Pacific Pride provides franchised, unattended, computerized commercial fueling station services to commercial fleet customers. The company is at crossroads and is evaluating expansion to 48 continental United States rather than limiting to its base in Oregon and Washington.
Situational Analysis
Transportation Fuel Market
The total transportation fuel market in 1992 is estimated to be 129 billion gallons for gasoline and 21 billion gallons for diesel. The commercial fleet customers will account for 15% of the gasoline market and 90% of diesel market (estimated to be between 30 and 50 billion gallons). The major oil companies dominate the non-commercial retail segment (114 billion gallons of gasoline). However, this sector continues to be consolidated and resulting in decline of fuel outlets. Increasing environmental regulations and the boom of unattended automated fuel retail outlets are perhaps the two largest reasons for consolidation. In many instances, retail outlets are forced to generate revenues from non-fuel related services to compensate for little margin of profits from fuel services.
Pacific Pride Services, Inc.
Pacific Pride Services, Inc. (PPSI), a wholly owned subsidiary of Pacific Pride Commercial Fueling System (PPCFS), is a franchiser and provides franchise services such as network switching, backroom services, and advertising. In addition, PPSI maintains a network of 235 independent franchisees and provides the information infrastructure and product concept advertising. Pacific Prides caters exclusively to commercial customers, and each franchise is required to have a set of services at no charge to their customers. For strengths and weaknesses analysis of PPSI see Exhibit A (Table 1).
Source of Revenue and Profits
The main source of income for PPSI (the franchiser) is generated from a variety of franchise operations fees (see Exhibit B). The franchisee makes money based on two methods – foreign sale and foreign purchases. The common denominator for a foreign sale or foreign purchase resulted in the profit of five cents above laid costs for each franchisee. Initial investments and break-even analysis reveals that a $150,000 investment in an automated fueling site (assuming a profit of five cents per gallon and dispensing 100,000 gallons per month) would require a payback period of 30 months and the minimum franchise commitment by PPSI is five years.
PPSI Benefits to the Customer
PPSI realized the needs of the commercial customers by capitalizing on convenience, cost, and control. The value added customer service, distribution network, and 24 hours/7 days a week operation eliminated downtime for fleet customers and provided convenient fueling facilities. The cost was a major issue, especially with fluctuating fuel prices and the energy dependency on the unstable areas of the world. Providing volume discounts and competitive pricing accommodated the cost. However, the greatest challenge was the control issue. Increasing number of commercial customers were interested in the information flow and performance data to schedule vehicle replacements strategies based on economic life cycle and maintenance factors. Emphasizing control over fuel usage, itemized billing, and fuel management reports provides this.
Competition
PPSI has three major groups of competitors, each using different types of marketing strategies and franchise network concept. CFN (Network Linking with Independent Sites) has 730 sites in 32 states and uses a network of automated commercial fuelers similar to PPSI. Although the number sites exceed PPSI’s coverage, CFN is not a franchise network and therefore can’t enforce standards for members or brand equity through trademarking.
The major threats to PPSI are the Multi-brand Fuel Card Networks (such as Gascard and Fuelman) and the Major Fleet Card Programs. Both have a large network distribution (exclusive agreements to supply the government and large commercial fleets), flexible payment plans (such as the use of credit cards), information flow (customized reports for fuel management, performance and maintenance control), and central marketing strategies (economies of scale provides a larger incentives for market penetration). However, these networks have some inconsistencies with enforcing standards and requirements, pricing, and reliability.
In addition, the major refineries are also potential competitors, but majors are not in the business to provide information system flow and control characteristics. The main business for the majors is to produce, refine, and deliver fuel and they get their profits whether they supply to retail or commercial markets. See Exhibit A (Table 2) for PPSI's opportunities and threats.
Evaluation of Marketing Strategy
At the franchiser level, there is little advertising and marketing involved. PPSI has penetrated the market through brand equity and value added services. PPSI’s main selling points are:
Problem Identification and Evaluation
PPSI is looking to expand its franchisee base to the 48 continental United States. PPSI currently enjoys the market share in 31 states with 660 franchisee sites, but it needs to refocus its strategy by paying more attention to its competition and transitioning its archaic technology into more cost efficient and high performance technologies. PPSI is deceiving itself by justifying the punch card technology when all of their competitors and other economic sectors have transitioned to the magnetic stripe card and Point of Sale (POS) technology. In addition, environmental regulations are threatening 30% of PPSI’s business. Although many tanks will be replaced, some franchisees may not have the necessary capital to transition, and therefore there is a potential that PPSI may lose some business and may have to generate additional franchisees.
Alternative Identification
For PPSI to sustain and grow in an increasingly competitive market, they need to shift their paradigm and improve on the weak areas such as centralized marketing, new technologies, and market defense strategies to flank the competitors.
One alternative is to adopt the Point of Sale (POS) technology (magnetic stripe cards and card readers) because it is increasingly accepted part of doing business for both business operators and customers. Many sectors of the economy, including PPSI's competitors, have embraced the POS technology because it serves the customer at the location of sale or transaction. POS system will allow franchiser and franchisees to record sales, financial, and other customer transactions at the point of transaction. The current punch card method is archaic because transactions are processed either through batch process (not current), and they move between redundant levels.
The POS eliminates redundant links (such as PetroVend) and allows transaction validated by magnetic stripe cards at the time and point of sale to the central computer (at PPSI) for processing. The benefits are obvious because it expedites service, saves money, provides control over fuel usage, and provides itemized billing and customized fuel management reports. In addition, there is less traffic, better access for customers, less redundant data entry, and less paper shuffling. In the event of magnetic stripe failure, keypunch provision will allow the driver to access transaction (back up system). The cost for the POS system setup is equivalent to their current structure and the availability is widespread.
Second alternative is to use the "Smart Card" technology, which is similar to magnetic stripe card, but consists of embedded microcomputer chip rather than stripe. Although initial costs are expected to be higher, an incredible amount of historical data about the vehicle performance and fuel can be stored and controlled. This information is beneficial for all three parties -- the customer, franchisee, and the franchiser.
Recommendation
As the future unfolds and leading engine manufacturers are transitioning from conventional engines to electronic engines, a large number of commercial fleet customers will also demand better performance data from fuel and so on. In addition, the government is mandating the use of alternative fuels to reduce harmful tailpipe emissions and increase energy security. Both of these factors require a change in the infrastructure of providing commercial fuel. PPSI is at the crossroads and can change the future by incorporating matching technology (to better position against sophisticated engines and fueling infrastructure), centralized marketing and advertising to expand franchisee base and assist franchisee expand customer base, and last to take the threat of the competitors seriously and protect by appropriate defensive strategy.