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Small Profits for Gas Stations | Oil Watchdog

Small Profits for Gas Stations

Sun, May 11, 2008 at 11:49 am

    Small Profits for Gas Stations

    Record Oil Company Earnings Haven’t Trickled Down to Gas Stations

    BOUNTIFUL, UT — During the first week in May, Doug Olson sold fuel at a loss.

    The co-owner of Slim Olson’s gas stations in Bountiful and Woods Cross
    charged customers $4.25 for a gallon of diesel — despite purchasing it
    from the Chevron USA Inc. refinery in Salt Lake City for $4.27 a gallon.

    Regular unleaded was trucked into the station from the refinery for
    $3.45 a gallon that week. Olson and his brother, the station’s
    co-owner, Keith, priced it at $3.49, for a 4-cent-per-gallon profit, if
    customers paid cash. But these days, most customers prefer paying with
    credit cards, and the Olsons lose 2 percent on transaction fees —
    roughly 7 cents a gallon — which resulted in a loss on regular gas.

    "Do the math," Olson said. "Do you want to own a gas station?"

    Record-high prices for a barrel of oil — which hit $123.53 Wednesday
    for a barrel of sweet crude to be delivered in June — are not just
    hurting drivers. Gas-station owners say they, too, are struggling
    financially.

    At a congressional hearing Wednesday on rising gas prices, the owner of
    a petroleum distribution company in Texas told the U.S. House Judiciary
    Committee that rising crude oil prices and stagnant gasoline demand are
    combining to push some small gas stations into insolvency.

    Utah gas-station owners blame credit-card transaction fees, the nature
    of the gas market, rules specified by oil companies that gas stations
    have to adhere to if they want to sell their brands, and overall
    inflationary increases in the price of doing business.

    International oil prices influence the price at the pump, because the
    amount of oil available is largely controlled by the Organization of
    the Petroleum Exporting Countries, which controls production of oil
    based on supply targets the organization tries to predict. After a
    barrel of oil is produced, it has to be refined before it is shipped to
    gas stations.

    But local competition also influences how gas stations set prices. If a
    gas station owner charges more than the station across the street, the
    owner could lose customers to the competing station. That’s the dilemma
    at Slim Olson’s when they get a new shipment of gas that costs more
    than the previous shipment.

    "Do we raise it and really lose the market?" Doug Olson said. "Or do we lose money and price it a little lower?"

    At Slim Olson’s — as with most gas stations — profits come from
    popcorn, Cokes and hot dogs sold at the station’s convenience store.
    Slim Olson’s also has a carwash that is a local favorite. Customers who
    fill up at Slim Olson’s get a discount on a carwash.

    But some customers are choosing to pay full price for the carwash and fill up at a cheaper station.

    "Sometimes at Smith’s, you get a discount with groceries," said Ron
    Day, who was waiting for a car wash at Slim Olson’s on a recent Monday.

    For gas stations in southern Davis County, profits were squeezed when
    Smith’s Food and Drug and Costco began selling gas about 15 cents
    cheaper than traditional stations, Olson said. Traditional stations
    struggle to compete with chain retailers, which have advantages of
    being able to sell a diversity of products and more easily absorb
    losses in gas sales.

    Bill Douglass, chief executive officer of Douglass Distributing Co. in
    Sherman, Texas, told the House Judiciary Committee on Wednesday in
    prepared remarks that the average gas station makes 1.5 cents per
    gallon and sells 4,000 gallons of gas a day.

    "This means we generate about $60 in profit per day at the pump,"
    Douglass said. "On average, convenience stores/gas stations in 2007 saw
    an (annual) average pretax profit of only $23,335 per store, which
    includes both profits at the pump and inside the store."

    Credit-card fees on average are 7.9 cents a gallon, said Douglass,
    former chairman of the National Association of Convenience Stores.

    The cost of buying 9,000 gallons of wholesale gasoline has jumped 26
    percent to $27,432 since 2006, according to the Oil Price Information
    Service.

    Slim Olson’s is a 70-year-old family business. The company gets income
    from real estate, which right now is subsidizing the company’s gas
    losses.

    "No one ever talks about quality anymore," Olson said.

    A spokeswoman for Smith’s was unavailable for comment this past week.
    An executive in charge of gasoline for Costco Wholesale Corp., based in
    Issaquah, Wash., did not return phone calls seeking comment.

    Judy Dugan, research director of Consumer Watchdog, a nonpartisan
    foundation based in Santa Monica, Calif., said a number of factors
    contribute to a gas station’s success.

    "It depends on their suppliers," she said. "It depends on how well run
    the station is. They’re not going broke, most of them, but it’s the oil
    companies that are making real money off $3.50 and $4 gas. The oil
    companies own some of the largest stations."

    But major oil companies own only 3 percent of gas stations, according to the National Association of Convenience Stores.

    Other gas stations tend to be "at the complete mercy of their
    suppliers," Dugan said. "We don’t see service stations closing left and
    right, but it’s true they’re not the ones getting rich off of high gas
    prices."

    The big push on gasoline prices these days is the price of oil itself,
    she said. "The oil companies and hedge funds are raking it in at our
    expense, at drivers’ expense and the whole economy’s expense."

    Some gas stations may be increasing the price of gas when they see
    media reports that futures — oil purchased for a later delivery date —
    have increased, Dugan said. "Others are responding to their latest
    delivery. Refiners and the wholesalers who deliver to stations
    sometimes (send) two price quotes that are different in the same day
    from the same refiner."

    Kevin Wilden has found his niche in a shop next to his Conoco station in Beaver in southern Utah.

    He does light repairs such as oil changes and sells tires — although he
    admits he’s not pushy enough to make a good living on tire sales. Four
    gas stations sell tires in the southern Utah town, and Wilden found he
    could be competitive selling tires for tractors and other farm
    equipment.

    "It’s been a tough market," he said. "I’ve been here for 30 years. It’s been a tough market for 30 years."

    Dave Archibald, who leases Jim and Dave’s Sinclair in Tremonton in
    northern Utah, also has a light repair shop, which is the primary
    source of income for the station.

    "You’d have to sell a lot of Twinkies to try to cover the rent, and in our community, it just doesn’t happen," Archibald said.

    He has run the station since 1969 and believes these days of high gas
    prices are the toughest in his career. To keep other expenses low,
    Archibald works in the shop every day, and his wife runs the
    convenience store with the help of some part-time employees.

    Archibald believes that if the oil prices would stabilize, he could get
    some relief by not having to constantly raise prices at the pump. In
    recent months, he has raised prices weekly. In more stable times, he
    only had to raise the price every three weeks or so.

    Michelle Corrigan, owner of Shady Acres Silver Eagle in Green River,
    offers her customers a 3-cent-per-gallon discount on gas if customers
    pay in cash.

    Customers are increasingly paying with cash to get the discount, and
    Corrigan is noticing more return customers in the east-central Utah
    town near the intersection of U.S. 6 and Interstate 70. "They’re
    actually starting to realize we’re trying to help them instead of
    sticking it to them again," she said.

    If customers pay cash, they have to pay inside the store. And drawing
    them inside the store is also helping Shady Acres’ profits, because
    people are buying more goodies.

    "We have a really big convenience store, because with the fuel, you’re
    basically making enough to pay for your lights and employees. We put a
    Blimpie Subs and Salads in there to bring people in more."

    Shady Acres is located in the middle of town, and three years ago,
    Corrigan spent $10,000 on billboards on each end of town to advertise
    the place, about the same time as the former Amoco station decided to
    purchase gas from the Silver Eagle refinery in Woods Cross instead of
    converting the station to a Tesoro Corp. station when the Amoco brand
    was discontinued.

    "We decided to do that so we could have even cheaper fuel," she said.
    "The fuel is the same, but when you go with a branded fuel, you’re
    obviously going to pay a little more. We decided, looking into the
    future, fuel seemed to be on the edge of skyrocketing, and we decided
    to go with nonbranding."

    Not being affiliated with an oil company brand has freed Corrigan to
    advertise how she wants and offer the 3-cent-per-gallon discount to
    cash-paying customers, she said.

    With no end in sight to the rising oil prices, gas-station owners are
    looking to such strategies to compete and survive. Doug Olson has a
    hard time contemplating closing shop. His grandfather, Slim Olson,
    began the company in 1937.

    "Hope is what keeps you in it," he said.
    —————–
    E-mail the author at: lhancock@desnews.com

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