!”?
“All or nothing sounds great, specifically changing the POS and pumps from headquarters. I don’t believe at all that you have to have 100% automation. The software system still has tremendous value even at the stores that we tested early on that had manual price signs. For us, it was too expensive to upgrade our Ruby VeriFone POS system in order to receive remote price changes directly into the POS. We instead added a dedicated touch screen device that sits up in the main register area and alerts each store when they have a new price change or need to perform a competitive survey. With PriceAdvantage, we can control our Skyline electronic price signs from headquarters. In the future as we upgrade our POS, PriceAdvantage can push the price all the way through the system. For today, we can have less man hours working a store and we can take care of our customers better. No more calling each store. Now we just push a button. We remember what we used to have to do.”
What is your advice to others now after you’ve implemented the system?
“If you are still getting ‘pencil-whipped’ from your stores and you are chasing stores every day to get prices changed, it doesn’t have to be that way anymore. Now in 30 seconds it is done and a store manager can get back to work and take care of customers. We’ve removed the emotion out of it and changed our company culture. Now there is a sense of urgency with direct consequences for non-compliance and the stores know that we know exactly what is getting done or not [getting done… and when]. Now we focus on beating our competitors and maximizing our profitability for each store each day.”
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