Crude Awakenings

By Ryan Schuster, Grand Forks Herald, N.D.

Jul. 12–Gas prices have set records this year and are hovering at about $4 a gallon.

But gas station owner Paul Helgeson said despite high prices, he is essentially breaking even selling gas at Odin’s Belmont Service in Grand Forks.

“I would rather not have the gas,” Helgeson said. “It’s a liability to me. There are times we are selling gas at cost or below cost.”

In the face of surging credit card fees and slimmer margins, some gas stations across the country have stopped selling gas altogether, focusing instead on more profitable convenience store operations.

But Helgeson, who doesn’t have a convenience store, said he can’t stop selling gas for fear it would hurt his automotive repair and towing business.

“It brings in money for the shop,” Helgeson said of selling gas. “It’s basically a loss leader. It’s something you need to bring them in. I would lose a lot of business in the shop if I didn’t sell gas.”

Many gas stations are in similar situations, depending on gas sales to drive traffic to their convenience stores.

Gas stations, which already sell gasoline on razor-thin margins, are getting squeezed by high gas prices as competition to lower prices and increased credit card fees are eating away at profits.

“When gas prices are high, you don’t make any money,” said Veronica Skavlem, who works at the Big Sioux Travel Plaza in Grand Forks. “You can’t gauge. There’s a lot of competition to keep prices down.”

Many consumers assume gas stations are getting rich off higher gas prices and take out their frustrations on gas station workers.

“A lot of times I feel sorry for the employees who work for us,” said Larry LePier, who is involved in the ownership of gas stations in Grand Forks and Fosston, Minn. “They are the ones who get chewed out by drivers. They have nothing to do with gas prices.”

Gas markups declining

The difference between what retailers pay for gasoline and what they sell it for at the pump dropped to an average of 10.3 cents per gallon during the second quarter of 2008 — its lowest level in more than three years, according to the Oil Price Information Service.

After factoring in expenses like transportation, credit card fees, salaries and maintenance, gas stations and convenience stores typically make only 1 or 2 cents per gallon selling gas, said Jeff Lenard, a spokesman for the Alexandria, Va.-based National Association of Convenience Stores.

But Lenard said with today’s roughly 10-cent-per-gallon gross margins, most gas stations are lucky to break even or make a small profit on gas, with some actually losing money.

“When gas prices rise, margins shrink,” Lenard said.

Lance Klatt, executive director of the Little Canada, Minn.-based Minnesota Service Station Association, said gas stations typically have gross profit margins of 10 to 12 cents per gallon on gas.

When gas was $1 a gallon, the gross profit margin amounted to about 10 percent of gas sales. But at $4 a gallon, gross profits have shrunk to about 2 1/2 percent of sales.

At the same time, credit card fees paid by stations to process credit and debit card transactions, which are largely percentage-based, have jumped with the price of gas.

The average 2 1/2 percent per transaction credit card fees gas stations pay have increased from about 2 1/2 cents per gallon to about 10 cents per gallon as gas prices have increased from $1 to $4 per gallon, essentially eating up stations’ potential gas profits before other expenses are factored in, Klatt said.

“There’s no margin there anymore,” Klatt said.

Competition holds down retail prices

While today’s gas prices seem high to consumers, gas station operators say prices would be even higher if it wasn’t for fierce competition among station owners.

Gas station employees say when their competitors drop their prices or keep their prices low, they are forced to follow suit to stay competitive, even if that means hurting their profit margins.

“Everybody in this business watches what everybody else is doing,” said Randy Engelstad, who owns the Jet Stop gas station and convenience store in Warren, Minn. “It’s not price fixing. You just have to follow your competition. If we don’t stay close to the competition, we’re not going to get the business.”

LePier said he changes his stations’ prices about three times a week depending on the wholesale price he is paying for fuel. He also keeps an eye on his competition and adjusts accordingly.

“As small as it seems, a customer will go to another station for 2 cents a gallon,” he said.

Price wars have been more cutthroat in cities, often leaving a disparity between what drivers pay in rural areas, midsize cities and larger cities.

Cash incentives

As a result of rising credit card fees, some local gas stations have started advertising discounts to customers who come into the store and pay with cash or check.

Others, though, aren’t so sure.

“We’ve talked about a smooth way to do it,” said LePier, who is managing partner in the University Station gas station in front of Ralph Engelstad Arena. “But we don’t want to upset people paying with credit.”

Convenience store sales drive profits

The majority of gas station profits come from convenience store sales of items like soda, chips, candy bars and cigarettes. Selling gas helps bring in customers to convenience stores, which account for an estimated 80 percent of fuel sales in the United States.

But with the ability to pay at the pump, fewer motorists are going inside to pay and high gas prices have cut down on how much consumers spend on convenience store products when they do go inside to pay or use the bathroom.

In addition, high gas prices have led Americans to drive less, cutting down on trips to the pump.

Convenience store sales reached a record high of $577 billion in 2007. But credit card fees jumped 15 percent to reach $7.6 billion — more than double the industry’s profits, helping to lead to an overall $1.4 billion drop in profits.

Gas sales accounting for about 71 percent of convenience store sales last year, but smaller margins meant that fuel sales made up only about 34 percent of gross profits. Percentagewise, fuel gross margins fell to 5.2 percent of industry revenue last year, their lowest level since 1983.

Who’s to blame for high gas prices?

If gas stations aren’t getting rich off high gas prices, who is?

With crude oil prices at historic highs, oil companies have been raking in record profits.

Oil companies influence supply, but don’t set oil prices. And oil companies have been ridding themselves of their small-margin gas stations, leaving less than 2 percent of gas stations owned by oil companies, according to Lenard of the National Association of Convenience Stores.

The rise in oil prices has been largely driven by investors purchasing crude oil futures, not actual supply shortages.

“It’s all based on speculators,” said Klatt of the Minnesota Service Station Association.

The price of crude oil accounts for roughly 75 percent of unleaded gasoline prices, with refining costs, taxes, distribution and marketing making up the rest, according to the U.S. Energy Information Administration.

Uncertain future for gas stations

Financial challenges have made it difficult for many gas stations, especially independent stations and smaller stations in rural areas, to pay for gas shipments.

Helgeson of Odin’s Belmont Service purchases 8,000 gallons of fuel at a time, which typically takes 10 to 15 days to sell, and at today’s prices costs about $31,000. He said he struggles to pay for the fuel when he takes delivery.

He said if prices keep rising, it will start forcing more gas stations out of business.

“There’s not going to be many mom and pop places left,” Helgeson said. “The small guys will be pushed out. They won’t be able to compete.”

Schuster covers business. Reach him at (701) 780-1107; (800) 477-6572, ext. 107; or send e-mail to rschuster@gfherald.com. Read his business blog at www.areavoices.com/bizbuzz.

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