E85: Can it break through as an alternative fuel?

Harry_S._TrumanPresident Harry S. Truman once said, “A pessimist is one who makes difficulties of his opportunities and an optimist is one who makes opportunities of his difficulties.” Over the past few weeks, my colleagues at Fuel Freedom Foundation and I have spoken with and read about several optimistic owners of E85 fuel stations.

Our selection wasn’t random. We focused on chains or fuel stations that apparently overcame literature-defined problems in marketing E85 and, according to their owners or senior managers, were on their way to success in securing profitable market penetration. Frankly, we wanted to find sufficient cases that testify to the fact that E85 can compete successfully with gasoline. Succinctly, we wanted to respond to a question that’s frequently asked of us, which goes something like this: “Assuming no major policy and feedstock changes (at least in the near term), can E85, in light of the current price of gasoline, provide consumers and the nation with a real competitive choice of alternative fuels that are safer, environmentally better and cheaper than gasoline?”

Future articles will provide mini case studies of some of E85 retailers. But for the present, based on many phone calls and Google descriptions, we found at least four or five stations (relatively quickly) with prices ranging from 60 cents to just over a $1 below the price of gasoline, despite the current, relatively low gas prices. The lowest price described was below $1.50 a gallon. All stations seemed committed to the continued sale of E85, and each one expressed conviction that they have sufficient price flexibility to build a vehicular fuel market able to meet cash flow and profit expectations. Their optimism was based on their present sales and future forecasts of sales.

Clearly, we need to know more. But what we heard deflated (at least partially) conventional wisdom suggesting that while a large pool of newer FFVs s and older vehicles that can be converted to FFV status exists, increased sales of E85 is unlikely because of the decline in the price of gasoline.

The E85 retailers we talked to and reviewed online appear to be using some of the following strategies to take on gasoline successfully in the market place. They are paraphrased and summarized from direct quotes for brevity:

Loosen Ties with Brand Names: Loosening ties with major brand-name franchisers provides the ability to sell E85 and permits more flexibility to set prices based on market perceptions.

Share Value of RINs: RINs are tradable and are valuable, particularly when their value is high. The ability to secure RINs from members of the supply chain is an incentive. Producers and blenders have a stake in retailer success; retailers have a stake in feedstock. The RINs help make the price right at the pump.

Amend Supply Chain: By incorporating blending as a function, retailers are able to manage costs and, indeed, lower costs. By avoiding the need to contract for transferring E85 from terminal to station and doing it themselves, retailers are able to also better manage costs.

Intuitive Marketing: Choosing an easily accessible location within which there is a high density of FFVs, along with recognition that price matters, are threshold needs to penetrate the fuel market. Smaller fuel stations often make their locational decision, in part, based on intuition and not on expensive market studies. Some might do a study…but those who did appeared to keep the costs low. They saw the possibilities in diverse locations by talking to the market and marketing folks and checking available data concerning FFVs in the area, as well as watching traffic patterns. They also had a feel for the area.

Anecdotes and small samples should not generate formulaic or prescriptive “one size fits all” market or marketing strategies. Maybe we were lucky in our calls! Maybe we were fortunate to quickly find the right articles or presentations. One of my colleagues fortuitously drove by a fuel station on his way to the airport and saw a sign touting a very low E85 cost per gallon. Clearly, economic, social, environmental, political and cultural variables are different in different areas of the country, and could very well negatively affect predictability of retail success, particularly concerning location, price and consumer acceptance. Just as clearly, supply-chain differences between and among retailers in different parts of the nation could well impede or facilitate success. What is important at this stage is to recognize that there are individuals and groups out there who own or manage fuel stations, and whose early market achievements should generate a positive bet concerning their intermediate and long-term success. Borrowing from Harry Truman, they appear, at least at first glance, to be making opportunities out of what others perceive as difficulties. If they succeed and generate copycats or variations on a theme, it will be good for the nation, its communities and consumers.

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