2016 Fuel SOI: Gas Powers a Profitable Year
Strong margins and an increased demand for premium contribute to big numbers
Fuel profitability actually slipped last year by 3.3%.
In any other period of gasoline and diesel retail, the slide would be disappointing. However, 2014 and 2015 were not typical years.
When the bottom fell out of crude oil in 2014, a cascade of events sent retail gasoline prices plummeting, ignited rack volatility and unleashed some of the most generous margins retailers had seen in their entire careers.
So reconsider the 3.3% drop. Overall industry profitability in 2014 vs. 2013—a year that was already trending upward—bounced up a whopping 46.5% to $10.4 billion from $7.1 billion.
Same-store fuel profitability in 2014 rose 25.4% to $33,001 from $26,304 in 2013. So the more proportionate comparison is between 2015’s number of $31,925 against 2013. That differential is a solid 21.4%, considering fuel profitability comparing 2012 to 2013 rose only 3.2% and was a negative percent the comparable year before that.
Margins tell a similar story. In 2014, fuel margins soared 18% to 22.52 cents per gallon (CPG) from 19 CPG in 2013. In 2015, margins slipped to 21.64 CPG, a drop of 3.9%. Comparing 2015 to 2013, however, the difference is a positive 13.9%. (See related story.)
Other business elements compounded last year’s success, according to Billy Milam, president of RaceTrac Petroleum, Atlanta, who presented the overall industry numbers at the summit. Strong fuel margins and greater depreciation expenses increased cash flow, pushing earnings before interest, taxes, depreciation and amortization (EBITDA) up an impressive 32.3% in 2014, he said.
Milam described cheap gas as a fundamental pillar in last year’s profitability. Motor fuel averaged $2.40 a gallon last year, almost $1 cheaper than in 2014. It powered a continued rise in gasoline consumption that is rewarding the channel exponentially. Consumption is trending back to the highs of 2007, when Americans consumed 9.6 million barrels of gasoline per day. Figures drifted downward to lows in the 8.5 million range in 2012, but since 2014 they have moved back up to pre-recession levels.
Another indicator of rising demand is vehicle miles traveled, which, after starting on a downward spiral in 2007, began a slow trudge back in 2012, Milam said. It started to shoot up in 2014 and continued to rise dramatically through 2015, surpassing a 2007 peak of about 3 billion vehicle miles traveled to hit 3.1 billion as of last fall, according to the Federal Highway Administration.
As icing on the cake, not only are consumers driving more, but they’re also buying more premium-grade fuel. It’s part of the lucky fallout from low gasoline prices and people having more money in their wallets. Drawing from NACS’ CSX data, Milam said a strong correlation exists between falling gasoline prices and the rise in premium gallons sold. In mapping the increases of premium-grade gallons sold vs. regular, premium grew two times faster.
In a new day of lower gas prices, Milam said, “the first winner was us.”
Exploring reasons behind the rising consumption rates, Milam pointed to record vehicle sales—especially a growing demand for light-duty trucks.
Overall vehicles sales hit record levels, with 15.8 million units sold—a number not seen since 2000, he said, citing motorintelligence.com and wards.com. While the 7.1 million cars sold represents a 2.1% decline, sales of light-duty trucks rose a strong 12.5% at 8.7 million units, with the bulk of those being pickups (2.3 million units) and crossovers (4.1 million units).
The three top-selling models were the Ford F Series, picking up 2.3% in units sold from the previous year; Chevy Silverado, up 13.9%; and the Dodge Ram, up 3.1%. These trends bode well for the industry, because bigger vehicles need more fuel to run.
Life After High Margins
Despite strong fuel margins and healthy profit-and-loss statements, Milam advised retailers to reassess their portfolios. A great store built in 1980 might not be able to sustain a chain’s growing overhead, as depicted in SOI numbers tracking operating and labor expenses.
Showing summit attendees a list of the country’s largest c-store firms, he pointed out that many of the biggest grow by acquisition and probably need to rationalize their networks. “We’re very top-heavy as an industry,” he said.
As of December 2015, the country had 154,195 stores, a 0.9% increase over 2014, with growth in both single-store and chain operators. Increases among independents tie back to chain rationalization, but at the same time, many chains have been taking advantage of cheap credit to build new-to-industry stores. Those steps put further pressure on legacy infrastructure, he said.
Such bold decision making and planning will be critical in the future, Milam said: “What are the odds for three consecutive record years?”