Value Judgment

Supply woes could hurt station, c-store valuations

WALL, N.J. -- The post-Hurricane Katrina and Rita era is presenting new challenges to unbranded gasoline retailers at a time when competition for multiple retail channels has never been higher, credit card fees are eating away at store profits and fuel supply shortages have caused price inversions for private brands and independents, said the Oil Price Information Service (OPIS), Wall, N.J.

The problem for the unbranded market, it said, is that branded stations have contracts with their suppliers that the refiners have to honor giving the branded stations [image-nocss] first pick. Secondly, major oil companies have been subsidizing their branded rack prices selling product for as much as 50 cents per gallon below spot prices.

The major oil companies have been reluctant to pass along the full cost of spot replacement costs, wanting to avoid the appearance of price gouging. So they can use their own refinery supply and downstream earnings to subsidize lower-priced branded rack prices. Whatever is left is sold to nonbranded stations at a price that is usually less than the branded station prices. When supply is tight, however, the branded stations still get first pick, but there may not be any product left over to sell to the independent stations, so unbranded prices tend to increase at much faster rates than branded prices.

As a result, branded stations such as Exxon, Shell, Chevron, Mobil, Texaco, Marathon, BP, Valero, Diamond Shamrock and others have a huge advantage over unbranded competitors, said OPIS. Private brands and independents have little, if any, flexibility. They must chose between buying the higher priced product, passing it along to consumers and being exposed to price gouging allegations or simply letting their supply run down, hoping prices fall back to levels they can afford.

In Dallas, as an example, branded rack prices have averaged nearly 27 cents per gallon less than unbranded prices since September 1. A few days during that period saw the difference between branded and unbranded prices more than 50 cents per gallon. That means a typical unbranded station selling 100,000 gallons per month had a fuel supply bill that was $27,000 more than a comparable branded station. Over that same time frame, branded stations in Dallas averaged a retail margin of 26 cents per gallon while unbranded marketers barely broke even.

Some industry observers are concerned that valuations for unbranded sites will take a big hit, making it more difficult for the unbranded station to borrow money at favorable rates and invest in upgrades. According to Mike Baskin, chairman and CEO of PetroConsulting, the effects of the unbranded price inversion are still unknown, although he expects supply to get back to normal over the next few months. "People have short memories," Baskin told OPIS. "Branded sites have tended to have more value than unbranded sites, and we will need to see how long the inversions last to see if the effects will widen the gap."

Traditional pricing is already getting back to normal in many markets, OPIS said, but the 40-day period that just passed will put a damper on unbranded retailers EBITDA, a number many appraiser use to calculate valuations.