FRAMINGHAM, Mass. — While retail fuel margins remain the most volatile earnings stream for a convenience and fuel retailer—mainly influenced by the wholesale price of fuel—the trend for the next few years is definitively upward. And while we will still have “The Big Inning” of incredibly strong fuel margins and periods of tight margins, the annual average retail fuel margin for both convenience stores and truckstops will still increase over time.
In 2012, national retail gasoline margins were 15 cents per gallon (CPG) with diesel at 17 CPG. Today we are at 19 CPG and 25 CPG, respectively. In fact, looking at seven-year tranches going back to 1991, national average retail gasoline margins have increased each time. For example, over the most recent past seven years, gasoline margins averaged 21.5 CPG. The seven years before that, they averaged 16.1 CPG. And the seven years before that, they averaged 12.6 CPG.
Seven years from now we should expect 27-cent margins in gasoline and 32 cents for diesel. What is driving this? There are four key trends at work. They include …
1. Industry consolidation
There are 153,500 retail gasoline stations with 35,000 controlled by firms of more than 200 sites and 26,000 controlled by firms with 500 or more sites. With more consolidation and mergers and acquisitions, which is inevitable, margins will improve as they always do in consolidating industries that are achieving scale.
Meanwhile, there are 2,200 truckstops in the United States with the five largest operators controlling 1,700 sites. While the truckstop industry has pretty much finished with its consolidation phase, there are still 500 single-site truckstops that will be consolidated among the big three: Pilot Flying J, Love’s Travel Stops & Country Stores and TravelCenters of America.
2. Stealth pricing
The street sign was always the driver to compressing retail margins, but today in the truckstop industry only 30% of purchases are off the posted street sign and 70% are purchased on a contract, rebate or loyalty system. While the retail gasoline market has not experienced the same growth in contract gallons, the current 80% purchase rate off the posted street sign is declining rapidly as proprietary loyalty programs and companies such as First Fuel Banks push internet and social-media pricing tied to merchandise purchases. The gasoline price sign will still drive customers to the site, but technology will now allow retailers to identify and target their most valuable customers, driving them to a higher-margin inside purchase.
3. Abundant U.S. fuel supply
We are definitely in the era of ample supplies. U.S. production is now 10 million barrels per day (bpd) and should exceed 15 million bpd by 2025. The United States is a net exporter of petroleum and will remain so. As any commodity trader will confirm, a net exporting country in a commodity by definition will always have the cheapest price in that commodity in the world analogous to food, fiber products and other commodities.
4. The growth of the independent marketer and private-label fuel
In 1976, 85% of stations flew the flag of a major. Today that is down to 44% and falling faster. Majors were always reluctant to raise prices because of publicity concerns and were very aggressive on retail prices when crude was expensive or refining margins wide. The development of liquid and transparent wholesale markets that independent marketers could access without the constraints placed on them by their major brand has added stability and profits to retail fueling.
In conclusion, while we will still have “The Big Inning” and regional differences in profitability, we may be entering the era of “The Big Decade.”
Joe Petrowski serves as director of fuels for Yesway, where he oversees all operations of the fuels team, including pricing, procurement and management of the firm’s fleet services program. He also works closely with the company’s senior executives to help manage Yesway’s growth, improve operations and implement the firm’s business plan. Prior to joining Yesway, Joe was the CEO of Cumberland Farms Gulf Oil Group, a diversified petroleum and retail c-store holding company located in 29 states with more than 8,000 employees and $13 billion in annual revenues. After leaving Cumberland Farms, he founded Mercantor Partners, a private-equity group focused on downstream energy distribution and retail convenience. He remained chairman of Gulf Oil through 2017 and oversaw the sale of Gulf Oil to ArcLight Capital Partners in 2015.