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Understanding Retail Gasoline Markets in Mexico

Posted by Dolores Santos on Sep 16, 2019 8:00:00 AM
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The retail gasoline market in Mexico has been undergoing a transformation since the passage of energy reforms in 2013 that opened up opportunities for U.S. fuel imports.

Haga clic aquí para ver en español.

Major U.S. refiners have been keen to expand their retail footprint in Mexico. 

Within this changing environment, Mexican retailers have had an important  choice to make: go branded or unbranded.

As Mexico’s market grows, there are lessons to be learned from the U.S. retail market, where branded and unbranded outlets have been operating side-by-side for years.

Based on what OPIS has noted in the U.S. market, there's appeal in either option. For example:

  • Branded: When your gas station is linked to a major flag. Gas retailers in Mexico stand to benefit from the instant brand recognition of household-name fuel brands if they choose to go the branded route in their outlets.
  • Unbranded: When a station is independent.  Retailers can often find lower prices for the fuel they buy while retaining greater station-image autonomy if they opt to go it unbranded.
To understand these options fully, and decide which is right for your gas station in Mexico, let's see what we can learn from the U.S. retail market.

 

U.S. Retail Gasoline Market Basics

All of the fueling sites in the U.S. have some type of brand name, be it a major or an independent brand.

As explained in this Retail 101 post, U.S. majors have largely abandoned the retail fuel business. There are only about 400 major oil company-owned branded stations left – single operators, jobbers/distributors and chain retailers own the rest.

But, you’d never know this driving down a typical U.S. street, where it still looks like the majors dominate the retail scene. You’ll see drivers filling up at at BP, Exxon and more.

 

Branded retail gasoline sign

 

In the United States,  about half of the fueling stations in the United States sell a brand of fuel from one of some 15 major refiner/suppliers. The signage touting that particular brand makes it seem like the oil company owns the store. That’s called being “branded.” 

And looking ahead, there's a good chance Mexico could share this type of appearance. This map image shows the many brands that have cropped up:

Mexico Retail Gasoline Station Map

Benefits of Being a Branded Gas Retailer

For an oil company, branded relationships with retail stations provide guaranteed customers for their product at predictable volumes. 

But what's in it for the retail station owner? 

  • The biggest benefit to the retail dealer is brand recognition. Most major brands advertise their fuel, so the public is familiar with the product.
  • Being affiliated with a major brand offers the dealer top quality fuel, injected with proprietary additives.
  • Many consumers are loyal to a brand that they feel offers the best quality fuel – regardless of price.
  • Major brands offer training for employees and best practice policies to help retailers attract and keep customers. 

And, perhaps most importantly.…

  • Having a branded contract guarantees supply – even during supply disruptions.

Benefits of Being an Unbranded Gas Retailer

On the other side of the coin, there are advantages to not tying one’s retail operation to one particular brand:

  • In most U.S. markets, there is less loyalty today than there was in years past to the fuel credit cards offered by major oil companies. Customers like to buy their gas with credit cards that offer rewards or other benefits like travel miles.
  • The unbranded dealer has more flexibility with store image and does not have to follow strict branding requirements. More on those in a bit.
  • Unbranded fuel is usually priced lower than branded fuel. But, during supply disruptions, like hurricanes, unbranded prices are subject to wild swings and can quickly shoot higher than branded fuel.

Challenges With BOTH Branded and Unbranded Retail Fuel Options

 

  • The biggest risk for an unbranded retailer without a supply contract is it will be the first segment in the supply chain to be cut off during a supply disruption. Suppliers will honor their contractual obligations first.
  • The unbranded dealer is subject to the wild swings of the spot market when there is a supply disruption. Branded prices tend to go up more slowly, creating an inversion between branded and unbranded wholesale prices.
  • The branded dealer is tied to just one supplier and the length of the contract is usually 10-15 years. The cost to cancel the contract before the term can be very expensive. 

FAQ: Can I Put Unbranded Fuel in a Branded Site?

NO. Absolutely NOT!

Putting unbranded fuel into your station could result in fines and penalties and your supply contract could be canceled.

How would anyone know?

  • Major brands use a proprietary fuel additive that “brands” their fuel. It is injected when the fuel is loaded at the supply terminal.
  • They also inject a tracer when that additive is injected. This tracer must be present in the fuel in a certain concentration when the supplier inspects your site and samples the fuel.
  • Most suppliers will require monthly gallons sales to compare with deliveries. 

A visual interpretation of an OPIS Alert highlights the importance of not putting unbranded fuel into branded sites.

Branded and Unbranded Fuel in Mexico

 

Key Takeaways:

  • It’s critical not to put unbranded fuel into branded sites
  • U.S. refiners will be just as aggressive as Pemex
  • Most suppliers will require monthly gallon sales to compare with deliveries 

U.S. Retail Gasoline Brands in Mexico

Mexico is now seeing several U.S. retail brands pop up in its cities. Here's that map again. That landscape stands to grow.

Mexico Retail Gasoline Station Map

Once more infrastructure is in place and available, U.S. suppliers will have access to storage in Mexico and will arrange for direct delivery of their fuel to the retailer.

As this trend grows, and as more and more dealers consider going the branded route, there are a couple things to bear in mind. 

A Focus on Branded Retail Contracts

The branded dealer will have a branded supply contract with their supplier. That could be direct with the major oil company or with a fuel jobber/distributor. The contract term can run anywhere from 10 to 15 years. Some may be as long as 20 years.

Here are a few more points: 

  • Even if the branded contract is with a jobber/distributor, the branded dealer will have a back-to-back contract in place with the major oil brand supplier.
  • In the U.S., the price of the branded fuel delivered by a jobber/distributor is mainly based on the supplier’s branded rack price posted at the closest terminal or supply point.
  • The contract will have volume requirements with minimum and maximum volumes.
  • The branded supplier may offer incentives such as temporary volume allowances based on a set amount of fuel sold in a given time frame.
  • The dealer may be required to submit sales volumes to the branded supplier on a monthly or quarterly basis. 

Image Is Everything

Brand image and trademark protection are of the utmost importance to a major supplier. Brands are very particular about how the site is imaged and its overall appearance to the customer. For example, it is very important that the site be clean, well lit and that all pumps are in good working order. 

Each major brand has its own image requirements. The dealer may have to bear the costs of reimaging the site on their own. However, in the United States, many major brands will offer money to the dealer for reimaging the site. 

But, there are a couple catches to this last option: 

  • That money is considered a “loan." The money is amortized over the life of the contract and if the dealer terminates the contract early, they have to pay back a prorated share of the money loaned.
  • This could result in having to pay back thousands of dollars to switch brands or go unbranded.

Here’s a sample checklist of station maintenance requirements for a branded dealer:

  1. Test the tanks daily for water.
  2. Keep the tanks free of water and other contaminants.
  3. Ensure the meters are calibrated and in proper working order.
  4. Reconcile the fuel inventory daily.
  5. Repair and/or replace damaged or non-working nozzles.
  6. Ensure point-of-sale equipment is in working order.
  7. Follow all credit card procedures.
  8. Keep the islands and restrooms clean and keep trashcans empty and clean.

The Final Word

Here are four final pieces of advice as you consider your options for branding:

  • Shop around and review all the branding opportunities being offered in your area.
  • Carefully review and weigh all aspects of contract offers to supply branded fuel.
  • Make sure you understand what early cancellation penalties may entail if you decide to de-brand before the contract is up.
  • Always have legal counsel review any contract before signing. 

Stay on top of Mexico's  transforming energy market

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Tags: Rack Market, Retail Market, Mexico

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