Despite rising gas prices, retailers face low profit margins

MCT

Convenience stores. They just aren’t huge moneymakers, said John Salven, local gas station owner.

And he would know. He owns three in the Chippewa Valley.

To make matters worse, the rising price of gas means less money for gas station owners.

As retailers pay more for crude oil, they are forced to sell it for less, creating slim profit margins nationwide, said John Eichberger, vice president of government relations for the National Association of Convenience Stores.

This presents a huge problem, Salven said.

“All you can do is hope to survive these times,” he said. “You just pray that you’re able to make a profit or put yourself up for sale.”

According to the NACS, the average retail price of a gallon of gas was almost $2.60 in 2006, creating a 5.39 percent profit margin for retailers. In 2007, the price rose to about $2.80 a gallon with the profit margin dropping to 4.96 percent.

Through March 21 of this year, the average retail price of a gallon of gas was almost $3.10 with the profit margin bottoming out at 4.34 percent.

In order for retailers to earn enough profit, they need to generate sales inside their stores on non-fuel items to meet their bottom line requirements, Eichberger said.

While gasoline offers a very slim profit margin, he said, in-store food products can bear 50 to 60 percent profit margins. Therefore, food service sales have risen significantly, he said, often in the form of sandwich offerings, proprietary coffee aisles, produce and even dry cleaning.

“Really, everything in the convenience store is needed to make a profit,” Salven said. “Whether it’s 30 percent on your bag of chips or 20 percent on a can of pop … On the fuel side, you just hope it pays for itself. The gas margin is a joke, how small it is.”

Eichberger said one Indiana convenience store owner began selling homemade soda, offering a wide assortment of flavor shots.

“The price of gasoline is irrelevant, because people are coming for his soft drinks,” he said. “Everybody loves his store … If you have something else to offer, then you have a competitive edge.”

Freshman Abby Nyseth said she prefers to get her gas at Super America stations because of their Speedy Rewards program which allows customers to receive points toward free drinks, food, candy and other items each time they purchase gas. They have also given away gift certificates to Blockbuster and Applebees, she said.

Kwik Trip convenience stores, based out of La Crosse, offer customers a vast assortment of hot food, baked goods and produce and are an example of a company that has made changes in order to be successful in its market, Eichberger said.

“Kwik Trip have been leaders in the industry for many years,” he said. “They saw the writing on the wall and made changes right away.”

It doesn’t matter what gas stations offer inside their stores, Nyseth said, she never goes inside – except to use her Speedy Rewards card.

In a testimony before the U.S. Senate Committee on Energy and Natural Resources during an April 3, 2008 hearing on crude oil prices, Eichberger presented information from NACS’s Consumer Fuels Report including the fact that 73 percent of consumers feel price is most important when choosing a gas station.

Furthermore, 29 percent said they would drive ten minutes out of their way to save three cents a gallon of gasoline.

Nyseth said price is most important when she chooses a gas station.

If there is a winner in the issue of higher oil prices, it is the credit card companies, Salven said.

“They’re making money off of each transaction and then their gross profit goes up.”

When one uses a credit card to buy gas, the processing fee is about 2.5 percent per transaction, Eichberger said, adding if the customer pays $3.09 a gallon, the credit card company receives over seven cents a gallon.

“It takes money from the retailer,” he said. “The retailer is giving the credit card company more money that they’re keeping in their pocket.”

According to the NACS, 45 percent of consumers said the high gas prices have a very significant effect on their spending behavior.

“Demand is down across the board and yet our price keeps going up and up and up,” Salven said, citing the devaluation of the U.S. dollar as the cause.

What is happening has nothing to do with supply and demand, he said. But rather, rising energy, agricultural and even gold prices can all be traced back to the declining value of the dollar.

“Until our federal government gets off its butt and tries to address the problem, it’s not going to get better,” he said. “It’s only going to get worse.”

If balance is not restored between resale and wholesale prices, Eichberger said, the future will see a great deal of consolidation within the gas station market followed by significant changes in the way new ownership operates them.

“I think you’re going to see some of the fuel-reliant operators potentially go out of business,” he said. “Replaced by a company that’s much more of a service center for customers in addition to getting fuel.”

This is already beginning to happen in the Chippewa Valley, Salven said.

“There’s a number of stations shutting down right now and it’s getting worse,” he said. “We’ve never had to deal with prices this high before. People may have survived the last couple of years, but once it got to this level, it’s the final straw for them.”