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Pricing Analysis: How Retailers Dodged Bullet After Wholesale Spike

OAKBROOK TERRACE, Ill. — When a Midwest retailer saw the incredible spike in wholesale gasoline prices over an app on his iPhone, he immediately called every delivery truck he could find to draw product before the pricing wave hit the terminal.

The retailer, who spoke to CSP Daily News on condition of anonymity, said that the app, from Wall, N.J.-based OPIS, paid for itself two years over in that one August afternoon. He said his actions were possible because changes in the rack price occur at 6 p.m., where trading ended earlier in the day around 2:30 p.m.

A second Midwest retailer, who also spoke on condition of anonymity, said the one-day spike with his major supplier was 66-cents a gallon, where a typical spike of any significance is more in the 12-cent range.

As reported in CSP Daily News, an emergency shutdown of a unit in BP’s Whiting, Ind., refinery in August forced the oil company to go to the spot market, causing a major surge in wholesale and retail prices that lasted several days.

As the first retailer put it, “essentially the oil companies were having to buy from each other, but there was nothing to buy.”

The wholesale shock did force market leaders to raise retail prices, but not enough to go above water, according to the first retailer. Then the next day, market leaders brought prices up to a $2.99 threshold in his market, where retail postings stayed, despite how wholesale prices rose slightly above that retail ceiling for a bit of time. He said competition worried that passing the $3 mark could have truly hurt volume.

Eventually, wholesale prices eased, and the competition in the area kept prices high to recover losses and bank margin in the event of near-term volatility, the first retailer said.

Throughout this process, automation has become an important part of his business, the first retailer said. In addition to the price tracker, he used price-sign software to secure price changes. It not only turned a two-hour job into a half hour, it gave him peace of mind that all his stores would change their prices.

A dual problem arises when a store’s prices don’t change. Not only does a retailer’s internal strategy misfire, the competition gets the wrong message.

“You want to support your market leader and [that can’t happen when] … you think you went to $2.99 but you’re still at $2.59,” said the first retailer. “The only way you can communicate in this business is by posting on price signs.”

“In this case, it was an issue of execution,” said Michael Johnson, director of sales, PriceAdvantage, a division of Skyline Products Inc., Colorado Springs, Colo. “Whoever executes fastest is going to win.”

For other retailers, pricing software also becomes an important day-to-day tool, according to Gregg Budoi, CFO and executive vice president, Kalibrate Technologies, Florham Park, N.J.

While no software solution can predict wild swings in wholesale prices—and certainly not the kind of historic spike seen in the Midwest this past summer, automation can add or save pennies on the gallon, which means a lot if a chain sells millions on a monthly, weekly or even daily basis, Budoi said.

Only a limited number of retailers can take advantage of the kind of dramatic spike the Midwest saw this summer, Budoi went on to say. Simply put, any retailer will see an advantage for however long he or she can sell cheaper-cost product at the higher retail price. For many, that’s not a long time.

An above-average retailer may need to take a load a day or possibly two or three loads a day to stay in stock, which means benefitting for only a day or less of activity, Budoi said. “But if you had bulk storage or were taking oil positions … and were locked into a low price, then you could have gotten a nice windfall over a longer period of time.”

Angel Abcede


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