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AUTO Article by Dan Fallon
July 22, 2008
Fuel price spikes have been fairly common over the last decade. The primary impact of those spikes was that a small percentage of customers reacted by seeking out lower cost retailers such as ARCO or one of the various hypermarketers. Since the spike was in the 20¢ - 30¢ range, there was a fairly insignificant increase of a penny or two in the dealer credit card fees and, over time, most of those customers who left, gradually came back because convenience won out over a few cents per gallon difference in price. If there was an impact on the value of the business, it was short-lived and minor.
Now, we are in new, unchartered territory. Over the past year (July '07 vs. July '08) the retail prices have spiked $1.32/gal. per the Energy Information Administration of the US Gov't. Not only has that driven customers to lower cost retailers, but many have simply cut back on their driving and stayed home. Consumption is down between 3% and 5% over last year at this time. (Wall Street Journal article in early July stated 3.3%). This reduction in consumption combined with the migration to lower cost providers has resulted in a net loss of volume in the 10% range for many. The high price of fuel has finally changed behavior of the American consumer. If prices return to the "glory days" of $3.00/gal or less, those same consumers will, I predict, gradually return to their previous driving and buying patterns. If prices continue to rise, as many have predicted, we will see a further reduction in consumption.
The impact of reduced consumption is fairly obvious. Lower sales leads to lower profits which leads to lower values. A few dealers may be able to counter the reduced demand with higher margins and still maintain or improve their bottom line. Here's why that won't work for most: credit card fees. This is the elephant in the room that must be addressed. These fees have an insidious effect on most dealers. I review P&L statements of gas stations daily and the increase in credit card fees has been staggering. If the wholesale price of a pack of cigarettes goes up a nickel, we can assume it goes up a nickel for everyone and the odds are that most dealers will simply raise the price of the product and maintain their previous margin. Not so with fuel. ARCO's business model is predicated on predominately cash sales and the credit card fees at the hypermarket stations are less than at the average major branded gas station. If the credit card fees increase by 5¢/gal, which it has for many dealers over the past 12 - 18 months, he has two options, neither of which is very appealing. Raise the price by that same 5¢ to maintain the same net margin as before, and you find yourself with a much wider than comfortable spread between your street price and the ARCO/Costco/Safeway street price. Or, he can choose to absorb it, resulting in a noticeable decline in profits.
According to a NACS (National Association of Convenience Stores - the Association for convenience and petroleum retailing), 67% of in-store sales are paid for with a credit card. It is a higher percentage for fuel purchases. In a recessionary economy, credit card usage will increase. Credit card fees are now the second highest item on the expense ledger following labor expense. According to the 2008 State of the Industry Handbook, published jointly by CSP (Convenience Store/Petroleum) and NACS, the credit card fees have made a whopping impact on operators. Nationally the credit card fees alone are more than double the industry profits! The scariest part of the story is that they are basing all of their charts and statistics on the data between 2006 and 2007. The impact of the changes in this area between 2007 and 2008 will be significantly greater.
The second largest challenge in the sales of gas station properties today is financing. While the interest rates have decreased over the past 12 - 18 months, the underwriting requirements have become much stiffer. SBA issued new guidelines specifically for gas station properties which will make it much more difficult for stations to be financed with SBA loans. Conventional loans are still available but they typically require a much higher down payment, often in the 25% - 35% range and increasingly, lenders want to see a borrower with significant gas station experience. We see more and more lenders withdrawing from the gas station lending business---Sterling Savings being the latest. These financing challenges will put downward pressure on values and also a lot of pressure on sellers to consider some seller financing. Seller financing was very common in the 1980's when banks were very afraid of gas station lending, primarily because of environmental concerns. Over 75% of the sales of gas station properties involved some seller financing.
In a more general sense, there is a growing fear and uncertainty in the marketplace resulting in a cloud of caution. Many choose to wait to buy, which is a symptom of any slowdown in the economy. The prospect of a dramatic increase in capital gain tax rates, if Obama is elected, weighs on many gas station property owners. Drive-offs are on the rise. The cost to maintain adequate fuel inventories on hand has impacted available working capital and is additional cause for concern among lenders. Oil company divesting, a very common trend, adds more confusion to the marketplace. Some oil companies, especially 76 and Shell, are selling properties to their dealers at higher than market value and that will shore up the sale comps. This could help some sellers in the appraisal and financing process. Many others, ARCO ampm for instance, seem to be selling at below market rates, which will create lower price sale comps. It takes a while for these comps to reach appraisers, but this will add to the downward pressure on values. According to NACS, only 3% of the nation's gas stations are owned by major oil companies and we know they are continuing to divest rapidly.
There are no easy fixes for the credit card fee crisis. Some dealers will offer discounts for cash. Oil companies discourage this policy and having two sets of prices can be confusing for the consumer. Hank Armour, the President and CEO of NACS is calling on Congress to pass legislation that allows the retail community to negotiate fees with credit card companies. This Congress, perhaps the least effective in recent history, is not likely to respond. Another solution is to simply get better at what we do. Some dealers will respond by identifying new profit centers, increasing margins on some products, adding espresso stands, or finding ways to reduce overhead.
There are some bright spots. First and foremost, the greater Seattle market and the Northwest in general are faring much better than the rest of the country. Our job base continues to grow, thanks largely to the high tech sector. Boeing is stable. Housing is off but nothing like California and the rest of the country. In fact, many of today's buyers for gas stations are coming here from California and other economically depressed areas of the country. The 2010 Winter Olympics in Vancouver will bring tens of thousands of guests to the Northwest and be an economic shot in the arm. The weaker dollar has been a magnet for Canadians searching for bargains south of the border. Migration of both Koreans, East Indians and others to the Northwest remains strong and they make up a significant segment of gas station buyers. There are few new competitors coming into the marketplace.
There is some solace in knowing that the impact to other industries has been more severe. These include residential construction and home building, banking, the auto industry, boating, motel and travel industry and all of those others who support these groups.
So, how does this impact the individual dealer who may want to sell his gas station property? At the risk of oversimplification, it still comes down to cash flow and projected cash flow. Regardless of the reasons, if your cash flow is declining, then the value of your business is declining. Demand for gas station properties has declined. Whatever your gas station was worth six months ago, it is most likely worth less than that now. There are fewer qualified buyers in the marketplace. Sellers need to be flexible. Seller financing will help. If one believes the market conditions will improve, some will choose to wait. If you believe that gas prices will continue to rise, and income will decline, selling now may make more sense.
Patience and flexibility---if you want to sell your gas station, these are two words you will hear a lot. Gas station dealers, as a group, are a resilient lot. They have faced tough times before and weathered the storm. They will do so again.
(Dan Fallon, Broker/Owner of McCallen & Sons, a firm specializing in sales and marketing of gas station properties, is a regular contributor to the AUTO Bulletin and may be contacted at 425 822-9752 or via e-mail at
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