Hidden Risk From Rising Gas Prices: The C-Store Impact
by Lassiter Mason and Juanita Schwartzkopf
Higher fuel prices at the pumps are causing consumers to behave in some predictable ways, but with unexpected repercussions. The obvious impact of higher fuel prices is that consumers will tend to alter their buying habits, spending less on other items because they are paying more for gas. The less obvious consequence of more expensive gas is that it can negatively affect cash flow for the operators of gas station and convenience stores (C-Stores).
Though this may seem counter-intuitive, operators receive only a few cents of margin per gallon of gas sold, sometimes having to sell at a loss to stay in line with competition that may have lower priced fuel in inventory. Whether gas sells for one dollar per gallon or for five dollars per gallon, the operator’s margin remains relatively flat at about $0.15 per gallon. The real profits come from the retail sales inside the store (tobacco, chips, soda, etc.).
A general historic guideline of C-Store economics is that fuel sales make up about 70 percent of total sales while inside store sales account for the remaining 30 percent (70/30 sales relationship). However, fuel sales produce only 30 percent of the gross margin while inside store sales account for the remaining 70 percent (30/70 margin relationship).
Scenario One: Margins at $3.50/gallon
Consider the hypothetical gas station/C-Store below. In Scenario One, the business sells 100,000 gallons of fuel per month at $3.50/gallon for total gas sales of $350,000. Based on the 70/30 sales relationship, the store would also experience $150,000 of inside sales for total monthly sales of $500,000. A $0.15 per gallon margin on 100,000 gallons of fuel would produce a gross margin on gas sales of just $15,000. Using the 30/70 margin relationship, the inside store sales gross margin would be approximately $35,000, and the total gross margin would be $50,000.
Gas margins are further squeezed by credit card fees at the pump, averaging 2.5 percent of the total transaction amount. Normally about 70 percent of gas sales are made with credit/debit cards. Using Table 1, the $15,000 margin on gas sales is reduced by another $6,125 for credit card fees before any of the cash generated is available to cover general and administrative expenses.
If fuel prices continue to rise, we could expect to see fuel margins decrease as a result of additional credit card fees related to the higher fuel sales. As consumers have to spend more on fuel, they will have less cash available for the discretionary purchases of high margin items inside the store.
Scenario Two at $ 3.75/gallon
Scenario Two illustrates the potential margin loss should gas increase to $3.75 per gallon with no change in total consumer dollars spent. The $0.25 increase in gas prices actually decreases the C-Store gross gas margins after credit card fees from $8,875 to $8,438 because the credit card percentage fee arrangement results in higher credit card fees on the same level of fuel sold. With more total consumer dollars spent at the pump, fewer dollars are available for inside purchases. This decreases the inside sales gross margin after credit card fees from $33,125 to $27,604. As a result of these changes, the total gross margin after credit card fees would drop from $42,000 to just $36,042.
This calculates to approximately $1,200 in reduced gross margin per month for every $0.05 increase in fuel prices. Put into perspective, a sustained $0.25 cent increase at the pumps could remove $72,000 from C-Store cash flows per year, all else remaining equal. This is cash that would normally be used to pay salaries, insurance, maintenance, utilities and debt service.
In reality, a $0.25 increase in gas would probably not result in a pure dollar-for-dollar transfer of spending from inside sales to gas sales. The impact would likely involve a combination of decreased fuel consumptionand a decrease in inside, retail purchases. However, in any combination, C-Store margins are reduced. In a rising fuel price environment, C-Store stakeholders must remain vigilant in their sales trend evaluations as small changes in consumer spending can have a significant effect on C-Store cash flow.
How to React to Trends
There is little an individual C-Store operator can do to impact fluctuating fuel costs. However, the operators do have control over the appearance of the store and many of the products for sale within it. Store cleanliness, product selection/placement, beverage temperature, ice procurement and car wash maintenance (when applicable) are key factors that drive repeat business from the customers who are purchasing high margin products.
In a rising fuel cost environment, even diligent attention paid to the items mentioned above may not be enough to overcome the consumer’s finite ability to purchase high margin retail items critical for the survival of the C-Store.
If the impact on cash flow is severe enough, a loan default may occur, landing the account in the lender’s special asset division.
C-Stores are not simple to evaluate and to manage as special assets. The fuel sales aspect of the business means there are additional levels of regulatory complexity and environmental monitoring requirements, unique to this industry. Industry specific questions must be answered in order to determine the viability of the C-Store and the possibility of any additional restructuring risks which could impact the lender’s recovery.
Industry Specific Questions to Determine Viability
- Industry Specific Questions to Determine C-Store Viability:
- What are the particular state and local environmental laws related to this location and this industry?
- What is the age/design of the fuel tank and what are the associated monitoring requirements?
- Which types of leak detection systems are in place and are they functioning?
- Is the required testing and record keeping taking place?
- Are there any past or current leaks at the site? If yes, how have they been addressed?
- Has financial responsibility for the site been properly addressed?
- Are appropriate insurances in place?
- Is there any ongoing litigation related to the site?
- What contracts are in place with the fuel provider(s)?
How Focus Can Help
Focus Professionals have experience dealing with these and other issues commonly found at fuel facilities. We have provided operational management, financial management, product marketing assistance and receivership services for a variety of troubled gas station facilities, ranging from stand-alone stations to multi-tenant strip-malls with gas station anchors. We also have experience working with local regulatory agencies to resolve outstanding issues while keeping the business open, allowing for the continued generation of revenues to service debt.
The proper operation of a service station is a surprisingly complex affair due to the environmental liability that can occur if a site is poorly managed. Even without the presence of environmental damage, lack of regulatory compliance can result in significant fines and loss of revenue from “red-tagged” sites. To adequately protect collateral value, a lender needs to reach out to skilled managers in both real estate management, and operations support to successfully address a gas station / C-Store work out situation.
For more information regarding our experience in the C-store arena, contact one of our experienced Managing Directors listed below:
Lassiter Mason: firstname.lastname@example.org or Juanita Schwartzkopf: email@example.com
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