It's been quite a year as far as fuel prices are concerned. From a high north of $4 a gallon all the way down to a sub-$2 a gallon, motorists can be forgiven for wondering what the heck is going on in one of the least avoidable places to do business -- the gas station.
In an effort to discover what makes the business successful -- or not -- we spoke with what might be considered a "typical" gas station owner, then corroborated much of what was said with someone we'd call an industry expert, who, like the gas station owner spoke on condition of anonymity.
So what's the scoop on the gas station business?
For starters, put out of your mind the idea that station owners like high gas prices. Actually, if anything, they're hurting when prices are high.
The reality is that profit margins at the gas pump stay at around 23 cents a gallon, regardless of the price per gallon. The rub comes when motorists, faced with soaring prices, become stingy with both the amount of gas they buy at any given time or, perhaps worse, don't bother going inside, which is where the real profits are generated.
"Fuel accounts for about 70 percent of the sales in the industry, but only about 30 percent of the gross profits," said our industry expert. "It's clear that most of the profits come from merchandise categories."
For the gas station owner that pays for the fuel before it's sold, fluctuating prices become a very risky proposition. "They may buy on contract, which allows them to lock in the price for a certain time, but success comes from the knowledge of the person guessing right. If they buy at the peak and the price goes down, they're going to lose."
In an environment where the price is steady, the gas station owner can at least predict their margins, what's left after all expenses, including credit-card fees.
Inside the store, it's a different story, where sales of tobacco products are at the top of the profitability heap.
Hungry? The gas station owner is counting on it: food service, including chips, candy, and even sandwiches are the second most profitable category.
Indeed, it's fresh food that's an emerging trend in the industry. "Sales are twice as much as it was a couple of years ago," our expert said.
The food category is followed by packaged beverages such as energy drinks, soda or alcoholic beverages (although not all jurisdictions allow for beer or liquor to be sold).
If you bought a lottery ticket or two the last time you stopped to fill out, your friendly neighborhood gas station owner will be pleased, if only for the fact that it brought you into the store. Sure, states get the bulk of the money, but remember: traffic is everything and the gas station owner is counting on you buying something else when you walk through the doors.
Another traffic builder is the ATM machine that's become iconic in the gas station business.
For the gas station owner that operates not on a purchase of fuel arrangement but on a management fee structure (the fuel is provided by a national brand), the concept of traffic is even more important, although the percentage of revenue from fuel sales remains the same regardless of the price.
Most national chains are adopting or have adopted a franchise model which dictates who the store owner can buy from when it comes to merchandise, making the idea of traffic into the store that much more important.
For those entrepreneurs, higher fuel prices means less traffic into the store. "Fuel is the major traffic driver," our industry expert said. "We hope they'll go in and buy something; when prices at the pump are high, that has the tendency to slow things down."
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