How high gas prices hurt the Kwikkie Mart.

Commentary about business and finance.
May 14 2004 4:05 PM

Pay at the Pump

Who's profiting off high gas prices? Not the owner of the Kwik-E-Mart.

The average retail price for unleaded gasoline in the United States on May 10 was $1.94 per gallon, up 45 cents from a year ago. With oil pushing $41 a barrel, prices are likely to rise further. And the more people spend on gas, the less they have to spend on everything else. Wal-Mart's CEO expressed concern Thursday that high gas prices "are taking more than somewhere around $7 a week out of our average customer's spendable income."

The companies that produce and sell oil are the beneficiaries of the squeeze. But not everybody in the gas business profits from rising prices. Drivers aren't the only victims when gas placards hit $2 a gallon. Equally hurt are the people who sell three quarters of the gas consumed in this country: convenience store owners.(If you're a gas station with a significant retail presence, you're a convenience store, whether you're an Exxon, Mobil, or Wawa. Stations that have gas pumps—and only gas pumps—aren't included.)

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How do these unfortunate entrepreneurs get nailed by rising prices at the pump? Profit margins for gas, which are already slim, tend to shrink when prices rise. In 2003, convenience store owners reported an 8.8 percent mark-up * on gas, meaning if gas cost them $1.00 per gallon, they could sell it for $1.088. That's the lowest mark-up since 1985, according to the National Association of Convenience Stores. Add in credit-card fees—typically 3 percent—and the cost of distribution, which ranges between 2 and 4 percent, and the margins for gas are razor-thin, at the most a couple of pennies on the dollar.

And if you have to eat price increases, your margin slips further. That's what happens when gas prices rise. Convenience store owners buy gas every day or once every couple of days, and they constantly adjust their prices. But as this Energy Department report shows, it takes about 10 weeks for a change in the spot price of oil to filter fully into the retail price of gas, with about half the change working its way in within two weeks. This lag is a boon for convenience store owners when gas prices are plummeting: The price they pay to fill up their tanks falls rapidly, while the price they charge falls more slowly. But it's poison when prices are rising. Each day they pay more to fill up their tanks, but they're unable fully to pass on the hikes to their customers.

Gas-station owners take their time boosting prices—and lower their profit margins—because the gas market is both highly transparent and highly competitive. (How many businesses display their prices so prominently and publicly?) Owners frequently set their prices based as much on what the guy across the street does as on the price they pay to fill up their tanks. Many gas stations are engaged in a daily game of chicken with their competitors. And because of Internet sites like Gasbuddy.com, drivers can now check out prices before they leave home and plot their routes accordingly.

Rising gas prices hurt profits inside the convenience store as well as at the pump. When drivers spend more on gas, they're likely to spend less on Twinkies and Marlboro Lights. That's bad news for store owners, because the real money lies in junk food and coffee. Convenience stores owners mark up gas by an average of 8.8 percent, but the margins on potato chips, beef jerky, and those awful cheese-filled hot dogs is 30.8 percent. For the $337 billion convenience store industry, as NACS reported, fuel accounted for 65.5 percent of total sales last year but just 35.2 percent of gross margin. In other words, gas accounts for two-thirds of the sales but only one-third of the profits.

Finally, when prices rise, many gasoline retailers fall victim to a form of road rage: Drivers steal more gas.

It's difficult to feel too much pity for convenience store owners. After all, they make a living selling us addictive goods that aren't particularly good for us: gas, cigarettes, Hostess Sno Balls, and tabloid newspapers. But as you mutter under your breath in disbelief as you shell out $30 to fill up your Jeep, pause to consider the shrinking margins of the convenience store owner. He's feeling your pain.

Correction, May 17, 2004: The article originally described the difference between what convenience stores pay for gas and what they charge for it as an 8.8 percent "margin." That 8.8 percent difference is actually the "mark-up," not the "margin." Return to the corrected sentence.

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