A C-Store Owner’s Guide to Fuel Supply Contracts

By: Anthony L. Barthel, Esq.

A favorable fuel supply contract can mean the success or failure of a C-Store. Failure to address important legal and financial matters prior to entering into relationships for purchasing fuel can have long-term consequences. While fuel supply contracts should address many issues, it is imperative that they address a number of key terms.

Pricing

All C-Store owners should know the price they will be paying for fuel. Because of fluctuation in fuel prices, it is important that all pricing terms in a fuel supply agreement are clear and decipherable. Some standards, such as “two cents over cost” are not adequate. For example, if a supplier lacks the necessary volume at the terminal, it may not receive similar pricing as the jobber servicing the store across the street. As such, without a competitive jobber, prices can easily be in excess of five to ten cents per gallon over what is sold to nearby competing C-stores.

Pricing indicia should be tied to rack pricing that can be verified. Subscription to a rack pricing index service should be able to provide information showing rack prices at local refineries. If the contract prices are keyed into verifiable rack prices, determining whether or not fuel is being provided at the correct price under the contract is possible. Special care should be taken by each C-Store owner to, on not less than a weekly basis, review all invoices and pricing for the week. Owners failing to monitor pricing will find that even small deviations can have an adverse impact that, over time, will decrease profitability.

Together with pricing, delivery costs should be carefully crafted to include a formula that is reasonably ascertainable so as to be computed on each invoice. Again, the jobbers’ cost of delivery should not always be taken at face value, and the delivery costs should be priced competitively through independent bidding.

Finally, pricing in each fuel supply contract should pay careful attention to rebates and incentives. Oftentimes, rebates or incentives are keyed to certain gallonage figures that promote an increase in sales and are achievable each year. While many rebates are available on branding items (discussed below), cash rebates are also available for certain benchmarks. Because increased gallonage allows each jobber the ability to buy fuel on more advantageous terms, each C-Store owner using that jobber should share with that jobber’s success in achieving better pricing

Credit Terms

For the new C-Store owner or for C-Store owners making a brand change, developing credit arrangements is crucial. While credit terms range from three to ten business days after supply of fuel, C-Store owners are well advised to negotiate for as much credit as possible in their fuel supply contract. Because supply contracts often provide for payment via electronic funds transfer (EFT) careful attention to credit given for credit card processing is important. The effect of EFT’s in conjunction with credit card processing terms it can have the unfortunate effect of eliminating the credit previously negotiated. For example, credit card terms included in the supply agreement often provide for immediate application of such funds if credit card payments are directly applied to invoicing, the credit terms negotiated for can be eviscerated. In times of cash shortage, the lack of available credit can equal the financial death of the C-Store.

For many small business owners, these Agreements contemplate an “exit strategy” or a “continuity strategy” to ensure the business’ ongoing vitality. By creating options for purchase by the company or other owners upon certain events, the remaining owners can protect the integrity of ownership while providing a departing owner with adequate compensation. Without these types of Agreements, it is often difficult, if not impossible to plan for the future

Branding and Signage

The cost of branding or re-branding a C-Store is one of the most important issues facing a C-Store owner. Branding included in a supply contract is often paid for over the life of the contract. In such cases it is important to allocate risks between the parties in certain events of default or in the event of a market withdrawal. For example, in August 2007, Conoco left the Minnesota market. This market withdrawal left a number of C-Store owners with Conoco branding that had either not been fully amortized over the course of the fuel contract or required a new brand to be implemented at the C-store owner’s cost. Where a C-Store owner is unable to front the cost of re-branding they can be forced into a captive relationship with their current jobber.

While there are many other terms that should be considered in a supply contract, paying careful attention to pricing, credit terms and branding it is extremely important to the profitability of a C-store. Trying to unwind a poorly drafted supply contract is expensive and may involve thousands of dollars of litigation costs. The best bargaining position that will ever be had by the C-Store owner is prior to engaging any one particular jobber - thus, it is imperative that this matter be addresses as soon as possible in the negotiations before becoming committed to a jobber. For current C-Store owners who are unhappy with their current jobber, a review of their existing contract could reveal alternatives to using their existing jobber.