By Geoff Coy, Certified Practising Accountant
Benchmarking is a method where a business is able to compare its practices and performances with other similar businesses. Utilized correctly, benchmarking provides the goal posts for improved performance in two ways:
First, it should provide information about how the best businesses achieve their superior performance levels. Second, and perhaps most important, is to create a will to make changes in the business.
Benchmarking should also answer
the questions: what are the most important performance yardsticks? and where
does your business rank compared with
others in your industry?
Ideally benchmarking should be repeated on a regular basis to monitor
progress in performance.
You can benchmark performance indicators such as:
Typically, service stations are low-margin, high-turnover businesses. Retail sales of fuel and related products usually account for around 75% of sales, whereas retail sales of non fuel products account for 16% of sales. Service income - including motor vehicle repairs - accounts for 5% of industry turnover, whilst wholesale sales - from hiring or leasing - comprise 4% of turnover.
The success of a service station is largely driven by the location of the site, price competitiveness and its relationship with the supplying oil company.
Site location and convenience are important in attracting passing business and obtaining the large volume of fuel sales required to make service stations viable.
Price competition is also particularly important
in this market, as most consumers see petrol as an undifferentiated
product.
A service station’s ability to attract and retain customers
through competitive pricing will assist non-petrol related sales,
thereby generating a competitive
advantage over sites that are more highly dependent on fuel sales.
Price cutting and discounting wars are major threats to what is otherwise an industry with fairly stable (but low) profitability. However, the oil companies will often support their operators through the use of rebates, thus lessening the impact of price discounting.
So what sort of
benchmarks are service stations and convenience stores interested
in, and why is it so important?
The following table provides an example of a number of key performance
indicators for the service station industry. Note that each indicator
should be considered
independently of the others.
| Indicator | Average |
Low |
High |
| Total Income ($000’s) | $ 2,133 |
$1,043 |
$ 3,522 |
| Gross Profit/Sales | 14.48% |
10.02% |
20.21% |
| Wages & Salaries (excl owners) | 4.12% |
2.32% |
6.12% |
| Rent of Premises | 1.62% |
0.87% |
2.02% |
| Net Profit before owners salaries | 4.46% |
2.07% |
7.64% |
| Stock Turnover Rate | 45 |
20 |
54 |
| Fuel Sales per Hose ($000's) | $ 169 |
$870 |
$251 |
| Fuel Sales/Total Sales | 74.00% |
58.00% |
95.00% |
If a dealer is aware through industry comparisons that the average gross profit margin obtained from non fuel convenience store sales is 32% and he/she is only generating a margin of 28% then the opportunity arises to identify and rectify the problem area(s).
Likewise, if the same business is paying out 8% of its turnover in wages and the industry benchmark is 6%. It’s here that the opportunity exists to find out why that business is more labour intensive than its competitors. Similar comparisons can also be made to rent, royalties or any other major expenditure categories.
On the other hand, a business may
find that its turnover or gross margins exceed the industry benchmark
whilst at the same time
suffer from a
slower than average
stock turnover rate.
Generally, larger service station businesses have higher productivity
and profits, lower gross and net profit margins and higher sales
per hose.
A service station’s sales are typically achieved from two diverse businesses: fuel sales, with gross margins of 3-4% and high stock turn, and non-fuel sales, with margins around 30% and lower stock turn. Boosting the proportion of non-fuel sales and gross margins can significantly improve profitability.
As we mentioned in the introduction, benchmarking
is a technique used to assist a business to improve its operations.
There is absolutely no value in using a benchmarking exercise
unless there is a commitment to follow through after the information
is gathered
and
comparisons made.