Tips on Branded and Unbranded Fuel in Mexico
Epic changes since the passage of energy reforms in 2013 have opened up opportunities for U.S. branded and unbranded fuel in Mexico.
Major U.S. refiners – especially those in the Gulf and West coasts – are eager to grow their retail footprint in a heretofore-untapped market. With current U.S. petroleum supply deemed plentiful, or “long,” exports look especially attractive right now.
Meanwhile Mexican retailers have a choice to make: branded or unbranded. They stand to benefit from the instant brand recognition of household-name fuel brands if they choose to go the branded route in their outlets. Or, they can often find cheaper prices for the fuel they buy, while retaining greater station-image independence, if they opt to go it unbranded.
But, while the overall benefits may be clear on both sides of the border, the ins and outs of U.S. branded and unbranded fuel markets may not be as well-defined in the evolving Mexican retail landscape.
Let’s see what advice the U.S. market can offer as Mexico’s market grows.
Find out more about OPIS Mexico fuel price discovery here.
First, Some Basics on U.S. Retail
All of the fueling sites in the US 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.
That’s because about half of the of the fueling stations in the United States sell a brand of fuel from one of the 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.”
Benefits of Branding
For an oil company, branded relationships with retail stations provide a guaranteed customer for their product at predictable volumes.
But what about the retail station owner? What do they get out of it?
- The biggest benefit to the retail dealer is brand recognition. Most major brands advertise their fuel, so the public is familiar with the products.
- 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, let’s not forget…
- Having a branded contract guarantees supply – even during supply disruptions.
Benefits of Being Unbranded
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. We’ll get to those later on.
- Unbranded fuel is usually priced cheaper than branded fuel. But, during supply disruptions, like hurricanes, unbranded prices are subject to wild swings and can quickly shoot higher than branded fuel.
There are pitfalls with either scenario. Here are a few to consider.
- The biggest risk for an unbranded retailer without a supply contract is they 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.
Can I Put Unbranded Fuel in a Branded Site?
Three words: No, no and no.
Putting unbranded fuel into your station could result in fines and penalties and your supply contract could be canceled.
How do they know?
- Major brands use a proprietary fuel additive that “brands” their fuel. It is injected when the fuel is loaded at the 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.
Let’s bring this back to what’s going on in the Mexican market right now. This recent OPIS Alert highlights the importance of not putting unbranded fuel into branded sites.
Read the full story right here.
- 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. Brands in Mexico
Mexico is now seeing several U.S. retail brands pop up in its cities. Download this free Mexico primer to find out more about that.
Based on the current infrastructure situation in Mexico, most U.S. companies are purchasing fuel through PEMEX, working with a local jobber/distributor to make the delivery, then adding their proprietary branded additive at the time of delivery.
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.
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 any where from 10-15 years. Some may be as long as 20 years.
Here’s 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 (TVA) 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.
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:
- Test the tanks daily for water.
- Keep the tanks free of water and other contaminants.
- Ensure the meters are calibrated and in proper working order.
- Reconcile the fuel inventory daily.
- Repair and or replace damaged or non-working nozzles.
- Ensure point-of-sale equipment is in working order.
- Follow all credit card procedures.
- Keep the islands and restrooms clean, keep trashcans empty and clean.
Some Final Thoughts
There is a lot of new information to process as Mexico’s fuel markets continue to evolve. And there’s clearly a lot of opportunity to be gained. Here’s 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.
Lastly, you are going to need a reliable reference for the prices quoted in your contracts to help you verify what your supplier is charging you and help you make informed decisions about future supply.
OPIS pioneered rack price discovery over 30 years ago and today billions of gallons of gasoline and diesel sold in the U.S. are based on OPIS rack benchmarks.