Geospatial Analytics and Downstream: From Baby Steps to Huge Leaps Towards Retail
In the past couple of years, some of the largest downstream focused companies have shifted their gaze towards the end consumer and started to explore the opportunities of investing into retail.
Indeed, there is a lot of room for flexibility and gathering valuable sales data when it comes to retail, largely due to it providing a steady source of reliable income, and it’s also a great chance to establish a direct communication channel between an oil company and its audience.
The seasonal issue with downstream
While oil is undoubtedly a profitable business to be in, it does not come without downsides. The main issue is related to the relatively unstable (or seasonal) nature of the business, when considering demand and supply, gasoline production, distribution and sales.
During the high peak seasons (spring-summer) when gasoline is in high demand, the profit margins are looking great, but as winter approaches, they tend to decrease, which most of the times creates a negative income situation for downstream companies.
Let’s say your company operates 500 gas stations across the country. Gasoline is priced $2.3 per gallon, or 96.6 per barrel, and considering that these numbers have a very low change range, the profit margin for downstream companies is dictated by crude oil prices.
Now, while in summer the demand for gasoline as at its peak, the prices for crude oil go down, allowing downstream focused companies to maintain a relatively high profit margin. However, in winter, the gasoline demand tends to decrease, which leads to crude oil price increase, and ultimately hurts the bottom line of downstream focused companies.
Also, let’s not forget that these simple calculations don’t take into account a lot of operational and fixed costs, which still need to be taken care of regardless of your profit margins and crude oil prices. From this angle, during winter, companies are exposed to suffering even more costs, and even working at a negative income. To put it simply, you have to “survive until summer” to start generating profits again.
Why invest in retail?
As a downstream focused company, investing into retail yields a number of opportunities, with the main ones being focused on marketing, brand recognition, exposure, a steady access to income, close communication with the end customer and (arguably) the best way to increase market share.
Let’s continue with our example.
Suppose you had small express stores behind your gas stations, which are primarily focused on selling the four key product categories of mass purchase – tobacco, immediate consumable beverages, coffee and food.
Assuming you always maintain high quality service and supply customers with fresh products (when it comes to food and coffee), this tactic will allow your company to:
- Get on the shortest line of communication between a brand and the end customer, allowing you to gather more data on your audience, which can later be used to strengthen your marketing and sales channels.
- Increase brand recognition and provide more marketing exposure for your company.
- Get customers to visit your store even during the harsh seasons, even when they don’t really need gasoline.
- Gradually “win over” customers from competing downstream companies (since you offer comfort and a warm welcome to customers who can relax during their trip, get a snack, have a cup of coffee and continue on whenever they like).
- Increase market share.
To sum it up:
For downstream companies, investing into retail can help negate the profit losses during harsh seasons by allowing to focus on other sales mechanics, and get to summer without taking losses, while also further strengthening their brand and acquiring more new and returning customers along the way.
Why do you need geospatial analytics?
In short, one does not simply jump into the retail business while being a downstream company.
When done right, retail can be a very rewarding business, however, if you’re not careful, you may end up in a far worse state than you were before.
The opportunities and threats of retail
When you’re thinking about entering retail, there is a ton of things you need to take into consideration (like suppliers, logistics, added operation costs, etc.) which all ultimately lead to one question – will your retail investments pay off?
Recalling our example above:
If you have 500 gas stations spread across the country, how many retail stores do you want to have? Does it make sense to open 500 stores behind each and every gas station? What problems can you encounter? Etc.
Let’s look at some answers.
Just like with gas stations, choosing the right location for your retail store is of utmost importance.
However, there is a difference between choosing a perfect spot for your gas station and choosing the perfect spot for your gas station AND your retail store combined.
To put it simply, if you have a profitable gas station that generates more income than your average gas station, it does in no way mean that blindly adding a retail store behind that particular gas station will be beneficial for you.
You have to make sure that each and every retail store will not just barely survive, but will be profitable!
This change of approach happens because you’ll be looking at different data, statistics, demographics, psychographics and population density in every region, particularly because you will have to take into account different logistics, suppliers, household income, etc.
In other words, you will have a new type of customers to focus on and target, customers that not only want gasoline, but also shop for the four key destination categories.
This is where geospatial analytics step in.
Modern Geospatial AI platforms offer companies a brand new way to look at their sales and business data. Geospatial analytics enable businesses to only take into account demographic and psychographic data, but also take a look at customer movement.
When choosing the locations for your retail stores, mapping territories and trade areas, it’s important to take into account the geospace of your locations and trade areas.
To put it simply, you need to worry about the convenience of approaching your store/station from a geospatial perspective (think about questions like “How easy it is to get to your store?” “Are there any natural obstacles that customers need to overcome like rivers, hills, mountains, etc.?” “Are there any competing businesses situated on the same route that most customers take to get to you?”), as well as minimizing the amount of time needed to get to your stores.
Here is why geospatial data is so important today.
As more and more companies start to understand and appreciate the value and importance of providing high quality service and products, these business attributes slowly start to become baseline for customers. In other words, most customers expect that whenever they walk into a store, they will be provided with high quality service, otherwise they will just never return.
With product and service quality getting baseline for technically any business, the only remaining major factor that will separate your company from the others in the eyes of customers in terms of value, trust and recognition, is time.
When shopping for anything (including gasoline and any of the four key product categories) customers are ALWAYS faced with a choice.
Every customer wants to choose an option, which will be most satisfying on the physical level (quality of products and service), but more importantly, on the mental level as well (customers feel a surge of satisfaction when they know they got the most out of their choice). Here is a detailed explanation of how customers make decisions today.
When the choice between high quality products and service is equal, customers will turn their attention to the only other option that can give them the satisfaction that they are looking for – time. If your store can save them time and effort, they will pick you over any other. Every time.
Getting actionable business insights with geospatial AI platforms
Geospatial AI platforms can help downstream businesses not only choose the correct locations for their stores, map territories and trade areas correctly, but also provide actionable business insights based on their past and current sales data to increase the profitability of those stores even further.
For example, after choosing the perfect gas station to tie your store to, you might want to add/remove some parking lots, which will increase your profitability. Thanks to modern techniques of data interpretation and visualization, machine learning and continuous data gathering, geospatial AI platforms will be able to automatically calculate and come up with an actionable insight on how many parking lots you want to add/remove and how much (in profits) will your business benefit from it.
Conclusion - There is a lot more than the eye can see
Geospatial analytics can be the perfect solution for identifying and solving problems that you never knew existed before, or seemed too hard to keep track of. If you would like to know more about how geospatial AI platforms can help your downstream company enter the retail space, simply drop us a line anyday, anytime.
Mike is the Co-Founder and CEO at Fract. With over 20 years of retail and business location analytics experience behind his belt, Mike counsels business owners and helps them get the most out of their business and sales data. He is also a passionate art lover and enjoys a glass (or two) of good wine with friends and family on the weekends.