2016 Overall SOI: Profits Soar Sky-Higher
Cheap gas, more jobs and easy credit help deliver more record-breaking earnings
Could retailers have imagined improving upon 2014, when the industry saw a 46.5% jump in profitability from the year before? Well, the 2015 numbers are in, and little is left to the imagination.
The convenience channel inched past that historic 2014 high to rake in $10.6 billion, up 1.6% from the previous record year of $10.4 billion, according to NACS’ preliminary State of the Industry (SOI) Report of 2015 Data.
Low gasoline prices drove consumer spending and buoyed fuel margins. The result: healthy increases in sales of premium fuel, merchandise (less cigarettes) and foodservice, according to Billy Milam, president of Atlanta-based RaceTrac Petroleum, who led the SOI general session covering overall industry statistics at the annual summit held in Chicago.
According to Milam, the continuing slump in oil prices meant additional cash in customers’ wallets—about $700 per person last year. “We didn’t get all of it,” Milam told the audience of approximately 600. “But we got some of it.”
Consumers apparently opted for higher-grade fuel, Milam said, with general increases coming in premium fuel sales. Though slightly down 1.1% less credit-card fees, fuel margins held strong at 16.95 cents per gallon vs. 17.15 cents in 2014. Sales numbers, of course, were down a considerable amount (27.7%) due to lower fuel prices, but the overall picture was upbeat.
“Strong fuel gross profits along with greater depreciation expenses increased cash flow,” Milam said, which led to what he called “the best year ever in fuel margins.”
Though reporting impressive numbers, Milam cautioned retailers of impending threats, including the encroachment of dollar stores into the tobacco and alcohol categories, increasing demand for electric and hybrid cars and competition from so-called “click-and-mortar” stores for convenience items.
“We’ve got to remember 2007 and 2009 were bad years,” Milam said. “There’s going to be a day of reckoning. I want our industry to be prepared.”
All Three Sides
In assessing key factors that played a role in the industry’s success last year, Milam suggested a triangle of elements—cheap gas, more jobs and easy credit—all hitting or approaching favorable levels.
“When jobs rebound, people are spending money in your stores, and it’s also easier to get credit. Do we remember the difficult years, 2008 and 2009, when [people] wanted to buy a new car? [They] could not do it,” Milam said. The same goes for retailers: “We want to build new stores, retrofit, reinvest, upgrade our foodservice [programs]. Many of us can do that when there’s easy credit—more importantly, cheap credit.”
As for the state of unemployment, Milam said U.S. numbers have fallen by half from a peak of 10.0% in spring 2009 to 4.9% today, citing numbers from the U.S. Department of Labor, Bureau of Labor Statistics.
And with that drop, Milam announced, “Bubba is back.”
Prior to the recession, in 2007, unemployment for 20- to 24-year-old males was a low 8.9%, and 4.7% for men 25 to 34 years old. But the recession sent those figures soaring, with men ages 20 to 24 seeing a 17.8% unemployment rate, and rates for men ages 25 to 34 jumping to 10.8%.
The good news is that 2015 saw the continued decline in unemployment of our channel’s core customer, with numbers for 20- to 24-year-olds falling closer to 2007 lows at 10.7%, and 25- to 34-year-olds falling back to 5.5%.
Labor-force participation rates, meanwhile, remain relatively stable, but since the early 2000s they have fallen about 5 points from a peak of 67%—representing a decline in the number of people actively participating in the workforce.
Restoring Credit While economic frailty may dominate this year’s presidential elections, signs point to improvements in both the job market and the state of credit.
Milam cited a Federal Reserve chart of outstanding consumer credit (essentially a degree of debt). In it, the amount in billions of revolving credit has increased only slightly, but nonrevolving debt was increasing at a noticeably faster rate. Nonrevolving credit, Milam said, refers to larger-ticket items such as cars and student loans.
Milam attributed that growth in nonrevolving debt in part to rising vehicle sales due to low gas prices. U.S. automakers sold 15.8 million units, a number not seen since 2000, he said. Many of these vehicles were light-duty trucks, with a 12.5% increase in sales from the prior year. That number means bigger cars that consume more fuel.
Another impressive number, he said, was how many Model 3 electric cars consumers preordered from Tesla Motors, Palo Alto, Calif., with 180,000 units ordered in the first 24 hours and $180 million raised. Though not all electric or hybrid cars have the cachet of Tesla, consumers are interested in high-mileage alternatives, Milam said.
The final part of the equation was cheap gas, he said. At almost $1 per gallon less than 2014, gasoline consumption last year returned to 2007 levels, when industry experts agree it peaked. “In 2013, we thought flat was the new up,” Milam said. “But in 2014, we went up in the fourth quarter. Then in 2015, the summer months were very close to that peak year of 2007.”
The Street-Level View Breaking down the numbers to same-store comparisons, the specifics of success are more apparent. While overall motor-fuel sales dropped 27.7% to $349.0 billion vs. $482.6 billion in 2014, inside sales bounced up 5.8% to $225.8 billion from $213.5 billion, underscoring how savings at the pump buoyed increased in-store activity.
On a per-store basis, a breakdown inside the store showed a 9.6% same-store increase in foodservice sales to $32,890 from $30,012, as well as a 7.2% increase in merchandise (less cigarettes) to $75,678 from $70,614.
Both figures show a growing independence from the core but shrinking categories of gasoline and tobacco. Profitability shows similar trends in foodservice (up 5.9%) and merchandise less cigarettes (up 8.4%).
Of course, no SOI would be complete without a review of credit-card fees, which have outpaced industry profits in the past decade. And attendees received moderately good news: The combination of the Durbin Amendment, lower fuel costs and other retailer efforts aimed at cutting interchange fees finally brought card fees below c-store profitability figures. Credit-card fees totaled $10 billion in 2015 vs. c-store profits of $10.6 billion. The numbers had been inverted since 2005. That said, $10 billion is still “too high” for retailers to bear, Milam said.
He also pointed to a disturbing trend: The cost of doing business has increased faster than store profitability. Direct-store operating and facility expenses grew at a same-store rate of 3.8% vs. 1.6% profitability growth last year.
Concluding the discussion, Milam said the industry has done well with gasoline margins of late. “We’ve been fat and happy for the last couple of years,” he said. “But I see a thinning of the herd.”
Review of 2015: Riding the Tsunami
Despite losses in fuel sales, profits were strong and inside sales up, providing the channel with a second year of unprecedented success. Another positive trend included a fall in credit-card fees, as people paid less at the pump coinciding with a growing demand for fuel—a reversal of recession-era projections that forecasted a continuing fall in fuel demand.
|Inside sales||$213.5 billion||$225.8 billion||5.8%|
|Fuel sales||$482.6 billion||$349.0 billion||(27.7%)|
|TOTAL SALES||$696.1 billion||$574.8 billion||(17.4%)|
|Pretax profit||$10.4 billion||$10.6 billion||1.6%|
|Credit-card fees||$11.4 billion||$10.0 billion||(12.8%)|
|Gasoline consumption (barrels/day)||8.75 million||9.30 million||6.2%|
|Employees||2.43 million||2.50 million||2.9%|
|Fuel margin (cents per gallon or CPG)||22.52¢||21.64¢||(3.9%)|
|-Net of credit-card fees||17.15¢||16.95¢||(1.1%)|
Sources: Nielsen/TDLinx, U.S. Energy Information Administration; NACS preliminary figures—final data to appear in the NACS® State of the Industry Report of 2015 Data; CSX LLC