FRAMINGHAM, Mass. -- When I began in this industry in 1974, the quintessential retail fueling site was the two-bay service station run by an independent dealer flying the flag of a major brand and providing auto parts, repairs, towing and, in certain locations, parking. My local station was a Sunoco-branded site in Brockton, Mass., run by a newly arrived Portuguese immigrant.
The classic portrayal of this American icon was a Norman Rockwell painting of a dealer with a greasy rag in his back pocket. In 1978, there were 60,000 of these “wrenches” throughout the United States. Today there are approximately 26,000 of these dealer locations among the 154,000 fueling sites in the United States. They are primarily run by independent business people, the majority being “new Americans.” What has changed besides the sheer number of these locations is that the underlying real estate is no longer owned and controlled by major oil but instead by mega-distributors (assured dealers) and the operators themselves (open dealers). The long and dramatic decline in the number of these sites was driven by five factors:
- TBA (tire, battery and accessory) legislation that no longer forced an oil supplier to insist on the dealer buying tires, batteries and accessories from the petroleum supplier.
- The rise of specialty shops for tires, oil changes, auto parts and routine maintenance.
- The growth in convenience chains, truckstops, hypermarts and grocery stores as the predominant fuel sellers in the United States.
- Legislation that in many cases granted right of first refusal on the underlying asset so that mega-distributors could no longer treat the dealer as a convenience store in waiting.
- The need for capital infusion that was hard to execute efficiently when the property owner and operator were divergent interests.
Running Some Numbers
Nevertheless, there are still compelling economic interests for both the owner/distributor and the operator in the 26,000 sites operating today. Consider the following example:
Financials (Per-Month Triple Net Lease)
| Category | Operator | Owner |
|---|---|---|
| Rent | ($10,000) | $10,000 |
| Repair/maintenance | ($1,100) | N/A |
| Insurance | ($500) | N/A |
| Taxes | ($600) | N/A |
| Fuel margin (60,000 gallons per month) | $7,000 | $3,000 |
| Other margin | $12,000 | N/A |
| Total | $6,800 | $13,000 |
In this example, the operator has an asset that, depending on cap rate and durability of the operator contract, might be worth $1 million. Change the rent stream, gallon volume or fuel margin split (here 13 cents per gallon to 5 for the operator) and the valuation changes.
For the operator, the $81,600 per year ($6,800 for 12 months) buys him or her a job. Again, change the volume, rent or fuel margin split along with other margin (bay service, towing, parking and a small c-store) and you may have a happy dealer—or a location headed for abandonment and credit risk.
Joe Petrowski is an adviser to BW Gas & Convenience, dba Yesway, Des Moines, Iowa, a c-store unit of Brookwood Financial Partners LLC, Beverly, Mass. He is also founder of Mercantor Partners LLC, a private-equity group focused on downstream energy distribution and retail convenience, and former CEO of Cumberland Farms and Gulf Oil.
Photo courtesy of Mike Mozart.
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