Name-your-own-price-for-everything retailer priceline.com(Nasdaq: PCLN) said it will start selling gas at a $0.10 to $0.20 discount to consumers through its grocery store affiliate, Priceline WebHouse Club.
Under the plan, consumers will be able to lock in a price for up to 50 gallons of gasoline per household a month, pay for the gas upfront, and fill up at a local station picked from one of their three favorites. The company expects to start service May 20.
The company's stock stayed pretty much pat, slipping $3/16 to $59 9/16. Investors are no longer surprised when reverse retail company priceline, or online retail king Amazon.com(Nasdaq: AMZN) announce a new service offering. More importantly, investors are starting to ask basic follow-up questions. Can WebHouse make money selling gas at a $0.10 to $0.20 discount? Are they even interested in making money in this category, or is it a loss leader to get folks onto their site?
Let's start with a few fun facts about the gasoline industry. Retail gasoline prices hit a 10-year high this week, according to Tom Kloza, content director at the Oil Pricing Information Service, a market research group. The average price for a gallon of gasoline in the U.S. is $1.41, up 47% from $0.96 a year ago. The U.S. state with the highest average price? Hawaii, at $1.62. The lowest? Georgia, at $1.28.
Don't hate the guy who owns the gas station. Wholesale gasoline prices have increased $0.26 per gallon since January 1, while retail prices are up about half as much, Kloza said. The average margin on a tank of regular unleaded is less than $0.10 a gallon. If you figure the average mom and pop gas station sells about 60,000 gallons of gasoline per month that means it's bringing in less than $6,000 from gasoline sales. Nobody's getting rich on those margins, except the companies that own crude oil. Everyone else, meaning the refiners and retailers, are getting squeezed.
Hold on, it gets worse. Retailers can't support the imbalance for long. Kloza expects the average price of gasoline to top $1.50 as early as St. Patrick's Day. In the oil and gas industry, it all boils down to supply and demand, and levels of crude oil and refined products have plunged. As of February 23, there were 584 million gallons of crude oil and refined products in U.S. inventories, down almost 20% from year-ago levels, Kloza said.
There are basically three tiers of gasoline retailers in the U.S. The traditional retailers like Exxon Mobil(NYSE: XOM), Texaco(NYSE: TX), and Amoco(NYSE: BPA); the low price gas outlets such as privately held Sheetz, and the hypermarket companies like Wal-Mart(NYSE: WMT) and Costco(NYSE: COST). Companies like Sheetz sell gasoline at a super low price hoping to make up the losses on grocery items. Wal-Mart and Costco shoot for high volume, selling in the neighborhood of 600,000 gallons per month in some regions.
When priceline says it's going to sell gas at a $0.10 to $0.20 discount, more than likely they're using traditional retailers as the base, not the discount companies. I can get gas at $1.46 per gallon at the Exxon near my house, or for $1.29 at the Merit station near Fool HQ -- so the discount retailers are already offering comparable prices. There's no way priceline can start selling gas at $1.09 in the current environment.
If it sells at a $0.20 discount to the national average, it will have to sell an awful lot to start making money at the pumps. But I like the model, especially the part that has consumers locking in a price for a volatile commodity. It not only gives the customer the power to buy like a wholesaler, but the ability to buy in advance of price increases, the way buyers and sellers purchase commodities in the futures markets. Plus, if the cost of gas falls below the price you negotiated, you pay the lower price. That's an attractive offering.
The simplicity of the model is compelling: priceline doesn't have to haul gas to stations, operate pumps, or deal with gas tanks leaking underground. It just sells the gasoline at a discount and receives advertising and referral revenues from the retailers it sends customers to. Think of it -- a whole new class of advertisers for priceline -- oil and gas companies. Plus, the cash dynamics look great -- customers have to pay up front for services yet to be rendered. In exchange, the gas stations lock in customers for a month, maybe a lot longer.
Of course the devil is in the details. Is priceline buying gas from wholesalers up front? Is it on the hook for a certain number of gallons at a certain price? Will it end up having to hedge fuel costs like FedEx (NYSE: FDX)? Can priceline make up in volume and ad revenue what it loses in margins? No idea.
I know this much. Wal-Mart is making a killing with its supercenters in the low margin food business because it's the Bruce Lee of inventory management and has an enormous customer base. Who would have thought a discount department store could make it in the grocery business, but Wal-Mart has introduced new concepts again and again -- film developing, pharmacies, gasoline.
The best retail companies find ways to leverage their customer base to change the way people shop, and priceline just might pull it off in the oil and gas business. How much money it will make on the venture is another matter.
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