Hidden Risk From Rising Gas Prices: The C-Store Impact
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Hidden Risk From Rising Gas Prices: The C-Store Impact July 2011 by Lassiter Mason and Juanita Schwartzkopf Focus Management Group
Table of Contents
The Impact of Higher Prices at the Pump 3-4
Scenario One: Margins at $3.50/gallon 3-4
Scenario Two: Margins at $3.75/gallon 4
How to React to Trends 5
How Focus Can Help 6
Contact Information 7
2 Hidden Risk from Rising Gas Prices: The C-Store Impact
The Impact of Higher Prices at the Pump
Higher fuel prices at the pumps are causing consumers may have lower priced fuel in inventory. Whether gas sells
to behave in some predictable ways, but with unexpected for one dollar per gallon or for five dollars per gallon, the
repercussions. The obvious impact of higher fuel prices operator’s margin remains relatively flat at about $0.15 per
is that consumers will tend to alter their buying habits, gallon. The real profits come from the retail sales inside the
spending less on other items because they are paying more store (tobacco, chips, soda, etc.).
for gas. The less obvious consequence of more expensive
A general historic guideline of C-Store economics is that
gas is that it can negatively affect cash flow for the opera-
fuel sales make up about 70 percent of total sales while in-
tors of gas station and convenience stores (C-Stores).
side store sales account for the remaining 30 percent (70/30
Though this may seem counter-intuitive, operators receive sales relationship). However, fuel sales produce only 30
only a few cents of margin per gallon of gas sold, sometimes percent of the gross margin while inside store sales account
having to sell at a loss to stay in line with competition that for the remaining 70 percent (30/70 margin relationship).
Scenario One: Margins at $3.50/gallon
Consider the hypothetical gas station/C-Store below. In of $500,000. A $0.15 per gallon margin on 100,000 gallons
Scenario One, the business sells 100,000 gallons of fuel of fuel would produce a gross margin on gas sales of just
per month at $3.50/gallon for total gas sales of $350,000. $15,000. Using the 30/70 margin relationship, the inside
Based on the 70/30 sales relationship, the store would also store sales gross margin would be approximately $35,000,
experience $150,000 of inside sales for total monthly sales and the total gross margin would be $50,000.
Table 1
SCENARIO ONE Monthly Gas Station Margins - $3.50/gallon
Gasoline Inside Sales Total Sales
Sales Distribution 70% 30% 100%
Price/Gallon $ 3.50
Gallons Sold 100,000
Margin/Gallon $ 0.15
Sales $ 350,000 100% $ 150,000 100% $ 500,000 100%
Cost of Goods Sold 335,000 96% 115,000 77% 450,000 90%
Gross Margin $ 15,000 4% $ 35,000 23% $ 50,000 10%
% Sales on Credit Card 70% 50% 0.64
Credit Card Fees at 2.5% 6,125 2% 1,875 1% 8,000 2%
Margin After Credit Card Fees $ 8,875 3% $ 33,125 22% $ 42,000 8%
Hidden Risk from Rising Gas Prices: The C-Store Impact 3The Impact of Higher Prices at the Pump
Gas margins are further squeezed by credit card fees at If fuel prices continue to rise, we could expect to see fuel
the pump, averaging 2.5 percent of the total transaction margins decrease as a result of additional credit card fees
amount. Normally about 70 percent of gas sales are made related to the higher fuel sales. As consumers have to spend
with credit/debit cards. Using Table 1, the $15,000 margin more on fuel, they will have less cash available for the dis-
on gas sales is reduced by another $6,125 for credit card cretionary purchases of high margin items inside the store.
fees before any of the cash generated is available to cover
general and administrative expenses.
Scenario Two: Margins at $3.75/gallon
Scenario Two illustrates the potential margin loss should Put into perspective, a sustained $0.25 cent increase at
gas increase to $3.75 per gallon with no change in total the pumps could remove $72,000 from C-Store cash flows
consumer dollars spent. The $0.25 increase in gas prices per year, all else remaining equal. This is cash that would
actually decreases the C-Store gross gas margins after credit normally be used to pay salaries, insurance, maintenance,
card fees from $8,875 to $8,438 because the credit card per- utilities and debt service.
centage fee arrangement results in higher credit card fees
In reality, a $0.25 increase in gas would probably not
on the same level of fuel sold. With more total consumer
result in a pure dollar-for-dollar transfer of spending from
dollars spent at the pump, fewer dollars are available for in-
inside sales to gas sales. The impact would likely involve a
side purchases. This decreases the inside sales gross margin
combination of decreased fuel consumptionand a decrease
after credit card fees from $33,125 to $27,604. As a result
in inside, retail purchases. However, in any combination,
of these changes, the total gross margin after credit card
C-Store margins are reduced. In a rising fuel price envi-
fees would drop from $42,000 to just $36,042.
ronment, C-Store stakeholders must remain vigilant in
This calculates to approximately $1,200 in reduced gross their sales trend evaluations as small changes in consumer
margin per month for every $0.05 increase in fuel prices. spending can have a significant effect on C-Store cash flow.
Table 2
SCENARIO TWO Monthly Gas Station Margins - $3.75/gallon
Gasoline Inside Sales Total Sales
Sales Distribution 75% 25% 100%
Price/Gallon $ 3.75
Gallons Sold 100,000
Margin/Gallon $ 0.15
Sales $ 375,000 100% $ 125,000 100% $ 500,000 100%
Cost of Goods Sold 360,000 96% 95,833 77% 455,833 91%
Gross Margin $ 15,000 4% $ 29,167 23% $ 44,167 9%
% Sales on Credit Card 70% 50%
Credit Card Fees at 2.5% 6,563 2% 1,563 1% 8,125 2%
Margin After Credit Card Fees $ 8,438 2% $ 27,604 22% $ 36,042 7%
4 Hidden Risk from Rising Gas Prices: The C-Store ImpactHow to React to Trends
There is little an individual C-Store operator can do to If the impact on cash flow is severe enough, a loan default
impact fluctuating fuel costs. However, the operators do may occur, landing the account in the lender’s special
have control over the appearance of the store and many of asset division.
the products for sale within it. Store cleanliness, product
C-Stores are not simple to evaluate and to manage as
selection/placement, beverage temperature, ice procure-
special assets. The fuel sales aspect of the business means
ment and car wash maintenance (when applicable) are key
there are additional levels of regulatory complexity and
factors that drive repeat business from the customers who
environmental monitoring requirements, unique to this
are purchasing high margin products.
industry. Industry specific questions must be answered in
In a rising fuel cost environment, even diligent attention order to determine the viability of the C-Store and the pos-
paid to the items mentioned above may not be enough to sibility of any additional restructuring risks which could
overcome the consumer’s finite ability to purchase high impact the lender’s recovery. Industry specific questions
margin retail items critical for the survival of the C-Store. are listed below.
Industry Specific Questions to Determine C-Store Viability
• What are the particular state and local environmental laws related to this location and this industry?
• What is the age/design of the fuel tank and what are the associated monitoring requirements?
• Which types of leak detection systems are in place and are they functioning?
• Is the required testing and record keeping taking place?
• Are there any past or current leaks at the site? If yes, how have they been addressed?
• Has financial responsibility for the site been properly addressed?
• Are appropriate insurances in place?
• Is there any ongoing litigation related to the site?
• What contracts are in place with the fuel provider(s)?
Hidden Risk from Rising Gas Prices: The C-Store Impact 5When Focus Can Help
Focus Professionals have experience dealing with these The proper operation of a service station is a surpris-
and other issues commonly found at fuel facilities. We ingly complex affair due to the environmental liability
have provided operational management, financial man- that can occur if a site is poorly managed. Even without
agement, product marketing assistance and receivership the presence of environmental damage, lack of regula-
services for a variety of troubled gas station facilities, tory compliance can result in significant fines and loss of
ranging from stand-alone stations to multi-tenant strip- revenue from “red-tagged” sites. To adequately protect
malls with gas station anchors. We also have experience collateral value, a lender needs to reach out to skilled
working with local regulatory agencies to resolve out- managers in both real estate management, and operations
standing issues while keeping the business open, allowing support to successfully address a gas station / C-Store
for the continued generation of revenues to service debt. work out situation.
About the Authors
Lassiter is an accomplished professional with over 15 years of experience in long-term strategic
financial planning. He has specific expertise in corporate restructuring as well as crisis manage-
ment for firms in financial distress. His experience in gas station / C-Store advisory services
includes operational management review, compliance oversight and as Court Appointed Receiver
for gas station locations across the United States.
Lassiter is based out of Focus Management Group’s Tampa office and can be reached at (813)
281-0062 or via e-mail at l.mason@focusmg.com.
Juanita Schwartzkopf has 25 years of experience in commercial banking, financial manage-
ment and risk management. Juanita is an expert at analyzing and working with a variety of
industries to improve financial and operating performance. She has an extensive background in
credit risk assessment and loan portfolio appraisal, and has reviewed asset based lending and
commercial lending loan portfolios of a wide range of financial institutions.
Juanita is based in Focus Management Group’s Tampa office and can be reached at (813) 281-
0062 or via e-mail at j.schwartzkopf@focusmg.com.Contact Information Focus Management Group is a leading business restructuring firm headquartered in Tampa, with offices in Atlanta, Chicago, Cleveland, Dallas, Los Angeles and Philadelphia. For more information regarding our experience in the C-store arena, contact one of our experienced Managing Directors listed below: Corporate Offices Key Contacts 5001 W. Lemon Street Lassiter Mason: l.mason@focusmg.com Tampa, FL 33609 Juanita Schwartzkopf: j.schwartzkopf@focusmg.com Tel: (800) 528-8985 Fax: (813) 281-0063 www.focusmg.com
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