Fuel Pricing - want to strike the right balance between customer, competition and profit?

We are thrilled to have Peter Cattell as a guest writer on the Edge blog.

Peter is extensively known in the industry as an expert in fuel retail and before coming on board as EdgePetrol's non-executive director, Peter spent over 30 years with Tesco and helping them to become the leading fuel retailer in the UK.

Now over to Peter...

I listened with interest to a Radio 4 programme recently where the subject matter was fuel pricing. The background to the programme was that following a period of rising fuel costs and the corresponding increases at the pump there has been a recent drop in cost prices and an expectation that pump prices should be dropping.

Having managed the largest fuel retailer in the UK for 12 years until July 2017 I was used to commentators implying practices of profiteering, a “rocket and feather” approach to pricing (prices go up like a rocket and down like a feather), a failure to pass on cost decreases to customers and a call for an industry regulator to be introduced.

I used to smile when I realised that many of the commentators had not had any accountability for striking the right balance between doing the right thing for customers, remaining competitive and delivering an acceptable return on investment.

Most of my working life has been in the commercial arena where finding the balance of costs, retail prices, margins, customers and paymasters is a challenging thing to achieve. Whilst a little churlish I used to joke that during my 12 years in fuel retailing I think I achieved that balance just twice!

The reality is that fuel costs, and therefore pump prices, are extremely dynamic – and that makes it a fascinating area to manage against a background of customer, competition and profit targets.

Before continuing it’s important to understand a key point – the retail fuel market is very competitive. Yes, there has been a significant reduction in the number of fuel stations in the UK over the last 20 years which could be seen as a reduction in competition.

However, if you subscribe to the view that margin share is a key indicator of competitiveness (I do!), then it is an ultra-competitive market.

The other key point is that, despite the view to the contrary, retail prices do follow cost prices. I know, I tracked it weekly in preparation for another potential investigation in to fuel pricing by the competition authorities. On each occasion of a review of fuel pricing the authorities concluded that the fuel retail market is competitive, there is no evidence of “rocket and feather” and retailers do act in the interest of consumers.

Most discussions are two-sided, so let’s have a look at what the fuel retailers are facing in to. Gross profit margins are thin – wafer thin. Please note I’m not betraying any commercial confidences – the vast majority of the breakdown of a litre of fuel (fuel cost, duty, VAT and pump price) are all available or in the public domain. Dependent on which sector you look at (supermarket, oil major, large group or indie) pence per litre gross margins broadly range from 3ppl to 8ppl.

Out of this the retailer has to pay people, pay the fuel distributor, pay for a loyalty scheme, transact debit and credit cards, transact fuel cards, pay the energy bills, clean and maintain the forecourt and shop, manage the depreciation costs etc etc. The gross margin soon disappears leaving gossamer thin net operating margins for investors, shareholders, and stakeholders.

So, my plea to the commentators is: before making statements about fuel pricing, please take some time to understand the job the fuel retailer has to do to provide customers with the service they demand and still make an acceptable return. With two sides to every story, let’s make it a balanced argument.

The unintended consequence of trying to increase regulation or cajole retailers to bring prices down to uneconomic levels will lead to a reduction in investment in the sector (remember investors have choices) and a further reduction in the number of stations.

The loser? Customers.