MIDLAND, Texas -- Bill Kent, owner of Kent Kwik convenience stores in Midland, Taxes, and a veteran of retail business, had a chuckle with a tidbit many in West Texas might not think is so funny. Gas is the cheapest fluid we sell, Kent told the Midland Report-Telegram, on a per gallon basis.
As the price of gas has proven a consistent source of pain for consumers, those who sell gas still hear about the alleged rip-off they're perpetrating, and find the need to defend themselves, whether it be from consumers or the media. There has to be two sides [image-nocss] to the story, Dan McCurdy, director of communication for Town & Country Food Stores in San Angelo, Texas, told the newspaper. In this case, there are three or four.
McCurdy lists demand, the lack of refineries and the need to import from OPEC countries and Venezuela as reasons for the higher prices. This past week provided another reason as Alaskan pipeline problems promise to increase gas prices nationwide, as could the threat of wide-scale damage should a hurricane enter the Gulf of Mexico.
In all cases, there is little the retailer can control, said Kent and McCurdy. And as gas prices increase, they insist their bottom lines drop.
The breakdown on what consumers pay for a gallon of regular gas, according to the Energy Information Administration, indicates the price of crude oil is 47% and federal taxes 23%. Of the remaining 30%, 12 is for distribution and marketing and 18 is for refining costs and profits. We have to fight it out for 10- to 13-cent margins, Kent told the newspaper.
And, according to the National Association of Convenience Stores, when the price of gas increases, the retail gross margins fall.
In 2004, when the EIA reported an average price of gas reached $1.85, NACS reported margins were at a 20-year low, dropping to 7.2% in 2004, the lowest level since 1984. Margins continued to shrink in 2005, according to the NACS, to the point where the distribution and marketing component of a gallon of gasoline (pipeline and other delivery costs, plus retailers' costs) was 2.1%, which doesn't cover the costs of credit-card fees (3%).
The use of credit cards increased to 54%, according to NACS, in 2004. That number spiked to 70% of all motor-fuel purchases for the first half of 2005 and increased again to 80% by October 2005.
The people getting rich out of this are the credit-card companies, Kent said. Talk about windfall. On $2 gas, if we pay a 3% fee to Visa or MasterCharge, that eats our profits. If our average margin is 10-13 cents, 60% or half the margin goes to credit-card companies. If there is $3 gas, the credit-card companies get 9 cents (a gallon). The higher the price, the less margin we make.
McCurdy added, ExxonMobil, being the largest retailer in the U.S. and passing Wal-Mart, was another good indication on cash flow. McCurdy said when gas prices rise to these eye-opening levels, the retailer must rely on in-store sales to make money. The days of offering only gas and maybe tobacco products are long gone, he said.
Town & Country may be an example of how a retailer can succeed despite lower margins from gas sales, the newspaper reports. McCurdy reported the chain has grown 400% in sales since 2001, thanks in part to offering conveniences such as foodservice program Country Cooking.
Kent stores include not only gas station/convenience stores but express oil change facilities. I feel sorry for the retailer who relies on sales of gas to make his living, McCurdy said.
Alon USA, which includes the area's 7-Eleven stores, has no need to rely on gas sales. In addition to selling the popular Big Gulp and Slurpee beverages, Alon's West Texas properties include the refinery in Big Spring, and because of that, Alon president Jeff Morris told the newspaper. We are doing real well in the market. It is not nearly as unfair to us.
Morris, though, makes an interesting point in that he doesn't see $3 gas being necessary and that producers and refiners, which are making more money in the short term, are operating on a business plan which should destroy demand.
West Texas producers don't need $60 crude to convince them to drill and produce; certainly the world doesn't need $60 crude to encourage production, and refiners don't need a 10% to 20% margin to encourage them to produce gas," Morris said. "The consumer is right when he or she says. I don't like $3 gas.' I don't see it has to be that way."
And while Morris said the gas growth rate has increased 0.6% in the last year and the consumer is using more, he said there have to be customers who must change the way they live rather than shell out $50 or $60 for a tank of gas. I think that is crazy, Morris said. The business plan of destroying demand is non-sensical.
Coincidentally, Alon's 7-Eleven stores were posting the highest prices for regular unleaded gasoline in Midland, according to TexasGasPrices.com. Still Morris hopes those paying $80, $90 or $100 to fill up their massive SUVs will think twice before venting on the clerk behind the counter. The retailers get the least portion of the profit, Morris said.
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