Petrobanc Finance Blog

National Association of Convenience Stores (NACS) working in partnership with Convenience Store/Petroleum (CSP),  released a State of the Industry Summit report in April 2009. Data is based on 156 retail chains with 20,000 convenience stores. Of particular interest:

For 2008,  while the total number of stores (in the U.S.) dropped one percent, total industry sales rose more than 8 percent and industry pre-tax profits rose 54 percent.
If you remove fuel sales, store sales still increased 3.2 percent. And while total fuel gallons dropped 2.4 percent, average selling price per gallon grew 16.1 percent. Fuel represented 75 percent of total stores sales contribution, but only 32 percent of total growth margin dollar contribution.

CSP TV recorded a video highlighting key points here.

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Anyone wanting to delve into the mysteries of retail gasoline prices should look at Energy Information Administration’s (EIA) site, which is bulging with statistics and useful information.

A few days ago EIA posted a useful article explaining why the price of crude oil doesn’t seem to correlate with price at the gas pump. In short, here’s why:

There’s a time lag between refining crude oil and distributing it to retail sites — typically about two weeks, but it can be as long as four to eight weeks. Fluctuations in crude oil price during that timeframe can be significant.

Supply and consumer demand also play a role, and at any point in time, can work in the opposite direction of crude oil prices. So while the price of crude has an impact on retail prices, market factors can mitigate or reverse that impact.

This happened in January 2009, when retail gas prices increased during the first half of the month, while crude oil prices were falling. Given the time lag we discussed above, retail prices should be compared against late December’s crude oil price, which in fact, did increase.

What role do the refiners play in all this? Well, in December, some refiners were selling gasoline at prices less than the cost of crude they were purchasing at that time. They have contracts, however, that require them to produce gasoline regardless of profitability. But refiners change production based on perceived consumer demand, so this profitability gap adjusts over time. Toward the end of 2008, refiners reduced gasoline production, responding to signals from the consumer market. In addition to supply dropping, refinery maintenance in January contributed to the positive uptick on prices at the pump.  

For more details, read the full text at http://tonto.eia.doe.gov/oog/info/twip/twiparch/090204/twipprint.html

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How bad did it get in 2008 for gasoline retailers? Maybe not all that bad.

During the first half of 2008, as wholesale gasoline prices climbed rapidly, the gas and convenience store industry was abuzz with talk of terrible fuel margins impacting gas station owners nationwide. Conventional wisdom is that if wholesale prices rise too rapidly, retailers cannot keep up with price increases at the pump and margins become compressed.

The conventional wisdom may have been wrong, if U.S. Government data are to be believed.

Petrobanc Finance completed an analysis of gasoline margins from 2006 through 2008 at the national level using Energy Information Administration (EIA) data published for wholesale and retail prices. Adjustments were made to account for higher credit card fees as street prices doubled.

Click on image to enlarge.

If we assume 2006 and 2007 represent a reasonably typical retail profit margin picture on average over time, then 2008 did not show a significant decline in margin during the price run up in the first half of the year. However, there was a strong surge in retail margins in the fourth quarter as wholesale prices dropped more quickly than retail. This surge nearly tripled the normal profit margin during October 2008.

What is the lesson here? Operators seemed to have done a good job keeping up with the price increases from their wholesalers. This is capitalism at its best, where one can imagine station owners going into overdrive to monitor their street prices versus their competition, trying to ensure they price adequately to cover the NEXT load of fuel, not the prior one. They were less quick to drop their prices during the decline, building reserves for future price fluctuations.

Why is this important? In a time when commercial credit to the industry is limited (to say the least), lenders are wary of financing independent operators that already suffer from dubious credit reputations on top of environmental concerns.

In my conversations with good operators, I’ve learned that their business models accommodate the peaks and valleys of gasoline margins. They bank the profits from high-margin periods to provide liquidity during low margin periods. They also have multiple profit centers, including c-stores, fast food and car washes.

So what really happened in 2008? There was some pain, but it came from reduced sales of gas and ancillary offerings. Simply put, consumers have changed their driving habits and aren’t stopping at gas stations/c-stores as often. We await a more complete analysis on store profitability that will be released by NACS in their State of the Industry report in summer 2009.

In the meantime, top operators will continue to watch their street prices daily, always capturing the most margin possible and improving their bottom line.

Author: Kevin Morley

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If you’re an independent gas station dealer who has tried to buy or refinance a site recently, you’ve gained firsthand experience of the stark new reality of the financial markets.

In the past you had choices. At the national level, major institutions like Citigroup provided competitive options on conventional mortgages and had virtually unlimited funding capacity. At the local or regional level, small banks could help with either conventional or SBA loans. Numerous brokerage firms, some locally based, many internet based, promised to ‘shop’ your loan for the best terms. Reflecting the excess of liquidity in the financial markets, rates and terms were highly competitive. Floating rates at or below prime were common. Because the yield curve – the difference between short term and long term interest rates – was so low, fixed rates were also available at attractive levels.

Less-than-stellar borrowers found themselves in the enviable position of having lenders fight over them, while those who were more stable could expect terms once reserved for only the best of the blue-chip players in the industry. All because there was too much money chasing too few deals. How times have changed.

Despite today’s business environment, the good news is that financing is still available for independent dealers in the Convenience & Gas (C&G) industry. The bad news is, you have to know where to find it and how to qualify for it.

With credit standards tightened considerably, obtaining a loan requires you to put the best face on your business and management. You will need to work hard to ensure your lender is comfortable with the underlying financials for your business. Solid financials presented in a professional format, strong references from suppliers and bankers, a proven track record for your business operations, and excellent personal credit are crucial elements. Equally important is the brand image of the retail site(s) being funded.

And remember, your lender will evaluate everything in light of the risk involved. Regardless of how promising the deal appears, the lender will want to protect itself with an exit strategy that details how it will unload your store without taking a hit.

Author: Kevin Morley

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