Card Fees, Gas Prices Sting C-Store Owners

There’s not a lot of money in selling gasoline these days. At least not much for many the nation’s 115,000 convenience stores.

Exxon Mobil Corp. posted the largest corporate profit in a single year in U.S. history in 2007 — more than $40 billion — mostly because of record high prices for its primary product.

As for the retailers of that product, most probably weren’t breaking out the bubbly to celebrate big oil’s record profits. After expenses, taxes and fees, some owners barely break even selling gas.

With margins of about a penny a gallon, many convenience store owners have a higher profit margin on a bottle of water or wiper fluid than on feeding that tiger in your tank.

“You can’t depend on gas and cigarettes to make money anymore,” said Steve Lair, co-owner of Petromark Inc. of Harrison. “And it’s worse than it’s ever been.”

That’s one reason why Lair and his partner Steve Turner are unveiling a new, considerably expanded twist on their White Oak Station brand of gas and retail stores.

The new 8,000-SF store, part of a 42,000-SF, $7 million development, is located in the Pinnacle Hills area on New Hope Road in Rogers.

It boasts an upscale design and inventory, with salad and breakfast bars, a high-end meat and seafood case, gelato counter, gourmet pizza, two chefs preparing take-home meals and other luxury amenities.

The store will be open by early May and will employ 40 to 50 people.

Petromark is also building a new upscale White Oak Station on Airport Road in Bentonville near the Northwest Arkansas Regional Airport, though it won’t be close to the scope of the Pinnacle Hills store, Lair said. The company operates 22 stations in Arkansas and two in Missouri.

“We’re trying to do everything possible to increase inside sales,” Lair said. “We build our stores a little bit nicer, and have a better public image. We’re trying to outdo the image of the convenience store being a dirty old gas station.”

New Ballgame

Profit margins on gasoline have been squeezed significantly because of two related reasons.

The first is that fuel is much more expensive, so while station owners try to compete by keeping prices lower than the next guy, many consumers might not have the extra scratch to spend on Gatorade or Gummi Bears.

“You can’t be priced much differently from the best price in town,” said Jeff Lenard, vice president of communications for the National Association of Convenience Stores in Alexandria, Va. “It’s like limbo — how low can you go?”

The second reason for lower margins is that with the cost of a fill-up pushing past the $50 mark (and way past that point for some drivers), using a credit card is more convenient than carrying that much cash.

The amount convenience store owners have paid in credit card transaction and interchange fees has more than doubled since 2003, from $3.2 billion to $6.6 billion in 2006, and that seriously cuts into profits, Lenard said.

Higher fuel prices “have had a significant impact on the business,” he said.

“Stores have really had to reevaluate how they will either evolve or get out, because the old model of being able to run the business on gas sales is gone.”

Gas can be a traffic driver — in both senses of the term — but it is no longer a profit driver, which is why more retail outlets like big box grocery stores are moving into gas sales to lure customers, Lenard said.

“Everybody wants to sell gas, but nobody’s making money on it,” he said.

This has meant many gas station owners and operators have had to change their game by offering a wider variety of products with fast service.

Some have opted for promotions, contests and rewards programs to get customers into the store, where profit margins are higher.

Many new gas stations are bigger, with wide aisles, low racks and a layout that is easier to navigate, Lenard said.

Consumers want to be able to accomplish more within a single trip to a retailer, which is why the new Pinnacle Hills White Oak Station will offer so many food options.

“We’re going to make it easier for you not to have to make that extra stop,” Lair said. “You can get gas and food and go home at a reasonable value.”

If the food-to-go concept is successful, it will likely be implemented at other White Oak Stations, Lair said.

Close Margins

Convenience stores sell 82 percent of all the gas in the United States, Lenard said. And although many of them carry an Exxon Mobil or Chevron sign, most are independent operations selling branded fuel, and aren’t owned by the big oil companies.

The average markup on a gallon of gas for these retailers is 14 cents, with 12 cents to 13 cents covering expenses, including credit card fees, Lenard said.

Prices fluctuate throughout the year, but “there are times when you’re selling at a loss,” he said. “When prices go up, margins erode.”

Credit card fees are a sticking point with many gas retailers, prompting some to offer incentives to customers who pay with cash.

A few have stopped taking cards altogether, said Brandon Wright, manager of communications for the Petroleum Marketers Association of America in Arlington, Va.

Others are trying to negotiate with banks and credit card companies for lower fees, Wright said.

Many gas station owners are frustrated by the interchange fees credit card companies charge. The fees were instigated when credit card slips were processed on paper, but technology has lowered that cost, Wright said.

Only 13 percent of the amount collected covers the cost of transactions, with the rest going to profits and marketing, he said.

There is another potential problem in addition to higher gas prices for consumers buying fuel with a debit card.

Some banks use debit holds of $50 to $100 for fuel purchases, regardless of how much gas the user bought. This can cause problems if a person doesn’t have much money in their account, and could trigger overdraft fees even though there is enough money to cover the cost of the gas and other purchases.

Also cause for concern is that as gas prices continue to increase, many credit cards still limit fuel purchases to $50 to $75.

Wright said he’s spoken with some gas station owners who had to explain this to customers who thought pumps were malfunctioning when they stopped before their tanks were full.

One of the major reasons Wright and the PMAA cite for increased fuel prices is the futures market for petroleum products.

“Hedging was set up primarily for our folks to lock in a good rate and to manage supply and demand,” he said.

But over time, speculators have gotten into the game, which has driven up costs.

“Now they’re buying and selling before it’s delivered,” Wright said.

The PMAA advocates only allowing purchasers who have the physical storage capacity to take fuel to bid on it. This would ideally lock out pure speculators.

Lenard said gas has gone up 60 cents since January, which is just “phase one of what’s going to happen this spring.”

Prices will most likely continue to rise as summer blends hit the market.

There are 17 different blends of summer fuel, which are supposed to create less smog. When refineries switch over to these blends, it causes an increase in the price of production.

Uncertainty in the stock market often sends investors to bonds and commodities, which is why there has been such a significant run-up in gas prices, Lenard said.