Retail as a Profit Center Becomes a Reality With Optistream and C3
The Challenge
Many fuel suppliers with a downstream or retail division have long desired to separate the economics of the retail division from other divisions such as supply and logistics. Retail divisions have very different economic factors in setting pricing in their retail communities. The economic factors become particularly challenging in volatile supply markets where retail markets may carry a different perceived market volatility from the trading or wholesale markets of the same products.
The intricacies in volatility, retail product delivery, customer demand, and other factors specific to retail make managing profitability directly in the retail sector a paramount priority for many retail leadership teams.
The Result
With supply and freight transitioned into their own respective profit centers, this leaves retail to simply transition into an independent profit center. The retail division is now directly responsible for managing retail profits. Fuel is delivered into retail locations at a “delivered price” that is derived and negotiated from the transfer price from the supply division plus the freight rate that is derived and negotiated from the freight division.
Once the transfer pricing journey and freight journey are completed, producing a gross margin report by retail division or location becomes feasible. In fact, it is a daily report that is monitored and managed throughout the month and not after the fact.
Close monitoring of retail margins drives continuous improvement in margin management and enables retail teams to act quicker to changes in margin during the month instead of in a later month when financials are available.
The Retail as a Profit Center Journey
If you have been following along, we recently covered how Optistream and C3 transition supply into a profit center. This transition establishes a transfer price between supply and retail with what is generally an index + differential based price depending on location and the economics around the location.
If your company operates an internal freight division, we also recently covered how Optistream and C3 transition freight into a profit center. This transition establishes an internal transfer rate usually based on a point to point rate between a supply point and the retail location. This rate emulates a common carrier rate closely. In some instances, the organization enables dispatchers to use common carriers instead of internal freight when pricing is advantageous.
With a transfer price for product cost and a transfer price for freight, we now have the building blocks to easily generate a gross margin report by sales location and by product type. The revenue from the retail system is grouped by location, division, or product type. The supply costs for product received into the retail locations is subtracted. The freight costs are also subtracted. Gross margin by retail location is derived.
Key Takeaways
Gross margin on the retail division becomes a daily report under this model. This is a dream most fuel retailers have long wanted to implement. Retailers make significant investment in teams to manage and run retail divisions toward greater profitability. Real time margin reporting enables the ability to measure these teams and position them to improve their ability to manage margins on a more real time basis.
These metrics and measurement enable an entirely new mindset in price management and profit reporting. Gone are the days when we knew margin halfway through the following month after financials were released. We now have gross margin reporting on the current financial period every single day.
With these measurements in place, we can reflect back to our saying – that which can be measured can be improved.
About Optistream
Optistream is a provider of SaaS based software solutions focused on the midstream wholesale and retail fuel sector. Our mission is leverage cutting edge technology to bring quantifiable solutions that maximize profit and minimize risk.
We bring 25+ years of experience in midstream fuel supply with a deep knowledge of commodity marketing, trading, and position management. We also bring a broad understanding of back office processes and ERP systems.