Commoditization — Beware the Danger of Complacency
After high school, I started a small business and had several part-time jobs — car wash on weekends, detailing cars during the week, and night shift at a gas station. The “filling” station, Keystone Oil, bought its products from Pennzoil.
This “full-service” site sold two grades of fuel (two pumps, four nozzles), engine oil, transmission fluid, windshield fluid, and antifreeze — no service bays, no wash. There were in-store vending machines for candy, soda/coffee, and cigarettes.
Customers stayed inside the vehicle while the attendant filled up, checked under the hood, topped fluids, checked tire pressure, and cleaned all glass — then collected money.
Those days a company could make a profit from such an operation, and drive-offs were as common as standing in the street and being struck by a bolt of lightning or a meteorite.
Things are much different now because the high price of gas causes motorists to cross the street to save two cents a gallon. In addition, you have to pay first and do everything yourself.
Absent service and perception of quality, gasoline became a commodity with slim margins. It’s tough to make money selling it. A commodity is a product or service that has nothing that differentiates it from what other providers in the market are offering.
Retailers now sell good (regular), better (mid-grade), and best (premium). The classification of gasoline is based on octane rating, used to judge volatility of gasoline, which is related to Reid Vapor Pressure — rate of vaporization.
Octane rating is based on an anti-knock index representing gas’s ability to resist pre-ignition. The higher the octane rating, the less an engine will make a knocking noise.
Vehicles control modules with built-in algorithms adjust for octane so the most efficient air/fuel mixture
is achieved. The octane requirement is set by engine design, which operates at optimum settings. Thus, using higher-octane fuel in a vehicle designed for lower octane will provide no additive effect.
Today, major oil companies (MOC) try to differentiate their product — Chevron features Techron®, BP Invigorate®, and Shell has nitrogen-infused gasoline to prevent carbon build up.
Carbon on engine intake valves absorbs fuel meant to be burned causing it to be wasted and it can block fuel injectors inhibiting fuel delivery. Both problems can cause a rough running engine with no check engine light.
With slim gas margins and failing at selling convenience merchandise, we have seen MOC exit from the retail side of the business to profit from managing rack prices — the price at which refineries sell gasoline to wholesalers — leaving spot pricing (street price) to retailers in local markets.
Consequently, this opened the door for more nimble entrepreneurs very adept at merchandising like Wawa, a convenience store and petroleum retailer based out of Pennsylvania. Wawa employs about 18,000 associates in over 500 stores located in portions of New Jersey, Pennsylvania, Delaware, Maryland, Virginia, and Florida.
Unlike many gas stations and c-stores, Wawa stores are exceptionally clean inside and out, including the bathrooms. The employees are well trained, friendly, and make sure customers find everything they want.
Wawa offers a full range of convenience merchandise, hot/cold beverages, and nutritional foods among other things and has a great deli with innovative electronic ordering machines where customers can customize their own sandwiches.
In short, Wawa has avoided commoditization by providing a well run operation with great selection of products and food, innovations, and excellent customer service. This has allowed the firm to expand and capture significant market share from stalwarts.
As anyone who has been married knows, there can be a tendency to get complacent with your partner and this can be an unenviable position to find yourself in. The same notion applies to business where successful owners may slowly come to rest on their laurels.
Of course, this opens the way for competition to come along and capitalize. Consider how full-service and in-bay automatic car wash operators have given up considerable market share to the advent and expansion of low-priced express washes, which pundits describe as being built on speed, convenience, and superior performance.
Now that this model has been perfected and the trend maturing, express wash is a commodity with absolutely nothing that differentiates it from what other express operators are offering.
Consequently, if operators doze at the helm, they may find themselves being powerless to negotiate on any aspect of the business other than price. Make sure this doesn’t happen to your business.
Bob Roman is president of RJR Enterprises – Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at firstname.lastname@example.org.