Gas station

Problem Definition

How many gas stations are there in Paris? Suppose a friend of yours wants to open a gas station in Paris. What aspects should he consider?

Comments

Since this is an interviewer-led case, the interviewer should guide the candidate through the interview.

There are several ways to estimate the number of gas stations. Their feasibility may be influenced by the amount of information the interviewer decides to give the interviewee. (In this case, there is not much information.)

Generally, an estimation method should use values that can be easily estimated and sanity-checked (verified using another approach).

Short Solution

Solution

Suggested case structure:

1. Strategies

Here, the interviewee should come up with two possible methods to estimate the number of gas stations in Paris.

Suggested methods:

• Estimate from the supply standpoint
• Estimate from the demand standpoint

After calculating the total demand for gas in Paris, we need to estimate the demand that each gas station can serve. By dividing total demand for gas by the demand that each gas station can serve, we can estimate the number of gas stations in Paris.

2. Selection

The first approach is very inaccurate because the population density of a block can vary significantly. This could cause the number of gas stations per block to vary.

The second strategy better reflects reality (gas stations are built as demand increases). Thus, we will use the second strategy to estimate the number of gas stations.

3. Calculation

First, we will calculate the total daily demand for gas in Paris (left side of the tree). There are about 10 million people living in Paris.

Since people below the age of 18 do not own cars and a lot of people use public transportation in Paris, we can estimate that there is 1 car for every 5 people.

There are also commercial vehicles such as trucks and company cars. (For simplicity’s sake, these are not shown in Diagram 2.) Let’s say that there are 4 times more private vehicles than commercial vehicles.

In total, there are 2.5 million vehicles.

• 20% (0.5m/2.5m) of the total vehicles are commercial vehicles.
• 80% (2m/2.5m) of the total vehicles are private vehicles.

To estimate the consumption per vehicle, we assume that cars have tanks of 50 liters. The tanks must be replenished every 10 days. Thus, each vehicle consumes 5 liters of gas every day.

Since commercial vehicles are on the road more frequently, they consume up to 5 times more gas than private vehicles.

We can calculate a weighted average of daily gas consumption per vehicle.

Thus, the demand for gas in Paris every day is 22.5 m liters.

Now, we can estimate the right side of the tree.

Let us assume that an average gas station has about 5 pumps. Each pump serves about 12 cars per hour during peak hours and about 5 cars per hour during off-peak hours.

If we assume that a gas station is open for 10 hours per day, 4 of which are peak hours, each pump serves 78 vehicles every day (4 * 12 + 6 * 5).

Thus, each gas station serves 390 vehicles every day.

Assume that every time a vehicle visits a gas station, normal vehicles buy about 50 liters while commercial vehicles (some of them are trucks) buy about 100 liters.

This gives us an average of 60 liters bought per vehicle.

Every day, each gas station supplies 24,000 liters.

This gives us about 938 gas stations in Paris.

4. Part 2

Suppose your friend wants to open a gas station in Paris. What aspects should he consider?

A good response to this question will consider both the attractiveness of the general industry and the proposed location of the gas station (Paris):

• What are a gas station’s typical profit margins?
  Hypothesis: Profit margins are generally low due to fierce competition among gas stations.
  
• Why is competition among gas stations so fierce?
  Hypothesis: Gas is a commodity. In big cities such as Paris, it is also a common good.
  
• What is the bargaining power of suppliers?
  Hypothesis: Since the suppliers are massive multinational oil companies, their bargaining power is high.
  
• What is the bargaining power of customers?
  Hypothesis: Low because they cannot bargain down the price of gas. However, they can easily drive to a different gas station.
  
• Are there substitutes in sight?
  Hypothesis: Minor ones such as electricity for electric cars. However, given the current oil industry, this is a minor problem.

Key insights

This is a difficult industry to enter.

Your friend should only go ahead with this idea if there are other favorable conditions such as:

• A location with big market growth
• A location with little local competition
• Other sources of income (e.g.: a small market at the gas station) 

Difficult Questions

What other sources of income could you think of for a gas station in a big city?

Possible answer:

Bundle products like:

• Car-wash discount for clients who buy more than 50 liters
• A small convenience shop which sells food and pharmaceutical items.
• Maintenance services for cars such as oil changes and brake maintenance.

If the interviewee solves the case very quickly, you can come up with more challenging questions to ask them.