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Profit Maximizing Decisions Through Demographics

By IMST Corp

The following article was provided by Meridian’s partner, IMST Corp., an excellent resource for profit-enhancing demographic data at reasonable prices. You can reach IMST at 800-231-4678.

A major concern for gasoline marketers is maximizing volume. New volume can be achieved through existing direct and dealer networks or through site acquisition.   Pricing strategy, store sales performance versus sales potential (optimization), and acquisition decisions are daily (and increasingly important) marketer challenges. The ability to implement strategies that address these issues leads to increased profits. Profit maximization strategies should begin with demographic analysis – the most effective tool for pricing, location optimization, and store acquisition decisions.

Pricing Strategy – Basic demographic data can identify locations conducive to profit increases through aggressive gasoline pricing and differentiate locations where profits will only increase through margin maintenance and improvement.

A common marketer frustration is when gasoline prices are lowered which results in strong gas volume increases, but the fuel volume increases are accompanied by only marginal increases in convenience store sales. Demographic analysis assists marketers in differentiating lower gasoline pricing/increased store volume opportunities from lower gasoline pricing/static store volume disappointments.

A sample store averaging 100,000 gallons per month at a 10-cent pool margin, grosses $10,000 monthly gasoline profit. A pricing strategy that lowers pool margin to 6 cents (40% decrease) and increases gasoline volume to 140,000 gallons (40% increase) would produce only $8,400 in gross fuel profit. The decision is not sound unless inside store gross profits increase by at least the $1,600 of monthly gasoline profits forfeited.

Demographic analysis provides residential and employee totals that can be used to estimate available gasoline gallons originating within a store’s primary trade area. The capture of customers who live and work around a store creates the opportunity to increase convenience store sales consistent with increases in gasoline volume through decreases in gasoline price. The capture of customers who do not live and work around a store creates the frustration of increases in gasoline volume with only marginal increases in convenience store sales with that same decrease in gasoline price.

Location Optimization – Basic demographic data can identify locations conducive to profit increases through facility upgrade, enhanced promotional strategies, and improved operational standards. Gasoline marketers are consistently challenged by direct operations and dealer sites that their intuition tells them are under performing. A facility performing below gasoline and store volume potential restricts overall profits and must be prioritized above expansion or acquisition opportunities because it is an existing asset. A low performing facility with low potential should be identified and eliminated from a direct or dealer network because it is a drag on overall profit.

Demographic analysis provides the necessary variables to determine the number of gasoline gallons and volume of convenience store sales within a store’s primary geographic area. Armed with gasoline and convenience store demand estimates, marketers are able to identify gaps between store sales and trade area potential. Large gaps between performance and potential represent profit opportunities through upgrades, promotion, and operations through an existing asset. Profit increases through leveraging existing assets are often considerably less expensive than profit increases through chain expansion or store acquisition.

Store Acquisition – Basic demographic data can identify site acquisition opportunities conducive to increased sales through branding, merchandising, operation, pricing, and upgrade strategies.

The opportunity to acquire under performing sites is more and more common. The strategy of identifying and acquiring under performing sites with strong potential is strategically sound. The purchase of two stores averaging 40,000 gasoline gallons per month but capable of pumping 80,000 gasoline gallons per month is an opportunity worth analyzing.

Demographic analysis can quantify total gasoline gallons and convenience store sales dollars immediately available to a site, highlight socio-economic characteristics conducive to specific merchandising strategies, and identify locations in proximity to strong short-term growth trends. Demographic analysis enables trade area comparison between successful direct and dealer network locations and available acquisition sites.

Demographic analysis is maligned for providing an abundance of data with very little direction. However, strategic decisions can be made less risky through the analysis and understanding of demographics. Gasoline marketers with an understanding and appreciation for the power of demographic variables and the manipulation of these variables into key decision-making tools, have a competitive advantage in pricing strategy, location optimization, and store acquisition.

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