About half of all U.S. fueling sites sell a branded gasoline from one of the top 15 brands and the other half sell fuel that is unbranded and essentially carries the name of the store as its fuel brand.
So, what’s the difference between these different fuel brands? First, gasoline doesn’t become a specific brand until it’s delivered to the store. Prior to that, it’s a generic fuel stored in common terminals and traveling through pipelines.
When fuel leaves the terminal in a tanker truck, it becomes a specific fuel. Each brand has a proprietary blend of additives that get spritzed into their fuel at that time. These proprietary additives are designed to help clean the engine and protect engines and each one is different. These packages are on top of additives a slightly different in terms of what this additive package includes. And unbranded stations? The U.S. Environmental Protection Agency (EPA) requires that all gasoline contain minimum amount of detergent to keep engines clean and unbranded stores all have this type of gasoline.
In addition to different types of detergents, brands also have different types of stores that they may franchise, or different types of loyalty programs that may tie into a cent-off-per-gallon program with a local grocery store or other promotions. But no matter what brand of fuel is sold, it all meets the requirements developed by EPA.
Since 2004, one new type of fuel has emerged: Top Tier, which has a detergent package that goes beyond minimum standards. Several automakers recommend this type of fuel to their customers; retailers who sell it must undergo certification.
Beyond the liquid sold at your local store, there are also significant differences in how stores operate, whether they are branded or unbranded.
A small percentage of fueling outlets are owned by one of the major, integrated oil companies. The store most likely has signed a contract to sell a specific brand of fuel, and as part of this arrangement the store also receives marketing support and signage to promote the fuel brand. This contractual relationship for fuel 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.
Benefits of Being Branded
For convenience stores, being branded means consumer recognition. More than half of all convenience stores selling fuels (57%) 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, one in 10 motorists (10%) 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.
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 the added benefits of branded fuel are not included, whether that comprises marketing support, the additive package or market intelligence. Unbranded retailers can 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 contracts may be 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 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. 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 support 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, 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,” where 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 that 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 retail site 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.