Why do retailers choose weekly lags?

In the UK, there are plenty of options when it comes to securing a fuel supply contract. Depending on your choice of brand, you may have the options of daily or weekly lags, more often than not based on what we in the industry know as ‘Platts Plus’, which is derived from the ‘Platts Price’.

What is the ‘Platts Price’?

Well, firstly, it’s actually called Platts MOC (Market On Close) and it’s the process Platts use to determine prices. Bids, offers and transactions are submitted to Platts by willing participants (usually traders) and are then assessed by Platt’s editors to determine an end-of-day value for crude oil, petroleum products and swaps (such as gasoline). You can find out more about this here.

In other words, as the trading day ends, a price is determined, commonly known throughout the commodities world as a benchmark. This benchmark is used as a base rate for a huge number of transaction types, one of which is likely to be between you and your fuel supplier and may be known to you as your ‘replacement cost’.

Right, so what is ‘Platts Plus’?

As a small or medium independent retailer you will be familiar with replacement costs. This is basically the Platts price plus any additional costs agreed with your fuel supplier. Whether you receive it via fuel supplier portal or via email, you will have a price available to you that applies should you receive a delivery today. What is built into this price is the Platts (or potentially other benchmark) price of gasoline (for example) plus an ‘on-cost’. This includes- but is in no way limited to- the cost of freight, signage and a small margin for your supplier. Your replacement cost will move along with the gasoline benchmark, but more often than not, the ‘on-cost’ will remain the same.

How do replacement costs differ?

As mentioned above they will be different as per your agreement with any individual fuel supplier, but one way they can differ in terms of the benchmark they use is the ‘lag’. It is common for fuel suppliers to offer optionality in negotiations:

It’s worth noting at this point that if you have a larger estate you may be able to deal directly with the commercial team at your fuel supplier. This may provide you further optionality and the opportunity to secure pricing in different formats.

If you’ve ever wondered how the supermarkets can be so cheap when cost prices are rising, note that many of them are on two or three weekly lags, or even a mix of different lags. This allows them to plan their pricing strategies further in advance to make sure they are making their desired margins but staying true to their customers by being a low-cost option.

So, as an independent retailer, what do you want and what can you do once you get it?

As we always say, every site is different and different solutions work for different retailers. There are advantages and disadvantages of both daily and weekly contracts:

Daily:

• Less movement when cost prices change, meaning margin-based price changes can be smoother and more appealing to customers.
• Typically get a lower on-cost depending on who your fuel supplier is.
• If cost prices are moving down, you benefit before competitors who are on weekly lags.
• If cost prices are moving up however, you feel the pain before they do.
• There is some flexibility on ordering at higher or lower prices, but typically you are more dependent on how the market moves than your own intuition.
• It is more difficult to work out what the blend of fuel currently in your tanks is.

Weekly:

• If cost prices are moving heavily, you may find yourself in a situation where your cost prices take significant rises or falls from the end of the week to the start of the next.
• You can however give yourself a much clearer picture of how to maximise profit through your supply chain, outlined below:

Generally, if our customers can get a weekly contract with your supplier and they do not use vendor managed inventory (VMI), we recommend to them that they take it. This is because combined with EdgePetrol and Platts data you can really take advantage of a moving market.

If you subscribe to receive the Platts Price (I think you can now get this at fuelpricesonline.com) or even if you just follow the price of crude (not as strong an indicator, but an indicator nonetheless), you can work out whether cost prices are going up or down across a week.

Problem is, it can take up to two days for a tanker to arrive on site (this is also one of the main disadvantages of a daily lag, as the price will change before the tanker arrives). So using our typical Monday to Sunday weekly lag contract, we need to decide – do we take a tanker on Sunday or Monday?

By using an average of the week’s Platts price so far, we can estimate with 80% accuracy whether cost prices are moving up and down. If the price is moving up we should order for Sunday, to make sure we fill the tanks at a cheaper price.

But, if the price is moving down, we know we want to wait. But as any fuel retailer will tell you, stocking out of fuel is the worst possible scenario! So we need to know if we can hold out for the new, cheaper price.

If you have a wetstock manager, most will offer a view of the number of days left in the tank. You can also work this out yourself using your typical Saturday/Sunday volumes to see if your tank levels will hold. On EdgePetrol we use machine learning to offer a view of not only how many days of fuel sales are left, but also what your tank levels will be at the end of each day:

Let’s take a look at the situation on Sunday for the same station:

Assuming tank 5 (shown on the far left) feeds pumps Tanks 3 and 2 doesn’t, we can probably be pretty sure we are unable to wait until Monday without having to shut a pump. But, imagine if we were to raise the unleaded price by a couple of pennies. This could slow volume, increase margins and also allow us to buy cheaper fuel next week and extend our margins further (or bring back the missing volume with lower prices). Go figure!

There is also the conundrum of fitting deliveries into your tanks. If you know the price is going up you may want to take a delivery but not have room for a full tanker (eating into profit as taking less than a full tanker comes at a premium with most fuel suppliers). By seeing into the future and predicting volumes, you can order a full tanker at just the right time with the right pots to go into the right tanks. Magic!

Of course this is something retailers use EdgePetrol for. One retailer told us they make over £1k a month by using these methods effectively combining Platts data with EdgePetrol insight. However, this is also something you can do- albeit with less certainty- without software and we’d encourage retailers who want to drive profit through their supply chains to give it a try.

So, the next time you are negotiating a fuel supply contract, ask your Territory Manager whether they offer weekly contracts. If you put the effort in, it can drive some great additional profits for your stations.