Distribution woes: Adapting to changes in traditional distribution channels

"In The Case Of..." makes its debut in this issue. We hope that alumni, friends, and other readers will share their business experience by "stepping up to bat" with solutions to a variety of business cases. Solutions and/or cases proposed by our professors, students and readers can add to our knowledge base, and the interaction will allow us to get to know some of our readers better.

David Cansler is the marketing/channel manager for a large, independent oil company headquartered in Louisiana. One of David's responsibilities is to support and monitor the various channels of distribution the company's gasoline products follow on their way to the final consumer. The primary channel of distribution for the company's gasoline is an extensive web of independent distributors located throughout the country but concentrated in the South and Southwestern United States. Distributors are primarily owners of convenience stores although there are still a small number of stand-alone gasoline stations being operated in some rural areas. Each of these distributors has entered into a supply agreement with David's company to market gasoline.

Two recent trends in gasoline distribution are a source of great concern for David. The first is the growing number of non-traditional gasoline marketers. For example, large grocery store chains and discount houses are placing gasoline pumps on their parking lots and selling gasoline at very low margins that make it increasingly more difficult for convenience stores to compete for the consumer's gasoline dollar.

The second trend in gasoline distribution relates directly to the convenience store industry. Convenience stores are evolving toward larger stores with an even wider array of products and services including branded fast food franchises such as McDonald's and Burger King. The cost of these new stores runs well over a million dollars per store. Building new stores and refurbishing older ones requires access to large amounts of capital that serves as a significant challenge to the owners of smaller chains of convenience stores. Furthermore, the convenience store industry is becoming more and more competitive. This has made cost control imperative. The principal tools used to control cost involve investing in expensive technology for inventory control and increasing total gasoline volume to achieve volume purchase discounts from gasoline suppliers. Again, the capital requirements and managerial expertise required to successfully implement these technological improvements provide a significant challenge to many of the smaller convenience store operators.

These facts are particularly troubling given that the fleet of convenience store marketers through which David supplies his company's gasoline are typically the "dinosaurs" of the c-store industry. While the industry average in-store sales for a typical convenience store are about $800,000 per year, David's marketers average about $350,000 per year at their c-stores. This reflects the outdated look of the old-style c-stores and their smaller physical size. Additionally, while the industry average annual gasoline throughput is approximately 1. 1 million gallons per establishment, David's marketers average approximately 600,000 gallons per store, reflecting fewer fueling positions per store and the absence of pay-at-thepump technology that other marketers have been embracing.

What should David do?

[Sidebar]

What Would You DO. The best reader responses to this case will be published in the next issue of BBR. Please keep your response under 100 words and also include your name, title, company, degree and year. Please send to:

Baylor Business Review Hankamer School of Business Box 98009, Waco, TX 76798 Judy-Corwin@baylor.edu Fax: 254/710-1068

[Author Affiliation]

The inaugural case was submitted by John D. Martin, Ph.D.

Carr P. Collins Chair in Finance and Professor of Finance

Beck A. Taylor, Ph.D.

Assistant Professor of Economics

[Author Affiliation]

Professor Martin's area of expertise lies in the field of mergers and acquisitions. Professor Taylor's research interests are in the area of industrial organization, Both have consulted extensively and have experience with the oil and gasoline industry.