In 2006, I had travel plans to Ukraine a few months later. I needed a job between now and then to occupy time and help keep my bank balance more on the positive side. So I hired on as a gas pump jockey at a local gasoline station. There were several life lessons with this short-term job.
It was interesting watching the gasoline price change. Our nearest competitor was only 50 meters down the street. This was a modern gasoline/convenience station. My station was from the 1970s that focused mostly on gasoline sales.
Every morning, we had to phone our logistical engineer to give some basic statistics. I would bark into a prerecorded menu: gas station ID, previous day’s sales volumes, and the competitor’s price. Then I hung up. We got that price by looking out the window and at the competitor’s station.
Then, maybe once or twice a week, the logistical engineer would call us to raise or lower the price. We minimum wage workers needed only change the price sign and make small adjustments at the pumps.
Here’s how the prices affected our sales volume:
1. If our price was the same as our main competitor, we sold a certain volume of gasoline.
2. If our price was $0.01 a liter more than our competitor, I could not see a change in our volume.
3. If our price was $0.02 a liter more, I could see a reduction in our sales volume.
4. If our price was $0.03 more, we lost half our volume.
If nothing else, this little observation shows how consumers will react to a known difference in price. If they needed gasoline and were driving down the street, it was not difficult to look at the two signs to see which station was selling at a lower price. Apparently $0.03 a liter was enough reason for more shoppers to go there, but not here.
As an aside, my station never sold gasoline at a lower price than our competitor. I’ll explain why later.
The Distribution Channel for Southern Alberta Fuel
In business speak, a “distribution channel” is how a product moves from the factory to the consumer. Here is how fuel moved from the refinery to my customers’ gas tanks.
There are four or five refineries east of Edmonton that produce a lot of fuel for western Canada. To cut transportation costs, these refineries built a pipeline to Calgary (300 km south of Edmonton), which terminates in a big tank farm in northeast Calgary. The petroleum companies have some kind of arrangement to share this pipeline. When a petroleum company has its time with the pipeline, it moves fuel from its refinery to their own tanks in Calgary. From the tanks, the fuel is moved by truck to the various gasoline stations in Calgary, southern Alberta, southeastern British Columbia, and southwestern Saskatchewan.
The Fuel Truck
My gas station was owned by a major petroleum company. But it contracted out the delivery to a fuel trucking company. This contractor was working for several big petroleum companies. The contractor allocated several trucks and drivers to my company’s needs.
My gasoline station had a fuel drop every three to eight days. When a drop occurred, I often talked to the drivers. They started their job at 6:00 a.m. with their fuel tanks full. They had orders to deliver fuel to specific stations. Sometimes they were done work in six hours, sometimes a 12-hour day was required to complete their deliveries. The drivers never knew how long their shift was going to be.
They were making $40 an hour ($60 with overtime). This was a reasonable 2006 wage given the skills needed to handle the B-train truck and its long turning radius, often in tight locations. The drivers worked four days on, two days off. The drivers were of middle age, indicating that they had lots of driving experience before they got their fuel delivery job.
Each rig — the truck and two trailers — were a $750,000 investment. These trucks were working 300 days a year, with the off days in the shop for maintenance and repairs.
It’s not cheap to run these trucks: Driver wages, mechanic wages, management salaries, fuel, repairs, maintenance, central office and shop.
We do not find trucks and experienced drivers out of thin air.
The Logistical Engineer
When we minimum wage workers submitted our daily report to the logistical engineer, he would, with the help of some software, would look at all the data from all the gasoline stations in the petroleum company’s network. He would first determine which gasoline stations were getting low on fuel. These stations would be on the list to get the next day’s deliveries. Some stations probably got a fuel drop every day.
For the stations that were not going to get deliveries, the fuel price was set high enough such that they would not run out of fuel in the next day or two. If the fuel price is set too low, too many customers will buy gasoline at that station and drain the station’s tanks. The station runs out and then nobody can buy more gasoline. Customers who pull up to a gasoline station with no gas to sell get annoyed — and are unlikely to return to the same station even with a low price.
I believe the most common axiom to run a gasoline station is “Don’t run out of fuel.” This axiom would then lead to a second axiom: “Raise the price, at least until the next delivery.”
My station never ran out of fuel in the three months I worked there. The logistical engineer and his software did a good job.
Comparing the two gas stations
As mentioned earlier, our main competitor was a modern gasoline station with a big convenience store. They sold all the junk food, tobacco products, sandwiches, worker gloves, canned food, firewood, magazines, etc., etc.
My station had maybe 1/10 of the convenience items for sale: basic cigarettes and junk food. Our coffee was usually stale. Our competitive advantages were our “points card” and we minimum wage workers pumped the gas with our old-fashioned gas pumps. We had some old-fashioned customers who did not like self-serve. Our overhead was much lower.
But our sales volumes were also much lower. We could see at least three times as many cars were gassing up at the competitor’s than at our station. Having the modern look helped attract customers.
People who are not that smart about business would argue that my station needed to lower our prices to get more customers. That is the simple solution. But that would have meant committing a fuel truck to make deliveries when our tanks were getting low. This would happen more often with lower prices. But having fuel trucks make more fuel drops at my station meant other stations not getting their drops as often.
My logistical engineer (and his software) was answering the question: “Today, should we sell 20,000 liters of gasoline with a $0.04 profit margin or 40,000 liters with a $0.02 profit margin? The answer often depends on whether a fuel truck could make a drop. Fuel trucks and experienced drivers do not appear out of thin air.
My 1970s gas station was never going to be competitive with our main competitor. If our prices were lower than theirs, they would just lower their price to our price, still keeping most of the business. If they sold gasoline at a loss, they could make it up with the higher-margin convenience store items.
In other words, my logistical engineer had devised a business formula for our old-fashioned gas station to be at least a break-even business unit. This meant fuel deliveries were fewer than other stations. So my station was given a low priority for fuel drops. Our prices were kept high when our deliveries were not forthcoming. But higher prices mean higher profit margins, so it still make sense to sell less for more.
My gasoline station could have been modernized. But that would have been an investment of several million dollars. The people who make these decisions probably calculated that extra sales would not pay for this investment, especially with an aggressive competitor next door.
When I hired on, I saw the signs that my gasoline station was set to close its doors. Any profit was likely to be small, probably more of a nuisance for the local manager (who was managing another gas station with a much bigger volume) and the logistical engineer (who was managing 100 or more stations). They needed to focus on the more profitable business units. I told my local manager of my last date almost when I hired. And it seemed my departure date was set as the day to close the store. I was the last person to pump gas at that station. It had been there since 1968. I used to buy gas there when I was in high school.
Conclusion
This story shows how business is more complicated than it seems. There are a lot of things happening for us to buy the products we consume. And all points of the distribution channel have to break even financially to move those products from the factory to the consumer. In this case, it was the refineries, the pipeline, the trucks, and the gas stations.
The retail gasoline industry is often accused of collusion and price-fixing. I saw no evidence of that.
Published on Medium 2024
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