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Independent Operators Say High Gas Prices Are No Jackpot -- Really

Posted on: Friday, 3 March 2006, 15:00 CST

By Vicki Vaughan, San Antonio Express-News

Mar. 3--It looks like a guaranteed ticket to wealth: owning a gasoline station in an era of high gas prices.

But owning a gas station these days is anything but a road to riches. Despite the public's perception that station owners have grown fat on rising gas prices, small operators say every day is a struggle.

"This is a very, very difficult time for us," said Sajid Bajwa, owner of a six-unit chain of stations and convenience stores.

Another independent operator, Bert Thompson, owner of Hollywood Park Automotive in San Antonio, says, "If it weren't for owning the land and having a repair shop, I wouldn't be here."

Independent gas station owners say their profits are crimped and have been for years. Big-box retailers such as Wal-Mart, Costco and H.E. Butt Grocery Co. undercut them on price. And stores owned by major oil companies offer competitive prices along with such conveniences as multiple bays, pay-at-the-pump, and fancy soda fountains and coffee bars inside.

But there are ways small operators can survive. They must have a thriving convenience store, or own several gas stations and stores, or have an automotive repair shop with an established clientele. Or they must avoid a payroll by working long hours and doing the jobs of several workers. Having some combination of all these is even better, independent operators say.

"You can't make a living off one store," Bajwa said.

Some small operators acknowledge that their profit margins widened when prices zoomed after Hurricanes Katrina and Rita -- some made 20 to 50 cents a gallon. But the high margins were short-lived, lasting three weeks at most.

Independent owners are unapologetic about making higher profits last fall, saying it doesn't make up for the lean times in a difficult business.

Independent operators "are like redheaded stepchildren" to the major oil companies, Thompson said.

"As an independent, I'm competing against my suppliers, because Shell and other majors own their own stations. They've actually, at times, sold gas to the public for cheaper than they're selling it to me." Spokesmen for major oil companies said that a situation such as Thompson describes is unusual and may be an anomaly.

Valero Energy spokeswoman Mary Rose Brown said that prices independents pay for gas depend on their agreement with a supplier, which could be a distributor or a company like Valero.

"There are different business models and the economics are different," she said.

"Katrina was an anomaly," Thompson said. It's ironic, he said, but "the only time we make money is when gas prices are falling." When wholesale prices drop quickly, Thompson said, the small operator's margins widen because pump prices stay high for a time, lagging wholesale prices.

Yet competition is always intense. Another small operator said it's difficult for him to maximize profits even when prices are falling.

"Let's say gas is $2 a gallon and at 4 p.m. you find out it's going up to $2.10," the operator said. The small operator can't buy gasoline at the lower price because he often isn't aware of the price increase in time to buy gas ahead of it.

"The problem is that you can't get the rack (wholesale) price," said the small operator, who asked not to be named for fear of alienating major oil companies.

The rack is the pipeline terminal where gas is sold at wholesale. Tanker trucks take on fuel at the rack for delivery to local stations. Big oil companies typically add 2 or 3 cents a gallon for the gas at the rack, and a jobber who delivers the gas in a tanker adds another penny or two to transport the gas.

"By the time you get the gas, you can't beat the market. The majors are making all the money," the small operator said, "while you're making pennies." And falling gas prices don't always guarantee a wider profit margin. When gas falls to $1.90 a gallon and the owner of a small station with low volume hasn't sold all the gas he bought at $2 a gallon, he's got a problem.

Bajwa said that on a recent day last week, Exxon was selling gas for $2.03 a gallon, while he paid $2.06 a gallon at the rack. Clearly, for him to make a profit, he'd have to charge more than $2.06, putting him far above Exxon's price.

The gas business began to change about a decade ago, said Thompson of Hollywood Park Automotive. In the 1980s and early '90s, his margins ranged from 13 to 20 cents a gallon.

But in 1996, "margins went away." That was the year Thompson added leak detection devices for his underground tanks at a cost of $250,000.

Today, he says, "I absolutely hate the gas business," and he wishes he'd spent the money to add auto repair bays and lifts instead.

Besides his auto repair business, Thompson says he fills a niche for local residents. His station has a full-service island "for about 60 ladies. I'll go to their house and air up their tires. I run this like it was a small-town service station." Bajwa also depends on neighborhood business, but he stresses that being an independent operator requires healthy cash flow at minimum.

"Cash flow is very important in this business," Bajwa said. One 8,500-gallon tanker load of gas costs $17,500 at current prices. "You've got to tie up money at a time when your profits are lower," he said.

For the past year or two, small operators said, their profit has averaged 5 to 10 cents a gallon.

A big station typically sells 10,000 gallons or more a day, while a medium-sized station of the type an independent owns sells 4,000 to 5,000. At a 10-cent margin, that's $400 to $500 a day, and the independent must pay overhead and insurance out of that.

A small neighborhood store has to look elsewhere for profit margins -- maybe to its convenience store -- because it typically sells no more than 1,000 to 2,000 gallons a day.

"There's not a lot of margin in selling gasoline anymore," said Jerry Anderson, a San Antonio resident and former district sales manager for Texaco. "They make it on the inside, where the merchandise is marked up a bunch." Profit margins are further squeezed when customers pay with credit cards. Local small operators say 65 percent to 70 percent of their customers use the cards, whose fees average about 21/2 percent. When gas sells for $2.10 a gallon, more than a nickel is going to the credit card company.

Remodeling and upgrading stations are ways independent owners can boost profits, but upgrades are costly.

San Antonio-based retail consultant Robert "Bobby" Cahill works with independent owners to put together new stores or make older ones more profitable.

"We guide them in picking a site and in selecting goods and services -- the profit centers that would work best on the site," Cahill said.

For many newer gas stations, the convenience store is the key to profitability, he said. The store must have merchandise that people in the neighborhood want. That begins with a thorough look at competitors.

"We look at voids in the market and we key in on those voids," Cahill said.

Opening a new gas station and convenience store in a good location costs about $1.75 million in San Antonio, including the land, Cahill said. He tells prospective owners that "gasoline brings people to your site -- it needs to be a destination stop." But what makes money are the extras -- what's sold in the convenience store, including fast-food items, and perhaps a car wash.

Where inexperienced operators most often fall short, Cahill said, "is in designing for the future. When you open, you need to look like the best thing on the block. You need a visual impact that will make people sit up and take notice." Cahill recently completed a feasibility study for Bajwa, suggesting he consider a ground-up renovation at his Colonies Mobil Car Care Center at 3822 Colony Drive at Interstate 10 near Wurzbach Road. A complete renovation would cost $1.3 million and include a new store, new canopy and six pay-at-the-pump dispensers.

Bajwa said he can't afford that, but he is considering spending $500,000 to renovate by using the existing building's shell and adding a new canopy and pumps.

Bajwa, a man of calm demeanor, breaks into a smile when he switches from talk of a renovation to discussing his favorite stores in his six-unit chain: the two that don't sell gas. They're convenience stores only.

"We're so pleased that we don't have gas at those units," he said. "We make from 20 to 25 percent average margin on beer, soda, cigarettes, snacks. And we don't have to worry about the big investment in gas."

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Copyright (c) 2006, San Antonio Express-News

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XOM,

Source: San Antonio Express-News

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