Metro Chicago gas stations can't afford it either

The surging price of crude oil, whether legitimate or driven by runaway speculation, has made the previously mundane gas-pumping experience an adventure for Illinois drivers – how high will the meter go?

But pumpers aren’t alone in frustration. For gas stations, $4 per gallon actually means more pain than pleasure.

Bill Fleischli of the Illinois Petroleum Marketers Association said the impact of record gas prices is so severe that some gas stations may be forced to close. In the meantime, gas stations are working worried and doing anything they can to cut expenditures.

A spokesperson for the National Association of Convenience Stores, Jeff Lenard, sees a far more disturbing trend in the making.

“I don’t think the days of being able to be a gas retailer only are viable today,” stated Lenard.

He said of the 146,000 convenience stores nationwide, 115,000 sell 80 percent of the gasoline purchased by drivers – more than $405 billion of it. The other 10 percent is sold by hypermarkets such as Wal-Mart Stores Inc. or Costco Wholesale Corp., with the final 10 percent sold by traditional service stations.

According to a 2001 report by the Energy Information Administration, service stations started exiting the gasoline game more than 30 years ago.

“The transition from the traditional service station to the convenience store format began during the early 1970s with the rise of availability of self-serve motor gasoline,” noted the report. “Replacing the traditional station was the convenience store format in which items such as soft drinks, coffee and cigarettes are sold inside a store that is surrounded by many gasoline pump islands."

Olvin's Service Station at 1654 N. Kedzie Ave. stopped selling gasoline 10 years ago, said owner Olvin Pagan. He said he would still like to, but there’s just too much competition. And for those selling it, the current position is not an enviable one.

After rent and labor, credit card fees are the main profit-drainers for gas station owners. In mid 2005, credit card fees began to exceed pre-tax profits for the industry, and they continue to move in opposite directions. In 2007, pre-tax profits were $3.4 billion, while credit card fees were nearly twice as much, $7.6 billion, according to the NACS.

Typically, owners make up the difference with sales in their attached convenient stores.

“The traditional model is that a convenience store selling gas will probably sell about 4,000 gallons a day, and maybe make about a penny-and-a-half profit – so you make about $60 a day at the pump. You hope that those 400 or so customers at the pump go inside the store, buy a cup of coffee, buy a sandwich – buy anything, so you make your money there,” said Lenard.

He further explained that as a result of a liquidity crisis (oil, not money), inventory costs have doubled. Coupled with a gun-shy banking sector still reeling from the sub-prime mortgage debacle, adequate credit lines are getting tougher to come by.

Add to the mix credit-card fees, which operators deem exorbitant because they are based on percentage of a total purchase which now eclipses $50 at most stations, and many owners are making decisions “on a month to month basis,” according to Fleischli.

And Lenard said the vast majority of owners are not supported by a larger entity. Lenard noted that 56 percent of gas stations are “mom and pop” operations, and while 72 percent of total sales dollars come from gasoline, that translates to only 34 percent of profits.

Oil giants like Exxon Mobil Corp. and Chevron Corp. may be wading in windfall profits of late, but only 2 percent of gas stations in the United States are owned by oil companies as a result of divesting. The Comex Shell station at 1950 W. Division St. is an example of a gas provider still owned by big oil.

Martin, 26, has been a manager at the Shell station for 18 months, and said they have no choice but to raise prices “to have a legit business and survive in this tough time.” Martin noted that within the last few months, prices went up 19 cents in one day, which he called a "phenomenal increase."

Martin said once prices hit $4.30, he started to notice a slowdown at the station, but said, “Corporate hasn’t rung the bell yet.” He attributed this to the high-quality “gunk-free” gas that Shell claims it pumps, and other promotional efforts like a chance to join the pit crew at a NASCAR event. He also suggested that since the big oil companies are hauling in big profits these days, they may be less concerned about their retail performance.

For the majority of retailers, emphasis will be placed on sales programs for items like sandwiches or coffee, and may even increase promotional costs, explained Lenard. Some stores are partnering with other retailers like a supermarket, and offering coupons.

Ms. Vnk, manager of Gas For Less at 2801 N. Damen Ave., said the current period is the worst she has seen in her 10 years working at the Northwest Side station. She said efforts are being stepped up to get customers inside the convenience store to buy food items, and the store has started to offer more sales.

For Chicago gas station owners, there is another reason why turning a profit is tougher than ever: at more than 70 cents per gallon, total taxes on gasoline in Chicago are the highest in the country. And the citywide sales-tax increase is just around the corner.

The pricing of gasoline also takes into account the price of crude oil, refining costs, and distributing and marketing costs.

In April, gasoline demand was down only a small amount compared with the year-earlier period. But the price of gasoline is up about $1 per gallon over that same period and retailers can’t pass along with wholesale price increase fast enough.

“If you get a 10-cent price increase you can only pass along a couple cents at a time because customers will go somewhere else to buy their gas, and buy everything else,” said Lenard.

And Fleischli said when retailers get behind the curve and start losing money on every load they get, that’s when the “death spiral” starts.

Retailers are also battling hypermarkets, which are now finding success in the gasoline game. According to a study by Energy Analysts International, hypermarkets held only a 3 percent market share in 2000. Now at 10 percent, with each store selling two-and-a-half times the volume of gasoline that a traditional retailer is capable of, hypermarkets may continue to replace traditional gas stations.

“They are certainly growing in importance,” said John Gabriel, analyst with Chicago-based Morningstar Inc. “It’s really for the consumers' benefit.”
Gabriel said Costco sells gasoline in 50 percent of its stores nationwide – a 10 percent increase over the last three years and growing. He added that in several markets, gasoline is drastically cheaper for Costco members than what’s offered at nearby corner stations.

Much like corner stores, Gabriel explained, Costco sells gasoline to draw traffic inside. But unlike old-school retailers, Costco is better equipped to tolerate the slim margins and occasional losses that come with selling gas, particularly in the current market.

Whether from a gas station or a hypermarket, consumers have an odd emotional connection to gasoline, according to Lenard.

Lenard said that a vacation drive of 200 miles, at 20 miles per gallon, costs only an extra $10 versus last year.

“Gas is the smallest element of holiday travel, but I think it is the one that’s having the biggest impact on whether people will travel. There’s an emotional connection with gas that there isn’t with any other product.”