Cash In Gas - Solved Case Part II

. . . Continued from Cash in Gas - Solved Case Part I

“Okay, so what about the people in the stores located on the gas station premises?

“They are less busy now than before.”

“How different are your cigarettes from those sold in 7-11?”

“They are the same.”

“And the coffee? Is it any better than that of Starbucks?”

“I would like to thinks so. But being a realist, I must admit that it is not the case. Starbucks is better.”

“What is your operating cost per store in terms of rent, salary and overhead?”

“I can’t not give you the exact numbers. Those are strategic and proprietary information for competitive advantage. But I will tell you this much. It varies. That is because in the city, I have to pay almost 50% more salary and rent.”

“Sure, no problems. I think we can analyze the issue at hand without having exact numbers, as long as we understand them broadly. In the rural stations, where you have seen revenue decline, which product has suffered the most?”

“Of course Gasoline. You see, it is expensive for the small-town folks. So they buy less now. Previously they would fill up the tank. These days they fill up only half or two thirds of the tank.”

“How often do the customers come to the rural stations these days compared to last year?”

“Let me see the report…Okay in 2006, we are expecting decline in gasoline revenue from $0.8 million per station to $0.4 million per station. But the number of transactions has gone up from 25,000 to 40,000. That does not surprise me. They buy less per visit. So they come more often. It is simple. I understand consumer behavior well.”

“You are correct. Actually that is to be expected. When the gas prices are high, people are cautious. So at any particular transaction, they will buy less or the demand per transaction is less. It is due to consumer price elasticity. If prices go up demand goes down. But then, in case of rural customers, the elasticity is high. That means, customers are more sensitive to gas price change compared to city dwellers, who make more money. However, since the customers buy less per transaction, they frequent more often to the gas station. So how has this affected your cigarette sales?”

“In other words your product mix has changed in terms of sales. You have lost $400,000 in gasoline sales. That is about 177,779 gallons of gasoline at a price of $2.25/gallon. This is also equal to a decline of gross profit by about $177,779 in gross margin, since you make 10 cents per gallon in gross profit.”

“That is right. My top line sales as well as gross profit have gone down. But how come my reports are telling me that the same stores are more profitable than ever?”

“Well, your convenience items sales have gone up from $200,000 to $300,000. And you make 100% profit on these items. This means, your sales are up by $100,000. You profit is up by $50,000. That is because at a 100% gross profit, the COGS (Cost of Goods Sold) for $100,000 in revenue has to be $50,000. This increase in profit has offset the decline in profit from gasoline sales.”

“This is great. I understand now. So my total revenue is down by $300,000. This is because gasoline sales are down by $400,000, but convenience items revenue is up by $100,000. But my net total profit is up by more than $32,000 per station?”

“That is correct. You are very good math and numbers. And what about new stores such as Starbucks and 7-11 stores near your sub-urban stations? Have they started coming there as well?”

“Actually no. These are not really attractive places, they are less populous. So I am spared there. I am beginning to understand where you are going.  But what about the staff? Who should I keep and who should I let go?”

“Before we talk about the staff strategy, let us revisit the stores were you have seen increase in sales. Where is the increase in sales coming from, gasoline or other products?”

“Ah ha! It is the opposite of my sub-urban stations. My gasoline sales are up by $400,000 but high-margin products sell only half of the $200,000 in annual sales, due to nearby Starbucks and 7-11 stores. So as per your logic, my net profit should go down by about $32,000, or $32,221 to be accurate. Thank you for helping me see the truth.”

“It is to your merit, you just analyzed the high-revenue gas station stations without my help.”

“Correct. Then thank you for noting my strategic business acumen.”

“You are welcome. Now, let us talk about the people strategy - whether and where to lay-off. What is important to understand is how and where you staff are used. You said you have a credit card system in your terminals. So why do you need people in your stations?”

“Well, they are needed for my convenience stores attached to the stations.”

“I see. Okay, now that the city stores have lesser sales in convenience items, it may be worthwhile looking at the utilization of the staff in those stations now and compare that to last year.”

“The average number of transactions of convenience items per sales-person in urban stores has gone down by 50%. It has gone up by 50% in rural stores.”

“In that case, you may consider boosting your convenience store sales force in rural stations rather than laying people off. Now more people come to those stores and that is where you need support. In the city stations, you may want to reduce the convenience sales force.”

“Great Idea! How will it impact my costs? I need to reduce costs since I am in the red on a total operations basis.”

 ...

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