How Branded Stations Operate

That branded station on the corner is almost certainly owned and operated by an independent.
February 13, 2018

Major oil companies have essentially exited the retail fuels business, but it often looks like they dominate the retail landscape. About half of the fueling stations in the United States sell a brand of fuel from one of the 15 major refiners/suppliers, which often makes the signage touting a particular fuel brand seem like an oil company owns the store.

But instead the contractual relationship for fuels is much like that inside the store, where beverage companies often help provide branded fountain dispensers that dispense a branded soft drink. Both the oil company and the beverage company help the retailer sell product, but that doesn’t mean they own the store.

Major oil companies shed their retail portfolios to better utilize their assets in upstream production—that is, oil refining and/or oil production.

Instead of tying up resources on real estate and making a few cents a gallon selling fuel, they can funnel their resources into large-scale, long-term projects. But there is obvious value to having your company name displayed in front of millions of consumers every day. And this is 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, and at predictable volumes. The same holds true for other refiners or supply companies.

The Benefits of Being Branded
For retailers, being branded means consumer recognition. More than half of all convenience stores selling fuels (59%) are single-store operations, so having a branded contract with a major refiner/supplier instantly provides a retailer with a familiar brand for their top product: motor fuels.

A branded fuel can also determine where some customers choose to shop. While price is still the number-one determinant for gas purchases, about one in 9 motorists (11%) consider fuel brand as the top reason for their 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.

There also are non-fuel benefits to branding. Operators can take advantage of the oil company’s knowledge in retail best practices for attracting customers and employee training tools. Retailers can also receive financial support such as an imaging allowance (loan) to improve the look of the store.

The Benefits of Being Unbranded
Other retails prefer to be unbranded. At unbranded stations, the fuel brand is usually the same as the store name. While this fuel doesn’t have a proprietary additive package, it does have a general additive package that meets all federal and local fuels requirements. Stores typically seek to be unbranded if they feel that their store name is strong enough to convey trust in their product.

In most instances, unbranded gasoline has lower wholesale prices because there is not the added benefits of branded fuel, whether that includes marketing support, the additive package or market intelligence. Unbranded retailers are able to find the best “deal” for wholesale product on the open market, regardless of brand. They may also enter into supply arrangements with a branded company to purchase fuel that is sold as unbranded.

If supplies are tight, unbranded retailers may have more trouble obtaining product, since oil companies first service their stores, their branded contacts and their other contracts. When supply is limited, that means that the remaining unbranded retailers must compete for what’s left — and wholesale prices are often much higher. 

Contractual Terms for Branded Contracts
While every contract differs, here is a broad overview of what is included in these contracts:

  • Length: A typical contract is for 10 years, although it could run as long as 20 years or as short as 3 years for renewals.
  • Volume requirements: Contracts typically set forth a certain amount of fuel each month that retailers must sell. Usually retailers can sell more than the agreed-to amount, but when supply disruptions exist, they may be put on allocation and only given a percentage of what they historically receive in a given time period. This enables the supplier to more efficiently manage fuel distribution to all branded outlets in an equitable fashion.
  • Image requirements: A branded retailer receives marketing muscle from its oil company partner, which may include broad advertising to encourage in-store sales. Also, the oil company may provide financial incentives to display its brands. This also depends on who operates the station and whether the store owner has access to capital. In exchange, the oil company expects the store to adhere to certain imaging requirements, including specific colors, logos and signage, standards of cleanliness and service. The oil company often relies on mystery-shopping programs to assess compliance.
  • Wholesale price requirements: A branded retailer must purchase fuel from a branded supplier or distributor. Branded contracts benchmark the wholesale price to common fuels indexes, such as 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 Retailers
There are 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 carried forward from stores 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 doesn’t 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 a distributor owns the building/facility and the business. The company pays a salary to the managers/proprietors and supplies fuel to the location. This is also known as company-operated and direct operated retail.