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
The Nature of the Decline
According to official numbers, the United States hit its peak in gasoline consumption in 2007, at the time using 9.29 million BPD. For that year, NACS reported a nearly 18% jump in motor fuel sales, observing in its annual State of the Industry survey, “The demand for motor fuel far exceeds the supply.”
At the time, few anticipated the coming recession, and a new demographic—the millennials—was seen as more of a quirky generational novelty than a major force of change. But five years after the Great Recession officially ended, demand continues to fall.
“I’m led to believe most of the decline we’re seeing in gas demand is not cyclical in nature at this point, but really is a true long-term decline,” says Nelson.
While demand has typically bounced back from previous economic pits, this time it has two massive weights on its ankles: tougher CAFÉ standards, and demographic trends that put fewer drivers on the road, driving less.
Consider the following:
▶ Population growth is set to slow from an annual rate of 0.84% in 2012 to 0.5% by 2060, according to the U.S. Department of Commerce.
▶ The population is growing representatively older as baby boomers transition into their golden years, with those 65 and older set to nearly double their share of the population by 2040.
▶ Older folks drive less than half the average miles of those who drive the most, the 35- to 54-year-olds. This group of “heavy drivers” will shrink from nearly 30% of the population to just less than 25% by 2020.
▶ Meanwhile, these future 35- to 54-year-olds—the millennials—are getting driver’s licenses later and showing less of an affinity for the automobile. The percentage of 16- to 24-year-olds with a license has fallen to the lowest level since 1963, according to a report by the U.S. PIRG Educational Fund. This group will begin representing the bulk of 35- to 54-year-olds by 2030.
It’s true that part of their driving habits may be economic: Millennials suffer the highest unemployment rate of any demographic group, according to a study by the Pew Research Center. But this group also has less of a loyalty to the automobile. An annual Zipcar survey found that more than 50% of millennials would drive less if other transportation options were available, and they were more likely to cite the cost of owning a car as a major difficulty.
Let’s get back to the structural element of demand decline: the tougher CAFÉ standards. By 2016, automakers must meet an average fuel economy of 35.5 mpg, which will then have to ratchet up quickly to meet the 54.5-mpg standard looming only 11 years away.
“You can’t look at it like one used to, where you would see lower prices and people would suddenly rush to get SUVs and the big Volvos,” says Tom Kloza, chief oil analyst for GasBuddy. com and OPIS, Wall, N.J. “CAFÉ standards pretty much indicate that automakers are going to be forced to average out and have a lot of very sensible vehicles to offset the insensible ones.”
Geographic Dynamic
Kwik Trip Inc. saw the writing on the wall in 2002.
“What we were making assumptions on is … we knew that vehicles were going to get more fuel-efficient, which obviously is going to be less gallons,” says John McHugh, manager of corporate communications for the La Crosse, Wis.-based chain. (Just a few years earlier, Congress had lifted a freeze on increasing fuel-efficiency standards.)
“Second, we operate in Minnesota, Wisconsin and Iowa, and we know demographically that there are just not a lot of people moving to those three states,” McHugh continues. “Third, we felt that with the price of fuel, the consumer was going to be more energy-conscious about their driving habits.
“If we see growth, it’s because, frankly, a competitor went out of business.”
Greater growth for Kwik Trip has come from a focus on grocery, leveraging its vertical-integration model for its cost efficiencies, and diversifying into alternative fuels—all as a means of making the business independent from gasoline.
“Frankly, we just have good locations and we sell a lot of things,” says McHugh. “So if in 20 years we’re not selling any fuel, we still have good locations to do some type of retail business.”
Jim Fisher, CEO of IMST Corp., a Houston-based site analysis firm, says his clients are seeing about a 6% to 7% decline in fuel demand. However, this is highly dependent on geography. Core urban areas and older suburbs with shifting demographics are seeing some of the greatest drops.
“The biggest enemy to growing suburbs is the government,” says Fisher. “It would rather everyone be an urbanite, using public transportation instead of private vehicles.” Millennials’ choice of residence, in urban markets or the suburban sprawl, will largely determine which type of market wins out, he says.
Millennials show a greater interest in urban areas; research by The Nielsen Co. reveals that 62% would prefer to live in mixed-use communities similar to those found in urban centers. But it is unclear to what degree their attitudes will change as they begin to establish families.
“It all depends on where millennials track,” says Fisher. “They’re tracking back into the metro areas and not into the ’burbs.”
The more focused and concentrated the population, the less demand for fuel. However, there is an opportunity for retailers to go back into urban areas abandoned years ago by major oil. “You can build a really strong, high-volume location here in terms of store sales and fuel,” he says, citing that many former old neighborhood service stations are being redeveloped as cities look for more revenue.
From here, one can make educated guesses about which regions will see the greatest demand destruction. The Northeast is home to several states—including Maine, Vermont, New Hampshire and Connecticut—with the highest median age in the country, according to the U.S. Census Bureau. The Eastern United States also hosts nine of the top 10 markets with the greatest concentrations of baby boomers, according to Nielsen.
The West Coast, where states have worked to cut consumption and diversify the fuel base, is another key area of demand decline. According to a Bloomberg New Energy Finance estimate, California could trim gas demand by up to 9% by the end of the decade. The state also has three of the top 10 markets with the highest concentration of millennials.
CONTINUED: Who's the Most Vulnerable?
Winners and Losers
Even within a market earmarked for big demand declines, retailers can still find growth opportunities—especially if they are of the “new era” variety, the large, privately owned, highly profitable retail chains that have assumed major oil’s position as the market leader.
“Some of these big c-store retailers—QuikTrip, Kum & Go, Wawa—they all have very good brand concepts,” says Debbie Miggins, vice president of business development for Kalibrate.
“They’re all company-owned and -operated, so they have a big consistency in their outlets across the network of sites,” she continues. “The consumer knows if they go into one of their stores, they know … what to expect vs. a retailer that is a network of dealers and jobbers, where there’s a very inconsistent feel across their stores.” Big-box retailers will also keep a solid hold of market share.
Who’s the most vulnerable? The fuel- dominated “gas bars,” many of which popped up in the 1980s and 1990s. “They are going to be in a perpetual state of decline,” says Fisher. “The old-generation, major-oil company sites with 1,600-square-foot stores with two MPDs on each side—that’s where fuel demand will go down.”
Longer term, midsize retailers are going to become an endangered species. “Negative is a small to midsize chain big enough [that] it has to have staffing positions for buyers, supervisors, accounting, etc.,” says Nelson, “but not so big it is starting to achieve real economies of scale with regard to leveraging technology, operations and so forth.”
If these operators are struggling to turn a profit, they could move to a dealer model. Another choice: sell to a larger chain, which can then realize the economies of scale. Or adopt a franchise model, which would provide some operational discipline and allow them to retain ownership of the site.
In the end: fewer, bigger operators—and more single-site operators as midsize retailers move to dealer models. “That means there will be fewer traditional midsize c-store chains,” says Nelson. “They won’t disappear because some do a very good job and are excellent, and some will probably grow up and become tomorrow’s giants.”
For them, location becomes key—and not simply the best street corner in town, but the best town in the region.
“Maybe my town is not a good key site,” Nelson says, “because of what’s happening to the broader movement of people to the coastal areas of the country, to Southern areas of the country, energy boom areas of country.”
“That’s the foundation of your outlet,” agrees Miggins of Kalibrate. What else determines the better facility? The number of fueling positions, size of the store and lot, ease of egress and ingress, and number of parking spaces, all of which depends on the competition.
From here, the winning retailers will figure out how to drive people to their site for fuel and then drive them inside the store, says Norman Turiano, founder of Turiano Strategic Consulting, Cape Coral, Fla., and former senior manager of fuel business development for Wawa Inc. The biggest factor from there: the customer experience on the forecourt, which he expects to change greatly over the next 10 to 15 years, especially as retailers upgrade payment systems to meet new standards such as EMV.
“In my mind, right now we are in the perfect storm: the nexus of the opportunity between payment changes, dispenser changes and loyalty’s evolution,” he says.
“Convenience is what we’re called, but it’s really all about the customer experience,” Turiano continues. “At the end of the day, there’s the forecourt offer, the customer experience on the forecourt, and what’s being offered inside the store from both a product and customer experience standpoint. We can meet all of these demands well into the future, even with declining fuel gallons.”
—Additional reporting by Kelly Kurt
Where Millennials’ Loyalties Lie
In its annual survey of millennials, car-share firm Zipcar Inc. uncovered how much more this demographic values smartphones over cars.
Question: In your daily routine, losing which piece of technology would have the greatest negative impact on you?
| Age group | TV | Mobile phone | Computer/tablet | Car |
| 18-34 years old | 10% | 39% | 25% | 26% |
| 35-44 years old | 13% | 28% | 26% | 33% |
| 45-54 years old | 12% | 14% | 24% | 49% |
| 55 years or more | 21% | 10% | 25% | 44% |
Source: Zipcar Inc.
Losing Markets
A selection of markets from each of the five Petroleum Administration for Defense Districts (PADD) reveals an overall decline in gasoline volume.
| Market | Annual average % change |
| Tulsa | 5.3% |
| St. Louis | -6.0% |
| Seattle-Tacoma Olympia | -0.6% |
| Portland/Vancouver | -2.1% |
| Nashville | -0.3% |
| Lubbock | 0.9% |
| Greater Los Angeles | -0.9% |
| Little Rock | -1.8% |
| Greater San Francisco | -0.8% |
| Greater Orlando | 0.4% |
| Front Range | -2.3% |
| Connecticut | -1.8% |
| Chicago | -1.8% |
| Charlotte | -1.5% |
| Atlanta | -4.5% |
| Albuquerque | -0.6% |
Source: Kalibrate Technologies
CONTINUED: Why EIA's Fuel-Volume Data Is Flawed
About Those EIA Numbers
While the Energy Information Administration (EIA) is considered the “official” word on fuel demand, the way it measures and projects demand is messy and, some argue, highly flawed.
“They exist in a realm where decisions made by consensus is among the different methods of calculation,” says Walter Zimmermann, senior technical analyst for United-ICAP, Jersey City, N.J. Political pressures have a skewing effect, he says, one that tends to make fuel demand look stronger than it is. “It’s reasonable to presume the projections are too rosy. The question is: How much too rosy?”
“The EIA doesn’t actually measure sales at the pump; they look at the disappearance of inventory, or the accumulation of inventory, and they look at production, and imports and exports,” says Tom Kloza, chief oil analyst for GasBuddy. com and OPIS. “One of the problems is they’re looking at export estimates, and they don’t really have a weekly export number, so you’re flawed from the start.”
This soup of data—month-old customs figures, production and inventory surveys— has a lot of noise in it. “The great tendency is to overestimate weekly demand numbers,” Kloza says. “Then 60 days after the fact, when they have much better resolution, they inevitably revise the numbers. More times than not, when they revise, they revise domestic gasoline demand lower.”
The estimates are also vulnerable to the vagaries of fuel buying, he says. Say the EIA bases an estimate on a day when wholesalers and distributors are trying to beat a price move. If prices are set to move higher at 6 p.m., wholesalers will dispatch drops to get ahead of that price. If prices are dropping, an inordinately low demand number could result because distributors are planning to wait until their current inventory drains lower to save money on the next load.
To get a better handle on actual gasoline demand at the pump, OPIS has begun surveying a representative sample of 5,000 U.S. fuel stations. A recent survey shows average same-store volumes off 5.4% compared to the year prior, for the year ending April 26, 2014. While OPIS’ station survey revealed a 3.88% average volume decline year to date, the EIA reported a 0.85% increase, showing how the official demand measurements can contradict what is actually happening on the site level.
Percent of Stations with Volumes Up or Down
| Criteria | Last year | Last month | Last week | Four-week rolling |
| Over 10% gain | 34.4% | 23.8% | 9.7% | 29.5% |
| 5% to 9.99% | 6.1% | 13.6% | 11.8% | 10.4% |
| 2% to 4.99% | 4.5% | 9.5% | 13.7% | 7.7% |
| 0% to 1.99% | 3.2% | 7.5% | 9.8% | 5.3% |
| 0% to –1.99% | 3.2% | 6.8% | 10.8% | 5.2% |
| –2.0% to –4.99% | 5.7% | 9.6% | 14.8% | 8.3% |
| –5.0% to –9.99% | 8.4% | 13.1% | 16.6% | 9.9% |
| Over 10% drop | 34.4% | 16.2% | 12.7% | 23.6% |
| Overall up | 48.3% | 54.3% | 45.0% | 53.0% |
| Overall down | 51.7% | 45.7% | 55.0% | 47.0% |
| Average change per site | 1.6% | 2.1% | -0.8% | 1.4% |
| Median change per site | -1.1% | 1.1% | -0.8% | 1.2% |
| Most common change per site | -3.0% | -1.3% | -0.8% | 1.4% |
Source: OPIS
Peak Everything
By multiple measures, gasoline demand has seen its peak, with gallons consumed beginning to decline as early as 2005, according to research from the University of Michigan.
Highlighted numbers=Peak demand
| Year | Measure | ||
| Gallons Consumed | Miles Driven | Registered Light-Duty Vehicles (in thousands) | |
| 2000 | 126,004 | 2,523,346 | 212,706 |
| 2001 | 127,081 | 2,569,980 | 221,821 |
| 2002 | 130,691 | 2,624,508 | 220,932 |
| 2003 | 136,691 | 2,655,987 | 222,857 |
| 2004 | 138,819 | 2,727,054 | 228,276 |
| 2005 | 136,288 | 2,749,472 | 231,905 |
| 2006 | 135,594 | 2,773,025 | 234,525 |
| 2007 | 126,393 | 2,691,034 | 235,678 |
| 2008 | 120,515 | 2,630,213 | 236,448 |
| 2009 | 121,368 | 2,633,248 | 234,468 |
| 2010 | 123,039 | 2,648,456 | 230,444 |
| 2011 | 123,693 | 2,650,458 | 233,841 |
| 2012 | 123,635 | 2,664,445 | 233,761 |
Sources: Michael Sivak, University of Michigan Transportation Research Institute
CONTINUED: How Retailers Are Fighting Back
Demand Defense
A look at different tactics three retailers have adopted to deal with declining fuel demand.
Tactic: Upgrade
Retailer: Tom Robinson, CEO and president, Robinson Oil Corp., Santa Clara, Calif.; 34 Rotten Robbie stores
Rotten Robbie sites are primarily located in metropolitan markets. In the San Francisco Bay area, older facilities on smaller lots are common. Land is very expensive, so in the past, Robinson had been reluctant to make investments in locations without a clear ROI. But no longer.
“We’ve been much more in the mindset that ROI or not, we’re going to upgrade locations,” he says. The chain has many buildings without room for any expansion. “Our two choices are either upgrade them or we get rid of them. And we’re not to the point [that] we want to get rid of them.”
Rotten Robbie has also installed VeriFone LiftRetail suggestive-selling technology at its registers, and introduced couponing at the dispenser, “so either you’re advertising or providing some opportunity to try and encourage somebody to go from outside to the inside and get something.”
Tactic: Loyalty
Retailer: Steve Quinette, vice president of sales, U.S. Oil, Appleton, Wis.; 35 Express Convenience Centers
At U.S. Oil, which has 35 company-owned Express Convenience Centers, the focus has been on its Open Road Rewards loyalty program, in which customers can accumulate cents off at the pump with the purchase of a promotional item inside.
“Buying gasoline is such an emotional thing,” says Quinette. “If we can make it easier for that person to come in and not only buy gas but have convenient items and save money … that’s helping not only our inside sales but our fuel sales with the additional frequency of stops.
“I think we’re going to have to deal with demand decline as part of our everyday business going forward. What are we going to do to set ourselves apart to not only maintain but grow our market share?”
Tactic: Technology
Retailer: Scott Zaremba, owner, Zarco USA Inc., Lawrence, Kan.; Nine Zarco USA stores
Zaremba was recently hit with heavy competition from two large chains with an aggressive pricing strategy and large-format stores.
“What I’m seeing today is something I’ve never seen before,” Zaremba says. “It started in ’07 and ’08. We hadn’t seen a decline in consumption. Now I’m seeing a decline and a lot of majors, but not major oil—major retailers.”
Rather than play the price game, he focused on pump-side technology to enable orders of Zarco’s Sandbar Subs from the forecourt.
At the pump, a touch screen invites customers to order a sub. Customers select the type of sandwich, spreads and other toppings, then enter their name. The order is printed inside the store’s kitchen for assembly. The customer must pay inside, but in the next version of the app, customers can pay at the pump.
C-Store Demographic Trends
According to The NPD Group’s Convenience Store Monitor, c-store traffic fell 3.5% in the first quarter of 2014 vs. first-quarter 2013. Those who visited conventional c-stores slightly increased their fuel and in-store purchases for this time period.
“There are only a few ways to get more traffic in the store—get more consumers, have them shop more often—but you are challenged to even get them into the parking lot,” says April Moffa, convenience store industry analyst for NPD, Port Washington, N.Y. Penetration of consumers at c-stores is also down 0.4 points to reach 49%.
Broken down by age group, the greatest attrition in visits is among baby boomers.
| Demographic | Percent change |
| 17 & younger | 3.1% |
| Millennials (18-34) | 29.1% |
| Generation X (35-44) | 18.7% |
| Boomers (45-64) | 36.3% |
| Matures (65+) | 12.8% |
Source: The NPD Group
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