As we listen to our independent dealer clients, we’re hearing a particular comment that seems to be becoming almost routine. It’s "The bank keeps calling about our overdraft levels and we’re not sure why we seem to be out of cash so often". So we look at their trading figures, we look at their credit card figures and their stock levels. But in most cases there’s no immediate problem to see.

The elephant in the room

The answer is so obvious that it’s easy to overlook. We’re all so used to it just being there that as long as nothing exceptional happens, we all tend to assume that it’s okay.

We are, of course, talking about wet stock. Naturally we’ll have looked at the stockholding in terms of days’ sales volumes held earlier in the process.

Most sites will be fairly consistent in their tank levels, holding somewhere between three and six days’ volume underground at most times. But the cost of that stock has risen to the point at which it now has a significant impact on the retailer’s cash flow, and this is why some dealers now receive uncomfortable phone calls from their bank each time another tanker invoice is due for payment.

The ’traditional’ model

In very simple terms, a dealer buys fuel from their supplier on the underlying, although unstated, assumption that most of that fuel will be sold by the time the tanker invoice is paid.

Typically today the payment terms are by direct debit, three working days from delivery although there was a time when oil companies used to give their dealers more generous payment terms. This was often a full week, sometimes two, and occasionally a full month. However, even with today’s three-day terms, there’s an unspoken assumption that petrol and diesel stock can be sold very quickly, and so the cost of buying the product shouldn’t be an issue.

The reality today (1)

The ’traditional model’ suggests that the dealer should hold a maximum of three days’ sales volume at any time. However this harks back to a time when fuel could be ordered in almost any quantity, at no more than a couple of days’ notice, by a simple phone call to the supplying depot. In other words, a time before orders had to be placed online, several weeks ahead. A time before it became difficult to amend or cancel tankers by another quick phone call. Before the oil companies started charging for ’small’ deliveries, cancellations or returned loads. In that simple world, the dealer would be able to estimate their projected sales volumes and receive the appropriate delivery, amending it right up to the point where it left the supply terminal. In the real world, however, the quantities are basically fixed a week or more before the delivery date. Unfortunately with the fuel market as volatile as it is, many dealers are finding it increasingly difficult to predict their short-term sales with any degree of accuracy.

If you come into work one morning to find your site 2ppl adrift of the local competitors, or a supermarket suddenly decides to issue 5ppl fuel vouchers, your volume predictions from a week earlier can look decidedly optimistic and your stock levels go up when the next tanker arrives.

However, given that the first rule of retailing is never run out of stock, most retailers will err on the side of caution, and hence always tend to keep rather more than a minimum of three days’ stock on site.

The reality today (2)

There’s another reason why the ’traditional model’ doesn’t square with today’s reality customer payment methods. The idea that you could sell any given delivery before you paid for it might have made some sense when the majority of sales were in cash. Then all that the retailer needed to do was to put each day’s takings in their bank’s overnight deposits safe and have it credited to their account the next working day.

Today a typical site might sell only a third of its fuel for cash the other two-thirds will be debit, credit or fuel cards. Assuming that nothing goes wrong with the EFT systems, the debit card proceeds will hit the dealer’s bank account three working days’ later the same day as the tanker payment goes out but the credit cards will take at least a week to arrive and the fuel cards (or agency payments) can take between 10 and 21 days to finally hit the bank.

The £s and pence

As this is being written, typical pump prices for regular diesel are around 142.9ppl and for regular unleaded around 133.9 ppl.

As far as our dealer is concerned, those equate to supply prices of some 116.08 and 108.58 ppl respectively, excluding VAT.

Let’s say that our dealer tries to stick to the ’traditional model’ and keep no more than three days’ stock underground. This isn’t a huge volume site, just a typical 4.5mlpa, and let’s assume it’s a 50:50 petrol:diesel split. Some quick arithmetic says that he’ll need to keep 18,863 litres of petrol, plus the same of diesel underground.

A bit more arithmetic says that’ll cost (£41,974 + VAT of £8,395) £50,369 and remember that’s only three days’ worth of volume. Assuming sales are consistent, roughly a third of that cost will have been recovered on the same day that the tanker invoice is paid but that leaves some £34,000 to come in anywhere between four and 14 days after the fuel has been paid for. No wonder that the bank now calls so frequently on the days that tanker debits are due to go out.

Is there a solution?

As far as the price of fuel is concerned probably not. However, there could be some more understanding of the dealers’ predicament by suppliers. It would also help if suppliers recognised market volatility and brought back ordering/delivery processes that were more flexible, and dare we say, less punitive, when dealers need to adjust their wet-stock holding.