E85 consumers attracted by value, convenience

Getting the right business model drives E85 sales. This article appears in the September issue of EPM.
By Susanne Retka Schill | August 17, 2015

The Corn Belt might be where most ethanol gets produced, but the bulk of potential consumers are on the urban coasts.  Protec in the East and Propel in California are learning what it takes to drive E85 sales. With both companies reaching about a decade of experience in working out their business models, each is seeing solid growth in the number of locations served and volumes handled. 

In California, Propel’s model is to partner with strategically located retailers with space to add a fuel kiosk offering Propel’s Flex Fuel E85 and, in many cases, renewable diesel. “We build, own and operate,” says Rob Elam, CEO. “We have found very, very little cannibalization of existing customers when we go onto a gas station site, so it’s almost all new customers. We give them a base rent and a revenue share of the upside of gallons. We offer them more C-store purchases, additional branding and visibility and media attention.”  The company has 47 E85 kiosks in prime California markets. Elam reports the E85 typically outsells the midgrade and premium offered on the traditional gas stations pumps, “many times by a lot.” 

Further East, Protec has built on the business started in 1999 to serve small and midsize retailers and fleets as their equipment and fuel supplier, along with risk management services. Offering a turnkey operation to a retailer drives its business model, CEO Todd Garner explains. “Once the retailer determines they’re going to put in the money, they don’t have to do another thing. We pull all the permits; we do all the construction; we change out all the signage; we bring in the dispensers. We deliver the fuel and we price the fuel out.”  Protec helps the retailer access any available grant money and will invest in the project as well.

Educating the gasoline-oriented retailer comes first, Garner says. “Nothing ever changes in the gasoline business, they only know it to work one way, but the E85 market doesn’t necessarily work that way. There’s a lot more moving parts.” Retailers need to understand the economics and what it takes to move the product, as well as embrace the advantages of higher ethanol blends. “We will not take a retailer in unless they follow our model,” he adds. “Over the last decade we’ve gone through all these iterations on how to make it work and we feel we finally have the right model to be successful.”

Price and Convenience
Garner and Elam both stress that success in offering E85 requires managing the pricing of the fuel, selling the product at a big enough discount to gasoline to drive the business forward. That means moving away from the spot market and relying upon risk management tools to maintain the needed spread between gasoline and ethanol. Both companies are blenders, separating the renewable identification number (RIN) and passing its value along to the consumer and managing that price risk as well. “It’s not a simple thing to do,” Garner says. In one area Protec serves, they’ve even seen a major oil company struggle to price E85 competitively. “They’re fluctuating with the market, going up and down and their price of ethanol could be only 20 cents under gasoline when ours is consistently 40, 60, 80 cents below,” Garner says.

That spread between gasoline and E85 may seem low to Midwesterners, Garner admits, “but we’ve got a lot of cost to get the ethanol to those locations.” Getting the infrastructure in place to keep logistic costs down has been a big part of Protec’s expansion strategy. Garner reports having nearly 400 retailers interested in the Protec program, but those in places lacking infrastructure won’t be economically feasible until the logistics are aligned. Some areas, like Atlanta and parts of Florida, now have the logistics in place and are seeing strong E85 growth.

While California is known for its tough environmental regulations, the state’s consumers are much like anywhere else in the U.S., Elam says. “People are not paying a premium for environment. It’s about price. It’s about convenience.” The company’s commitment to its customers is to deliver consistent value. “We have sophisticated strategies on the supply side that positions the product where we think it needs to be at a discount to gasoline,” Elam says. “And we do that consistently.”

There are a couple of pieces to Propel’s pricing strategy, Elam adds. One is threshold pricing, which he describes as when the prices cross from $2.50 to $2.51 or $3.99 to $4. The second component is the discount to gasoline on a percentage basis, which Propel keeps in the 15 percent ballpark. Elam adds that the mileage reduction from using E85 is not nearly as bad as people say.

“To a large extent ethanol and E85 has been unfairly characterized as having this 25 percent mileage loss and it needs to be priced accordingly. The 25 percent number is inaccurate and the pricing is a market based logic,” he explains. The actual mileage reduction will vary from car to car, he says. “It’s clearly not a 1 to 1 relationship based on energy density. That should be no surprise. Any fuel has variable performance when it’s in use based on environmental conditions or duty cycle.” Customers will pay what they think they should pay for a product in the marketplace, he continues. “You have people paying $135,000 for an electric car—that seems to be mispriced product, if you ask me.”

Getting the Word Out
“It’s really about educating the customer,” Elam says. “The customer seeing the value, understanding the value and wanting the product. That combined with the pricing will get you a satisfied customer.” And, while customers will buy as low as a company is willing to go, Elam cautions against going too low. “You don’t want to box yourself in. You’re not going to have a valuable product going forward, if you’re bouncing off the bottom. If it’s going to be a sustainable growth product and market, it’s got to be priced fair for everybody.  And that includes the retailer.”

It requires relentless effort to attract new E85 consumers, convincing them the fuel is better and removing barriers. That includes aggressive marketing of the benefits of ethanol, strong branding on site, direct mail campaigns and 24/7 customer service, he says. To remove a barrier for first-time customers, Propel calls the fuel Flex Fuel E85 to match up with the labeling on vehicles that mention the one but not the other. Propel also offers a store locator app that gives real-time pricing and information on which vehicles are FFVs. Interested customers can track their renewable fuel use through the company’s CleanDrive software. Elam adds that an interesting customer base for CleanDrive are fleets trying to hit goals for greenhouse gas reductions and air quality improvement.

Garner concurs with his western counterpart on the importance of consumer education. “We do everything we can to get the word out. We spend a lot of time, whether it be through mailings or through apps, or trying to educate consumers at the station using brand ambassadors.”  Protec works with the Clean Cities Coalition, distributes news releases and sends out postcards to local residents. For the past year, Protec has also been working with Prime the Pump in the nonprofit’s mission of expanding E15 locations. As E15 is not yet available from terminals, that has meant adding blender pumps so E85 is available to blend into E15. As a result, sales of both are growing, Garner says. “Not only have we seen E15 take off, but we’ve seen an increase in our E85 business, because now it’s more convenient. It’s at every dispenser instead of just one.”

Education for those other than the local consumer is important, too. “We started to notice some significant divergence from what the market assumptions were and the general narratives and what we were seeing,” Elam says. “We wanted to help the industry overall, and the policymakers understand what was really happening.” While sales volume and customer demographics are normally confidential information, Propel released a white paper in June titled “E85: A California Success Story,” to share what it’s learned about its E85 customers. “When we realized that Propel pumps sell 10 times the national average on a per pump basis and we have single dispensers selling over 50,000 gallons a month, which has got to be the highest in the country, and that we have a way of attracting and retaining customers to our high-blend ethanol product that nobody else seems to be able to figure out—we wanted to release information about those facts,” Elam says.

In addition to helping the industry and national policymakers think about how the E85 offering can be improved, the Propel white paper is also aimed at California, which is  preparing to distribute $2.2 billion in cap-and-trade revenue this year to low-carbon projects. The social equity side of carbon accounting needs to be a part of the discussion, Elam says. “You can see in the white paper what the average incomes are, what the demographic breakdown is. For instance, in the Central Valley and Inland Empire of the Los Angeles basin, 49 percent of our customers are Latino, which in California compares to 37 percent of the overall population being Latino.”

Fairness is a strong value in California, Elam says, and E85 is a means of bringing renewable energy benefits to working and middle class citizens today. He argues California needs to balance its investments in expensive new technologies for the future, like hydrogen, with renewable energy that’s available now. Ethanol can help the state meet the Low Carbon Fuel Standard and the new goal recently announced by the governor to cut the state’s petroleum use in half by 2030, Elam says. His personal goal is to see just how much E85 California can consume. After all, the state is the third largest petroleum market in the world, behind the U.S. as a whole and China.

Author: Susanne Retka Schill
Senior Editor, Ethanol Producer Magazine
701-738-4922
sretkaschill@bbiinternational.com