2008 Gas Price Kit

Are Petroleum Retailers Facing a Liquidity Crisis?
While the credit crunch hit the stock markets hard in the opening weeks of 2008, those in the convenience and petroleum retailing industry have been dealing with their own credit crunch for quite some time. The increased retail price of gasoline has an underlying effect on the economy that is not apparent to the casual observer — it has dramatically reduced the financial liquidity within the convenience and petroleum retailing industry.

Since 2002, the average retail price of gasoline has more than doubled. While retailers essentially are selling fuel for twice the price they sold it several years ago, they are paying twice as much as they paid several years ago and they have to dedicate twice as much capital to inventory – a typical "load" of fuel for one underground storage tank can cost $20,000 or more. Meanwhile, gross margins for motor fuels sales have declined and per gallon gross profit as a percent of sales has dropped to its lowest level in history. Compounding this reduction in gross margins is the increase in credit card fees (assessed as a percent of the transaction), which have further constricted profits on each gallon.

What does this mean? It means that the cash flow that all businesses rely upon to perform their day-to-day functions, as well as the capital available to fund facility improvements or expansions, has essentially dried up for retailers and put on hold many of their plans to improve their businesses.

Higher gasoline prices exhaust retailers' cash, force credit extensions
With higher prices, retailers must pay more for the inventory they sell, reducing cash flow and increasing liabilities. Since 2002, the price of gasoline has risen 107 percent, increasing a retailer's investment in inventory. Compounding this increase in costs, many retailers incur additional fuel surcharges for each delivery as their distributors seek to cover the increased expense of the diesel required to power their trucks. Gross margins on fuel have dramaticallydecreased, reducing the ability of cash flow from fuel sales to purchase replacement gallons.

Consequently, many retailers are forced to extend their lines of credit to keep fuel in their tanks. This has brought with it additional costs. Terms which may have provided the retailer 10 days to pay for a delivery in many cases have been reduced by creditors, who are likewise experiencing a crunch as demand for financing has increased within the industry. Many of these creditors are distributors to multiple retailers, and these distributors are running into their own credit limits in their efforts to keep their customers supplied with fuel. As more inventory is purchased on credit, the additional payments of interest have further reduced cash flow.

After months of operating on credit, while wholesale costs have continued to increase and gross margins have remained stagnant or declined, many retailers are approaching the limit of their available credit. This forces companies to delay or suspend investments in their operations and, in the most dire circumstances, threatens their ability to keep fuel in their tanks.

Motor fuel margins suffer with higher retail prices
Motor fuel gross margins are extremely volatile and are largely dependent upon fluctuations in wholesale prices and competitive pressures. As consumers become more price conscious (29 percent of consumers say they would drive 10 minutes out of their way to save 3 cents per gallon), retailers must charge the most competitive prices possible. Over the long term, this compromises gross margins. Meanwhile, the expense of increased credit card usage further reduces profitability at the pump. According to the Oil Price Information Service's (OPIS) Retail Fuel Watch, the average retail price increased from $2.56 in 2006 to $2.79 in 2007, yet gross margins remained stagnant at 13.8 cents per gallon. On a percent per gallon basis, real gross margins dropped from 5.4 percent to 4.9 percent, the lowest in recorded history.

Credit card companies profit from higher gasoline prices
As prices increase and retailers turn to lines of credit to secure supplies, their customers have turned to credit cards to finance their gasoline purchases. It is now estimated that two-thirds of all gasoline transactions are paid for with credit or debit cards. Each time a credit card is swiped at the dispenser, the retailer must pay a fee, typically between 2 to 3 percent. According to the 2007 NACS State of the Industry report, credit card fees paid by the convenience and petroleum retailing industry more than doubled from $3.2 billion in 2003 to $6.6 billion in 2006. Calculating the average credit card fee at 2.5 percent and using OPIS' average reported retail price, credit card fees on a cents per gallon basis increased from 6.4 cents to 7.0 cents between 2006 and 2007, representing more than 50 percent of a retailer's gross margin.