April 2, 2008 in Business

Gas stations feel the pinch

John Wilen Associated Press
 

NEW YORK – Gas prices may be sitting near record levels, but the owner of your local gas station quite likely is struggling.

Profit margins on gasoline sales are razor thin. Indeed, some gas stations are losing money on credit card sales, once the fees are factored in.

How do they stay in business? More and more a gas station’s bread and butter is, well, bread and butter – and the coffee and candy bars it sells in its convenience store. Most of these items generate much higher profits than gas.

“Gasoline is a relatively low margin part of what we do,” said Jay Ricker, president of Ricker Oil Co. in Anderson, Ind.

Increasingly, a station owner’s biggest challenge is persuading drivers to step inside the store after they gas up.

“It’s all about trying to sell other things,” said Scott Hartman, president and chief executive of Rutter’s Farm Stores, a York, Pa., company that owns and operates 51 gas stations.

Jeff Lenard, spokesman for the National Association of Convenience Stores, estimates that gasoline accounts for 70 percent of a typical station’s revenues, but only 30 percent of its profits. Paul Fiore, executive director of the Service Station Dealers of America, a trade association for auto repair shops, said the mix is about the same for service stations.

Low profit margins are squeezing companies along the length of the gasoline supply chain, from the biggest refiners to the smallest corner stations. Contrary to popular belief, 95 percent of gas stations in the U.S. are independently owned: Their prices and procedures aren’t dictated by a major oil company, even if the station licenses that company’s name.

With crude oil, gasoline’s raw ingredient, soaring to records near $112 earlier this month, up from about $60 a year ago, gas prices are actually struggling to keep up. Crack spreads, the difference between what refiners pay for crude and get for the gasoline they make, have gone negative on some days in recent weeks. That means that in those cases, refiners were losing money making and selling gasoline. In comparison, at one point last spring, crack spreads reached as high as $37 a barrel.

Oil’s rise has been driven by investors snapping up crude futures as a hedge against a falling dollar and inflation. But while gas prices have tried to keep pace, demand for gasoline has fallen, limiting refiners’ pricing power.

Top executives of the five biggest U.S. oil companies appearing before a congressional committee Tuesday deflected any blame for the effect of gas prices on consumers and argued their profits – $123 billion last year – were in line with other industries.

That pain travels down the chain to retailers, who base the prices they charge consumers on what they expect they’ll have to pay for their next shipment of gas. Many make no more than a few cents a gallon selling gas, a margin that evaporates once credit card fees are tacked on.

Some decide it’s not worth the bother. A station in Bushnell, Fla., stopped selling gas entirely a month ago after its owner determined he couldn’t make money on it. He’s not alone; many refiners have cut back on gasoline production in recent weeks due to low profit margins.

But most stations view gas as a loss leader – something they’re willing to take a loss on, or accept a very small profit for selling – under the theory that it will bring people into their store or shop.

Competition between stations is becoming increasingly cutthroat as demand for gasoline falls. Energy Department data shows gas consumption has fallen about 1 percent over the last nine weeks, compared to the same period last year.

Unlike other industries, which might run a sale or slash prices when demand for their main product is falling, there isn’t much gas stations can do to pump up demand. Most are reluctant to cut prices.

“We don’t do that and most don’t because you just start a price war,” Ricker said.

To get a competitive edge, many station owners are investing heavily in other things. Rutter’s Hartman says he makes more selling a cup of coffee than a gallon of gas, and is operating his stations with that in mind. He’s emphasizing convenience, building bigger stations and investing over $1 million in bathroom upgrades, “more like you would find in an upscale restaurant.”

The idea is to build a base of customers who could get gas anywhere, but choose to buy it at Rutter’s because there’s always an open pump and the restrooms are nice and clean.

Ricker, who operates 30 stations throughout Indiana, advertises heavily at the pump. Signs touting fountain drink and sandwich deals are prominent, and Ricker is also experimenting with pump-top televisions advertising goodies inside the store.

© Copyright 2008 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


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