Demystifying an Uncertain Future

By Norman Turiano | June 2016

There have been numerous articles written over the years regarding alternative fuels, which retailers eagerly read for insights on how alternative fuels will impact the market. Retailers are hoping for an alternative fuel that is similar in nature to today’s transportation fuels. To prepare for this future, that the industry may need to dedicate capital resources for the winner that will replace petroleum-based fuels.

Before retiring from Wawa in 2012, my responsibilities included preparing for a universe that would include one or more alternative fuels. At that time, I truly believed certain fuels were more likely to succeed and made more sense for the market than others. However, I have come to realize that my beliefs were no more than biased wishes, where I was really hoping for a solution that could be sold like gasoline. So how do we really prepare for a very uncertain future?

The Fuels Institute

Fortunately for our industry, in 2013 NACS created the Fuels Institute as a non-profit think tank to help retailers develop long-term strategies that deal with both the apparent and unexpected realities. I have been fortunate to serve as one of the founding directors. The first reports published by the Fuels Institute focused on different fuel types and understanding their impacts, followed by reports that take a more systemic approach, looking at how changes will affect all components of the fuel universe. The Institute challenges all stakeholders to think differently and more broadly to better understand where the market is heading, and perhaps more importantly, why it’s going there. If we understand the underlying factors influencing the direction of the market, we can get ahead of the curve and capitalize on opportunities instead of struggling with challenges.

So, what have I learned over the last two years?

A Very Mixed Bag

Initially, when I thought about alternative fuels, it was mostly a discussion about compressed natural gas (CNG), electric (EV) and ethanol (E85). Increasingly, that discussion includes hydrogen fuel cell and optimized fuel vehicles. As the choices increase, the question on everyone’s lips remains: Will all of these options become available, which would be prohibitive for a retailer to adopt in their entirety, or will specific ones rise to the top? Keeping in mind that this is purely my analysis and resulting point of view, here is what I see trending:

Ethanol: The Renewable Fuel Standard (RFS) calls for increased percentages of renewable fuel in the market. Currently, much of this comes from corn, but the government is funding other sources. Through the Fuels Institute, we have visited laboratories in Colorado and California that are doing exciting and brilliant work in this area. This would bode well for retailers, as it would keep us in the liquid fuel business.

CNG: There was once the promise of CNG becoming one of the biggest alternative fuels. This was good news for retailers, because the fueling experience was not unlike that of liquid fuels. However, much of the promise was driven by Chesapeake Energy, whose focus has since changed. Most studies we recently initiated through the Fuels Institute indicate that CNG will be largely confined to fleet vehicles and medium- to heavy-duty vehicles. While this is an opportunity for many retailers, those with limited sized lots or stores focused on high turnover of vehicles will not likely see the same opportunity.

Hydrogen: This technology addresses the “fuel anxiety” that comes from limited range of electric vehicles. It is good from a retailing standpoint in the same way that CNG is, as in something we can store and sell. My concern lies with its infrastructure expense (about $2 million), as well as improvements in battery and charging technology for electric vehicles rendering hydrogen as short-lived.

EVs: Finally, as noted, improvements in battery and charging technology can make EV adoption increase substantially. This is good news for consumers. However, vehicles refilling for 20 minutes today does not support the convenience store business model. While faster charging technology will change this, nearly everyone with a parking lot can offer the same “fuel refill” as convenience stores.

Finally, I need to discuss autonomous vehicle technology, in which research and investments have been increasing exponentially. At 12,000 miles per year (the average U.S. distance travelled for privately owned cars), electric vehicles in 2030 are still expected to be more expensive than a gasoline-powered car. But if a vehicle is driven 40,000 to 70,000 miles per year, typical for U.S. taxis, an EV becomes the most cost-effective option per mile driven. Many time-starved people would likely embrace driverless taxis for work, and use their new-found time more productively. They would at the very least sell their second car, the least efficient from an ownership standpoint. The savings on maintenance and repairs are tremendous, and that doesn’t even factor in the cost of storage in urban settings.

More than fuels themselves, autonomous vehicles are where we as retailers should remain focused.

The Future of Convenience Retailing

Our lives have always changed as a result of disruptive technologies, innovations that create new markets and eventually disrupt existing markets and value networks. I believe that the future of our industry will fragment, with some offering transportation fuels such as CNG and legacy liquid fuels, while others will embrace a business model that is independent of fuel purchases. This is apparent today, as Sheetz is adding more sit-down dining experiences at its new and rebuilt stores and Wawa appears to be heading in the same direction, adding stools and counters in Philadelphia, as well as outdoor seating in Florida. Other similar chains are dedicating increasing resources for developing similar offers.

I believe we’ll see the convenience store industry diverge increasingly into one of these models.

Read more from the Jun Issue of our Fuel for Thought newsletter.

Norman Turiano is the principal of Turiano Strategic Consulting LLC.