Budget planning? Make wiser post-crisis decisions

Fuel retail budgeting for the next financial year is going to be complex. Fuel retailers already know how much volume they’ve lost during the global lockdown; many have responded with shorter term mitigation measures like temporary site closures. We’ve already discussed these responsive tactics to counter sudden market volatility, but it’s important to recognize that an effective longer term budget strategy involves returning to a spending mindset.

Post-COVID, we expect demand will eventually recover, but still anticipate a loss due to the recession, altered consumer habits, and widespread lifestyle changes. So, in a capital-constrained environment, how can you set a realistic CapEx budget for the next year, and what can you do to invest it wisely? Here’s how to make the best decisions so your investment is directed towards the highest return:

Pre-budget approval

Identifying the fundamentals and potential of sites is essential to capitalizing on this process. Make your initial budget plan based on these two steps:

• Long-list

All stations will have lost volume, so this is not sufficient criteria to assess whether to stop investing in a site. Assess the underlying fundamentals instead using the 7 Elements for Fuel and Convenience Retail Success, including location and facilities. Identify promising sites for capital investment based on their site potential: determine this using Potential Performance Quadrant (PPQ) for existing sites, or hot spot analysis for new builds.

• Short-list

A site may have qualified for budget assistance based on the criteria in step one, but the demand drop from COVID-19 will have changed that landscape. For example, if a site’s projected volume has dropped by one third since COVID-19, it no longer meets the threshold for budget assistance as its sales won’t return on capital investments. Budget granting for individual projects or a market plan as a whole will depend on total investment and whether they meet your minimum ROI. So, of those long-listed sites, accounting for projected volumes post-COVID, which still qualify for capital investment?

Planning for a changed market landscape

Remember you’re planning for the next few years rather than just months ahead — by which time, consumer patterns, habits, and preferences will be quite different when restrictions are lifted. There are two main theories around what this reality will look like:

• Theory A

There will be an overall lower consumption of fuel as working culture shifts from office-based to home-working. Jack Dorsey, dual CEO of both Twitter and Square, has already allowed employees to continue working from home “forever.” Meanwhile, The University of North Carolina recently moved online after an outbreak a week into the fall semester. Many institutions have already cancelled in-person classes, and many others are considering it for the long-term. Of course, people will still need to use their vehicles for shopping, school runs, and other daily errands, but significantly less without these work commutes.

• Theory B

There will be increased demand as people will be reluctant to, or actively discouraged from, using public transport. The Institute for Fiscal Studies recently advised discouraging public transport use during peak times to limit overcrowding and reduce public health risks. If more countries, regions, or workplaces themselves promote public transport avoidance, this will influence fuel demand.

It’s therefore essential to model multiple scenarios so you can understand how overall demand destruction could affect your sites. While stronger retailers may retain more customers, if the market loses 20%, for example, scenario modeling shows how much that could impact you specifically. Kalibrate Planning can help you quickly compare many scenarios and their potential outcomes without having to commit to budgetary decisions upfront.

Post-budget approval

It’s likely the budget granted will be less than you requested — it’s not unusual to not get everything you want, especially this year.

Now you don’t have enough budget to invest in all the sites you initially ear-marked in your plan, it’s crucial not to make any expensive mistakes. Previously, if you built 10 new sites, and one underperforms, it’s not as detrimental. But if you were to only build one new site this year, and it performs very poorly, you no longer have the security of more successfully performing sites to mitigate it. You need to quickly re-prioritize your short-list to focus on those that will provide the best ROI.

These are challenges faced by planners and network managers every year — but this year, it’s especially important to avoid costly errors and make the best decisions with strained budgets. So why would you want to take that risk when you could use Kalibrate Planning? The powerful platform enables you to efficiently identify the sites which will attract the most volume, so you can focus on the most worthwhile investments. 

Why not use Kalibrate Planning to help set a realistic CapEx budget which appeals to your executive committee, and adjust your plan when the budget you asked for is slashed? Get in touch with a Kalibrate Planning expert.