Here’s a quick checklist to determine if investing in upgrading your pumps is a good investment.
Richard Browne, Vice-President Marketing, Patriot Capital
One of the most important decisions you can make in running your business is when, and on what, you should invest in. The choices can be overwhelming. Developing a cash flow model can provide you a comparison of the impact of your choices.
Here’s a checklist to help determine what the payoff can be from a pump upgrade. In this example, upgrading to new pumps with Applause TV and EMV payment could generate over $70,000 in incremental profit in 3 years, enough to pay for the upgrade in many situations. This does not include the savings benefits from lower maintenance costs and enhanced fuel and data security.
To walk through the process, we’ll look at a site that is considering upgrading their gas pumps to accept EMV. What we know is the following:
- Well over 2 Million U.S. retail locations are accepting EMV.[i]
- EMV capable gas pumps will exceed 50% by the end of 2018. Customers around the world have shown they will move their business to EMV capable sites.
- VISA will start fining high fraud sites with the potential to remove them from the network.
- Liability for card fraud at the pump will shift to the retailer in October, 2020.
Our investment options boil down to three choices: upgrade in 2018, upgrade in 2020 or do nothing. Do nothing is always an option, however in this case it will likely result in you incurring penalties and liability for higher fraud or losing the ability to process on some networks. Let’s focus on the benefits of upgrading in 2018 vs waiting until 2020.
1. How will the investment impact my sales?
New pumps are generally credited with an increase of volume between 3 and 7%.[ii] These increased gallons should also generate increased in-store sales. With Applause TV promoting in-store product you could see your inside sales grow faster than your gallons. If you have competition down the road with ‘modern’ pumps and your site has older pumps, how many potential customers are passing you by? For our model, let’s assume you get a 5% increase both outside and inside. If you don’t upgrade, how much business will you lose over the next 3 years?
How will my costs change?
In addition to a warranty that will handle most maintenance costs, other savings from new pumps include greater security against fuel theft and payment skimming. With any investment, consider if it will make you more efficient or add additional costs. For example, upgrading to LED lighting has a significant impact on your energy costs as well as your site image. In the case of a pump upgrade, it’s likely that you can handle any volume increase without adding additional staff or other costs. As a result any profit margin generated should fall straight to the bottom line site profits. Industry data suggests that an inside sales margin of 28.8% is a reasonable number.
What is the cost of waiting?
There are several factors to consider here. We may be entering an inflationary period, with both interest rates and equipment prices rising. Service technicians are a scarce resource, and the demand for their time will increase significantly over the next couple of years due to both more pumps being upgraded and pumps becoming a more complicated product.
What is the impact on my businesses value?
The value of your business is important regardless of your plans to sell or keep it. Increasing the value of your business provides peace of mind regarding your financial security.
Here’s a template that uses some industry average monthly data to show how these concepts could be applied. The template is available in Excel by emailing me at the address below.
This example suggests that investing could increase your profits by 35%, while waiting could result in you loosing over 10% of your profits. Not included in this example are the maintenance saving that having equipment under warranty provides nor the potential that price increases will result in you having to invest an additional more capital in equipment costs and installation if you wait until 2020 or later.
Increasing your stores fuel sales and inside sales should translate into a higher value being placed on your site. These values are usually calculated as a multiple of store profits, creating a leveraged impact on your sites market value.
Using a cash flow model to determine the impact of an investment on your stores profits and costs can help you make a more informed decision about when and on what to invest.
Richard Browne is Vice President, Marketing at Patriot Capital, a division of State Bank & Trust Company. Contact him at firstname.lastname@example.org. Examples provided for informational purposes only. Please consult your professional advisors for advice regarding your specific situation. Member FDIC.