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LEXINGTON, Ky. – Gasoline dealerships and energy experts are weighing in about the uncertainties of gas price and dealership profits as they move deeper into 2014.
2013 profit margins up but what about 2014?
It was a good year in 2013. Net profit margins for the nation's service stations, 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 (COGS), which were about 87 percent of sales on average.
But because margins were good in 2013 doesn't mean that the industry thinks they'll be good again in 2014. The National Association of Convenience Stores observes that gross margins were up, to 5.4 percent. "With respect to margins, they were higher last year, but you have to also put it in context – 5.4 percent gross margins are slim by anyone's calculations," says Jeff Lenard, NACS spokesman.
Ali Mazarei, an Arco gas station owner in Southern California, observes that despite the fatter margins in 2013, dealers have some major obstacles ahead in 2014 that will likely lead to higher gas prices for consumers, but lower profit margins for dealers. "We are going to be in trouble soon," he says. Mazarei runs through a list of legal issues that he and other franchisees want to curb.
Fuel consumption trending down
There is the problem of vehicles having better and better gas mileage. When President Obama came into office, he set into motion in the spring of 2009 a new national policy of increasing vehicle gas mileage, requiring an average fuel economy standard of 35.5 miles per gallon by 2016. That translates into less fuel demand at the gas pump (see graph). Just last week, the President announced while visiting a Safeway supermarket distribution center in Maryland that the Department of Transportation will consult with heavy truck manufacturers to put tougher fuel-economy standards into gear for trucks by spring of next year.
Jeff Lenard, vice president of strategic industry initiatives and spokesman of the National Association of Convenience Stores, tells Blue MauMau "It is clear that there is continuing demand destruction with fuels. We have communicated to members what is happening and what they may want to do to adjust, whether by growing in-store sales or looking at alternative fuels. We have a new research paper coming out next week – look for it perhaps on Wednesday."
That decrease is offset by more natural gas being used this winter. The U.S. Energy Information Administration, the statistical and analytical agency within the U.S. Department of Energy, observed this month that temperatures east of the Rocky Mountains have been significantly lower this winter. That is resulting in a higher natural gas prices. "Cold weather also contributed to a new record-high withdrawal of natural gas from storage and a surge in natural gas spot prices," it reported.
Wages, ObamaCare, ethanol, card fees — i.e. regulation problems
Dealer Mazarei is concerned about California's rise in minimum wage this year. California passed a law increasing the minimum wage from the current $8.00 for most employees to $9.00 on July 1. It will then increase to $10.00 per hour in January of 2016. Federally, "Many operators pay minimum wage since gas station employees are usually first jobbers. This increase in cost will surely raise prices, since cost is always passed down to the consumer," says the Arco service station owner.
As if higher wages weren't enough of a concern, quite a few gas dealers aren't happy with the Affordable Care Act. "For multi-site operators, the cost [tax penalties for not providing ObamaCare to employees] will cause increases across the board," says Mazarei, who is also vice president of the Service Station Franchise Owners Association.
Ethanol has gas station owners worried. Almost all gasoline in the United States has roughly 10 percent ethanol. Congress passed a law that required ethanol be blended into gasoline starting in 2005 in order to cut foreign oil dependency. It expanded the program in 2007, mandating yearly increases in the total amount of ethanol blended into gasoline nationwide. It was set at 15 billion gallons for 2015, with more annual increases to come. Restaurateurs feel that the mandate inflated the price of grain, increasing the cost of goods and deflating their own bottom line.
Now E15, a 15 percent ethanol to gasoline blend, is coming to gas pumps to be used by light vehicles. It has dealers worried. Mazarei warns that station equipment might have to be changed or upgraded. "This is a major capital investment," he says, mindful of franchisees' bottom line. He also cautions about an increase in liability from the new ethanol blend, since some cars on the road may be damaged by the new formula. "Who is responsible for the damage?" asks the gas station owner.
Finally, a federal settlement over high swipe fees charged by credit card companies is a concern to franchise owners. Merchants through various associations filed a lawsuit in 2005 to challenge the high fees as an anti-competitive practice. A settlement was reached in 2012 stipulating that retailers could add their own fees to consumers to help pay for the credit card fees. But the National Association of Convenience Stores, the National 7-Eleven Franchise Owners Association, Service Station Franchise Owners Association and others have rejected that settlement. Not only are the fees still too high, but franchisees are critical because there is still a lack of transparency with the credit card vendors over those fees.
NACS CEO Henry Armour spoke in opposition to the proposed settlement, saying, "This settlement is worse than going to court and losing."
As dealers, merchants and their associations fight and appeal the ruling in 2014, the outcome is far from certain.
"This is the second highest expense in gas station operations, even over rent fee," says Mazarei. The gas station owner adds his worries: "With no resolution in the future yet, it is going to get worse."
In looking at the various regulations and gas trends, franchisee Mazarei says, "These are very scary scenarios in the near future." He believes net margins for gas dealerships will be shrinking in the near future rather than expanding.