In June, Pacific Pride Services, LLC, a subsidiary of Wright Express Corp., announced that Quality Petroleum of Alabama had opened the first Commercial Fuel Center in Tarrant, Ala., to offer biodiesel for commercial fleet fueling as well as EPA-approved, ethanol-enhanced unleaded gasoline. The new location was Quality Petroleum’s eighth Pacific Pride Commercial Fuel Center in Alabama.
NPN Magazine decided to follow up with an interview of David Melton, vice president of Quality Petroleum of Alabama, and Gregory D. Iverson, president of Pacific Pride Services, to discuss offering alternative fuels in a cardlock environment and other issues impacting cardlock operators today.
NPN: David, give us an overview of your cardlock operations.
Melton: Quality Petroleum has been operating cardlocks for approximately the last 15 years. When the underground storage tank regulations came into effect, some of the older service station facilities became non-effective as service stations. We realized that the commercial customer with fleets maybe had tanks on their own property were going to be a problem because of the new regulations. A lot of them were getting out of the business. Pacific Pride had an excellent presentation on how to recapture a lot of that business, and we've been very lucky that we found some channels that have given us the ability to help our existing customers and then go out and find a whole new venue for customers to sign up and use our cardlocks.
NPN: What role do cardlock operations play in your overall business portfolio?
Melton: Cardlocks have probably been about 80 percent of our growth over the past five years. We have not been a large distributor in the third-party dealer fueling world. We mainly own our assets, whether it's an operation that we choose to operate or lease out—we are going to own the tanks and the real estate. As we looked at the financial implications of building a convenience store in today's environment and the return on investment versus building a cardlock at reduced cost, we decided we were going to stay in the fuel business and serve the customers that needed information, education and fueling services. We found cardlocks to be a vital part and, quite frankly, the cornerstone of our business.
NPN: What is the current business environment like for cardlock operators with the economy?
Iverson: From our network perspective, generally the industry is facing a lot of pressures at this point in time. There is a lot of consolidation going on, the margins are sometimes difficult to deal with, card fees are cutting into the margin significantly – certainly in the retail environment. One of the advantages of a cardlock is it is a closed network. The fees are less, in many cases the margins are better and a lot of commercial operators don't want their fleet drivers of the convenience store to cut down on distractions and save time. And cardlocks are generally much more suitable for commercial traffic and frequently have the products available that a commercial operator would need such as red dyed diesel. So it remains a compelling and viable business.
Melton: In the last five years you have cut your sales opportunities in half—the number of fleets out there, the number of businesses that have survived – so there is a much tougher research piece up front. But once you walk in you get their attention simply because they want to know what to do about fuel. Especially if fuel is the number one uncontrollable expense they have. You make a presentation that says this is what we do for a living – we’re a refueling network. The next question out of their mouth is, “What's the price?” As a distributor, I control what I charge them and I control how I buy it and who I buy it from and what products are in the ground. And the next thing we start talking about is what their needs are. Are their needs simply diesel fuel or do they have a fleet of cars or a mixed fleet? You don't get all the business, but you get an audience from somebody who really wants to listen and really wants to talk about what you have to offer.
NPN: Quality Petroleum seems to be taking a leadership position with alternative fuels. What is your business philosophy on these products?
Melton: We have been involved with alternative fuels from the get go. Quality Petroleum has co-ventured CNG sites and had great success with Pacific Pride those locations and we have had customers come to us and say we want biodiesel – it’ what is required of us. I can't go to the retail station because they are not ready yet or they are not going to do it because there is no relationship there, but we have that relationship. That's where we've seen our opportunities; by going to the municipal customers in the cities and the counties in the state governments and saying we see the requirement, so let's make this painless for you.
NPN: What is your supply situation like and which blends do you offer?
Melton: I am currently only offering B20 at our locations. As I look at some blending opportunities, probably the next cardlock that I build from the ground up will have blenders with a B100 tank and then based on price offer the different grades. I have no issues with biodiesel supply in the Birmingham market. I have four different suppliers I check daily.
NPN: Is there a market beyond the municipalities?
Melton: The key with talking to a non-municipal fleet is that you have to make a financial argument and show them that it is not a negative and that you can sell them the product at a cost-effective basis—were not talking retail prices—but you're going to charge them at a cost-plus price. The Alabama Clean Fuel Coalition has been an excellent sponsor and an excellent training partner with me and for me. It is kind of nice to put on a Clean Fuel Coalition sticker as a local company to show that you are using biodiesel in your trucks and trying to help the local community.
Iverson: In addition to the more obvious customers, you have utilities and waste management companies with large fleets looking to capture some of the benefits.
NPN: What are some of the issues involved with marketing biofuels?
Melton: There are some issues, or least perceptions, which can be active in the minds of fleet managers or laypeople, because at one time or another they thought they had a problem with a biofuel. We just had a training session at our new Tarrant location, and the city got involved and we had people from Caterpillar there and several biodiesel manufacturers. It was so interesting to hear the fleet managers talk about these problems and then as the experts got up and provided feedback, they realized that the reality ten years ago when they were making it in the back of the shop – it's not that industry anymore. It's a very technical product and the issues aren't there and quite frankly we've had excellent results when we do the education.
(With the product itself) we just have to make sure that the moment it comes from the pipeline or the plant where we’re purchasing it that we've documented the chain of events to when it goes into my tank, we know it's clean. And we’re testing it monthly and we’re testing it as it goes in and goes out. We start there—we have to educate the consumer and that's an ongoing process.
Iverson: To the point of bio diesel and the perception of quality -- the product quality issues have gone away. In addition, new additives have really taken much of that concern away though not everybody does that as good as they should but it is evolved significantly in the past couple of years.
NPN: If the biofuels mandate stay in place, but the subsidy component gets removed, what are the concerns with that?
Melton: I anticipate it will become an issue simply because if the cost is not as competitive they will go back. That is my concern. Now, there is a percentage of your customers that would use it as long as the prices (are at least) reasonably competitive.
Iverson: Certainly, the big question right now is ethanol and with ethanol subsidies being examined and taking out some of the margin differential between ethanol and straight gasoline where marketers enjoyed some pretty decent margins. If that subsidy goes away, then clearly the dynamic will change and people may not be so eager to put in some of the specialty equipment that might be necessary to handle higher ethanol blends.
NPN: A growing consideration for marketers serving diesel customers is offering diesel exhaust fluid. How is that sorting itself out?
Melton: For the first time ever, we've had customers call us with a need that they didn't even know they had until they actually bought their new vehicles. So we've had to start providing ways to satisfy their need for DEF. One of the ways we are doing it through our cardlocks is that we're looking at bulk dispensing, which raises some issues for us. It is a little bit different than going into a truck stop or travel center store and buying jugs. We've researched several vendors that have some great systems and it is our intention to go ahead and if your location justifies that it's a case of the chicken and the egg. And when you’ve got the eggs, you can find an awful lot of chickens.
Iverson: At Pacific Pride we started into this discussion over a year ago, and we work with a bunch of national providers of equipment and DEF supply itself. We’re proud to say that we probably have a dozen cardlocks sites now that dispense bulk DEF from a metered pump. It is new, and there have been some issues with some of the equipment because it's quite corrosive, but we've had good success with smaller bulk units. A cardlock has lower volume than your typical travel plaza and a cardlock doesn't necessarily need a $50,000 or $80,000 DEF dispenser. The ones we have are portable end units that you can slide a tote in holding maybe 500 gallons of DEF and then we connect wirelessly to the pump controls. So, it is a relatively cost-effective way to get in. And the benefit to the cardlock operators is that right now the margins on DEF are pretty good, and there aren't that many places to get it unless you buy two gallon jugs where the price is much higher.