Cover Story: Gas Exodus
Decline in gas consumption puts retailers in a fight for survival
Let’s do a back-of-the-napkin calculation.
Gasoline consumption peaked in 2007. It’s estimated to bottom out in 2035. By that time, the United States could consume about 2 million fewer barrels per day (BPD), or 84 million fewer gallons per day, according to the Energy Information Administration (EIA).
The government agency predicts that gasoline demand will plummet 24% from 2012 to 2040.
What is causing this plunge in projected forecourt demand? First the structural part: tougher Corporate Average Fuel Economy (CAFÉ) standards that require automakers to essentially double the average fuel economy of the U.S. vehicle fleet in little more than a decade. Then there is the demographic demand vise: aging baby boomers driving less, and millennials who are driving later—if at all.
Now factor the average fill-up—let’s say 10 gallons—into that 84-milliongallon- per-day decline. This means potentially 8.4 million fewer visits per day to a gas pump. Spread that across all U.S. gas stations—or roughly 126,000 fueling sites, according to NACS—and the industry could see an average of 66 fewer fill-ups per day per store by 2035.
This is roughly a 17% drop from the current industry average.
Meanwhile, as demand slips, the c-store industry continues to add more fueling sites. In 2013, that total of 126,000, according to NACS, reflects a more than 21% increase over the past decade.
Something—or rather, someone—has got to give.
“It means more people in a price war over a shrinking pie,” says Walter Zimmermann, senior technical analyst for United-ICAP, Jersey City, N.J., who helped frame this calculation. “This industry is at the crosshairs of so many turbulent issues. To succeed here, you will have to reinvent yourself.”
“With declining fuel demand from demographic changes, [and] more efficient vehicles, there has to be a decline in the number of retail c-stores; it can’t just keep growing,” says David Nelson, founder and president of Finance & Resource Management Consultants Inc., a retail study-group facilitator, and professor of economics at Western Washington University in Bellingham, Wash.
“Some of these sites have got to leave the industry and move to non-petroleum uses,” he continues. “You can’t keep building more and more facilities with declining demand and have the economics work out for people.”
It is not Judgment Day yet. According to NACS’ same-firm sample, fuel gallons inched up 0.9% in 2013. Nelson’s own study-group same-firm sample shows more fuel sold per retail location in the 12 months ending January 2014 than the 12 months ending January 2013. But from his standpoint, this is not evidence of revived demand, but rather a small blip against a backdrop of long-term decline.
And not everywhere and everyone would be hit by that same 17% decline in gallons. In some markets, notably energy-boom states, demand is positively rocketing. For big-box and new-era retailers, gallons overall continue to grow. But for everyone else, in most of the states without 2% unemployment and record income growth, it’s set to be a street fight over a shrinking share of gallons.
“The industry is due for right-sizing,” says Scott Barrett, vice president of client success for Kalibrate Technologies, Florham Park, N.J., which provides fuel market analysis services. “As demand falls, the product offer changes, and traditional gas stations and nozzles will disappear from the marketplace.
“The folks winning are those who can weather the storm of the demand drop and find other ways to improve profitability, whether it is food offers, an enhanced c-store offer or a more broad fuel market offer.”
“Volume as we knew it peaked 10 years ago,” says Mike Thornbrugh, spokesperson for QuikTrip Corp., Tulsa, Okla., referring to overall market demand. “That and more and more pipes of business are entering the market as we’re entering their market. It’s old-fashioned slug-it-out retail. We plan on lasting 15 rounds.”
QuikTrip, with nearly 700 sites in 11 states, has honed its Generation 3 stores for this environment; the sites are designed to drive inside and outside sales partly by making the lot easier to maneuver.
“The old traditional convenience-store-vs.-convenience-store model is over,” says Thornbrugh. “We’re competing against everybody and everybody is competing against us. The next five to 10 years will be interesting to see who is going to remain standing and who is not.”
For Santa Clara, Calif.-based Robinson Oil Corp., California gasoline demand peaked in 2006, a year before much of the rest of the country. The chain has 34 Rotten Robbie sites throughout the state, which over the past seven years has seen an 8% drop in gasoline volumes. And according to some estimates, it could see a drop of a billion gallons by 2020 because of government policy and consumer migration to more fuel-efficient vehicles.
“As volumes decline, the question is: Can they decline less at your stores than competitors’ stores?” says Tom Robinson, CEO and president. “You can do that by spending money on stores, trying to upgrade programs, trying to upgrade your offering, trying to use technology as a way to build connections or relationships with consumers.”
“I don’t think there’s a single thing we’re going to do that’s going to be that [magic] bullet,” Robinson continues. “All of the above is a way that companies are going to survive and prosper.”
CONTINUED: The Nature of the Decline