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Raleigh, N.C.—With some of the thinnest profit margins in retailing, gas stations gave a collective sigh of relief in 2013 as they experienced their strongest margins in years.
Net profit margins, on average, increased to nearly 3 percent, compared with 1.6 percent in 2012, according to data from Sageworks, a company that provides financial benchmarking and industry analysis. At the same time, sales among private gas stations were relatively flat, increasing only about 1 percent.
Gas stations in 2013 experienced less pressure on their margins from costs of goods sold, or COGS, which were about 87 percent of sales, on average. Fuel expense is the biggest component of COGS, according to Sageworks' financial statement analysis. Wholesale prices for resale ("rack" prices) fluctuated through the year, ranging from $2.587 a gallon to $2.989 a gallon for regular but ending 2013 slightly lower than they were at the start of the year, according to data from the U.S. Energy Information Administration.
Sageworks analyst Regan Camp said gas station owners may get grief from customers when gas prices rise, but they often see relatively little of the proceeds from a gallon of gas. Distribution and marketing – costs that include any profits earned by a gas station, transportation of the fuel to the station, advertising and "swipe" fees for payment cards – account for only 11 percent of the cost of a gallon, based on November 2013 data from the U.S. EIA.
"If you consider the fact that gas stations' margins are so thin to begin with, any fluctuation in COGS – even if it's not significant – can have a pretty dramatic impact on stations' ultimate margins," Camp said. "If they had big margins, a small fluctuation in costs may not impact them so much."
Franchise owner Ali Mazarei, who owns an Arco gas station in Southern California, points out that he has seen gas consumption struggle in 2013. He thinks margins in 2014 are not going to go up. "We have some major obstacles ahead of us, which will insure higher gas prices and lower margins," said Mazarei.
With a gallon of regular gasoline recently averaging $3.284 across the U.S, gas station owners have been taking home about a dime a gallon recently, compared with about a nickel a gallon in 2012, assuming the same price at the pump. In 2008, when prices at the pump hit a record $4.11 for regular, gas station owners for the year had a net profit margin of 0.9 percent.
Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies' operational performance.
Despite the profitability improvement in 2013, private gas stations still have lower net profit margins on average than most retailers. And the average net profit margin for privately held companies across all industries was more than 8 percent in 2013, according to data from Sageworks.
Retailers know consumers will go somewhere else to save a few pennies a gallon, so they keep the difference between the selling price and their fuel costs as low as possible, according to the 2013 Retail Fuels Report by the National Association for Convenience and Fuel Retailing. Indeed, while 71 percent of a store's total sales are motor fuels, only 36 percent of profit dollars are generated by fuels, the trade group said in its report. Many gas station owners try to make up for the thin gasoline margins through sales of other products, such as snacks and drinks.