Volatile Fuel and Rising Food Cost for Lou Perrine’s Gas and Grocery
Concordia University Wisconsin
Instructor Dan Kugler
April 23, 2012
Table of Contents
Identification and Evaluation of Economic Theory
Benefit of identifying Economic Conditions
Lou Perrine’s Gas and Grocery is just what the name says. They are mainly known as a landmark gas station centrally located near Lake Michigan in Kenosha, Wisconsin. The business operates much like a convenience store and advertises itself as a 24 hour one-stop shop for gas and groceries. Lou Perrine’s earns a small profit on fuel making it similar to “the majority of convenience gas stations being independently own and operated,” according to the National Association of Convenient Stores). Anthony Perrine states, “Of every gallon of fuel sold, the business profits one percent of margin on that fuel, and quantity-wise gas is the majority of sales. The business's sustainable profit is due to the groceries combined with the other services provided and the possibility of adding a deli in the back of the store.” According to USA Today, the Associated Food and Petroleum dealers (AFPD) a trade association of independent operators, “Most of convenient and gas stores profit is near 75 percent, which comes from the markups on items such as beer, liquor, grocery, candy, soda, cigarettes, and hot foods."
According to Automotive Yellow Pages, Lou Perrine’s competes with “20 similar convenient gas stations within Kenosha, Wisconsin.” The most significant competitors are BP Express, CITGO's Gas & Food Mart, Speedway Convenient Station and Shell Food Plaza. More specifically, in a straight line on Sheridan Road within a one miles radius of Lou Perrine's you will find a Mobil, Shell gas stations to the north and south, and a CITGO.
With volatile gas prices peaking over four dollars per gallon on March 28, 2012 - which have since then declined slightly - and rising grocery prices Lou Perrine's is strategizing for newer ways to differentiate its business. They recognize the need to direct consumers into their store, which is why they developed a strategy to advertise a lower price on gas for cash. Use of credit cards by consumers is an explicit cost directly to any business. Therefore, by customers paying cash it reduces Lou Perrine's costs. Unlike competitors the owner says they "get a cheaper price on fuel," because they do not have to buy at the branded price which gives them a competitive advantage. While Lou Perrine is an independent but large enough establishment that he can buy fuel at reasonable prices (e.g., a full tanker truck), his competitors have even greater economies of scales because they buy in massive quantities for multiple gas stations.
According to Economic Collapse, natural disasters such as tsunamis, fires, earthquakes, and hurricanes have impacted agricultural production all over the globe. The World Bank cites an increase in poverty of 44 million people compared with June 2011. This affects Lou Perrine's because volatile fuel price at a time when consumers’ income has not increased, they are using their remaining disposable income to compensate for fuel costs. The result is that consumers are buying less grocery items at Lou Perrine's.
Economist Peter Drucker's theory to maximize profits is the principle behind this business. Lou Perrine's use of managerial economics will aid him in determining whether or not profits are maximized. Peter Drucker states in his Management Principles book, “In business, innovation rarely springs from a flash of inspiration. It arises from a cold-eyed analysis of seven kinds of opportunities.” He summarizes seven innovation opportunities that a business may encounter throughout its lifecycle such as the unexpected,...
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