OAK BROOK, Ill. -- While marketers in most states continue to enjoy double-digit margins in the wake of the recent gasoline price drop, Dawn Carlson gets two to three calls a week from Des Moines retailers asking for help in selling their businesses.
The executive vice president of the Iowa Petroleum Marketers Association said this Midwest market has earned the dubious distinction of being one of this year's least-profitable gasoline marketsgenerating an average margin of -1.3 cents as of Oct. 9, 2006, according to OPIS Retail Fuel Watch, and 5.6 cents [image-nocss] year-to-datethanks to plain old competition.
It's all competition, Carlson told CSP Daily News. We've got several new entrants in the market here and it's just been kind of brutal. People are trying to stay up with some of these new market entrants.
Some of these entrants are the usual suspects. Carlson cites hypermarkets and local grocery stores entering the fuel business as a couple forces that have spurred traditional fuel retailers to compress their own margins to compete. However, a new one is casting its shadow over the state: casinos.
If you look at OPIS data, Iowa ranks pretty low on retail margins consistently, but this last year has been extremely tough, especially in the Des Moines area here, said Carlson. We have a lot of casinos going up in Iowa, and they're able to give gas away to lure patrons in.
She cites a casino 30 miles south of Des Moines that owns its own gasoline operation and has been promoting the fuel for 20 to 30 cents below cost, subsidizing it with gambling profits. When you see prices advertised like that consistentlythey've taken full-page color ads out in the Des Moines Registerthen consumers get the impression everyone else is gouging them.
What's ironic is last year, the legislature banned these touch-play video lottery machines in convenience stores, said Carlson. So they told us we couldn't get into gaming and yet the casinos are getting into gasoline retailing.
St. Louis Blues
Meanwhile in St. Louisearning -1.0 cent of margin in 2006 year-to-date, according to OPIS Retail Fuel Watch figuresintense competition and a unique market inequality are keeping margins lean to nonexistent.
We all know every market has its ups and downs, and there'll be periods of time in which margins are low or nonexistent, said Ronald Leone, executive director of the Missouri Petroleum Marketers & Convenience Store Association, citing especially poor profits in St. Louis and Springfield, Mo. But to have margins low, nonexistent or negative for the majority of 2006 is really creating a lot of financial pressure for my members in those particular markets, especially St. Louis.
Although Leone cites the aggressive market leaderQuikTripas driving the margin compression in St. Louis, supply cost issues are tying the hands of many branded marketers attempting to compete.
From our perspective, it was a cost issue, not a retail issue, Mark Martinovich, COO at Wallis Cos., Cuba, Mo., told CSP Daily News. Wallis has branded locations in the St. Louis market. The historical problem in St. Louis is we are right in the middle of two major spot marketsChicago and the Gulf Coast. Couple this with the fact that we have multiple avenues to get productinto this market, such as pipelines, barges and local refineries, and you have a tough environment for a branded marketer.
Martinovich said the major oil companies have historically priced the St. Louis market with a Chicago basis price; however, the spread between the Chicago and Gulf Coast markets can be considerable, at one point reaching 30 cents per gallon this summer, he said. The daily average over the summer driving season was in the 12-cent range, and this put St. Louis branded marketers at a unique disadvantage to the unbranded marketers.
When an unbranded buyer like QuikTrip was bringing product into St. Louis this summer from the Gulf Coast, they had a tremendous cost advantage over every single branded buyer. This was due to the fact that all our branded suppliers were using a Chicago basis price for our cost instead of a Gulf Coast basis. The oil companies are well aware of the problems we experienced this summer, and time will tell how they choose to respond to the issue, said Martinovich.
To cope, Wallis has been busy focusing on driving inside sales, and has been enjoying a surprisingly strong year inside its Mobil On the Run locations. Despite the hairy fuel-margin situation, Martinovich also sees a silver lining.
What a bad year forces you to do islook very closely at your business and your entire cost structure, he said. We have always watched our operating expenses and capital expenses with a close eye; however, our leadership team is completely focused on our cost structure today, and driving efficiency throughout our company. This year's margin pressure will make us better and stronger long term, and our learnings will allow us to continue to grow and reinvest in this market well into the future."
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