9 ms·

Why most gas stations don’t make money from selling gas

80 points by Anon84 5y ago

tsjq 5y ago
overall nice interesting article. the actual "why" part is less than 5% of the content. TLDR: tight competition, highly price sensitive customers. most fuel stations have attached convenience store which brings in bigger profit margins. so they don't want to increase fuel price coz that will result in losing bigger profits from the convenience stores.
- antattack 5y ago
  Exactly - gasoline is a loss leader just like eggs and milk are in supermarkets.
- AnimalMuppet 5y ago
  It seems to be consistently true that people are only price sensitive on some things. People stop for gas at a place that has a good price on gas, then pay stupid prices for candy or chips. Is it because that costs less than the gas, so they optimize for saving money on gas? Is it because stations advertise the price of gas, but don't usually advertise the price of chips? Anybody know what's going on in our brains, that this works on us?
  - ghaff 5y ago
    It's probably something along the lines of: You can easily compare gas prices and many/most people (correctly) consider it a commodity. So, while they may or may not go out of their way to find a cheaper price, it often makes sense to wait for a cheaper price so long as they have margin to spare. Whereas the chips and cold soda are something of an impulse buy. People probably don't think about the price too much. It's something they want and, if they do think about the price, they figure (probably correctly) that it won't be cheaper at the next convenience store. And, even if a supermarket is handy, they're not going to spend 20 minutes dealing with that.
  - tsjq 5y ago
    wow. that's an insightful observation indeed. does this behavior come under the "mental accounting" topic that Richard Thaler talks about ?
h2odragon 5y ago
I've been told that few of those little "independent" gas stations own their gas pumps themselves; the operations get handled by a bigger outfit that pays the owner some pittance for the space. The insurance and environmental regulations on keeping a fuel tank, even without dispensing to the public, are often rather heavy and vary from town to town.
bombcar 5y ago
Interestingly enough this may mean that the electric car revolution may not hurt gas stations as much as you might think - as the convenience store aspect will still exist. It’ll be interesting to see (and I wonder if there’s been any studies on this).
- esrauch 5y ago
  Movie theaters don't make much of their money from the actual tickets, but if they stopped showing movies no one is going to pay them $20 for a popcorn. Gas stations might not be quite as drastic as that, but still seems like the same principle applies. Although conversely the convenience stores at fast charge stations probably do a lot better. If you have to wait for 30 minutes anyway might as well go in...
  - snarf21 5y ago
    I think there is a huge win here for a first mover. Let's say McDonalds works out a deal to have EV chargers at all restaurants with a parking lot. You know have a known location to EV charge anywhere in the country. And as you say, might as well go get something to eat while you wait. Seems like a win-win. I think this is the thing that could take make gas stations less relevant. If I have to wait 30 minutes, I may want more than a candy bar or bag of chips. Obviously the EV transition is going to take quite a while so I expect convenience stores to slowly add "subway" style made to order subs, etc.
    - clouddrover 5y ago
      > Let's say McDonalds works out a deal to have EV chargers at all restaurants with a parking lot Already have: https://www.mcdonalds.com/gb/en-gb/newsroom/article/News.ev_rollout.html https://www.mcdonalds.com/gb/en-gb/newsroom/article/News.ev_... https://instavolt.co.uk/first-instavolt-ev-rapid-charger-goes-live-at-mcdonalds/ https://instavolt.co.uk/first-instavolt-ev-rapid-charger-goe...
    - galdosdi 5y ago
      Yes, in fact the gas chain Sheetz sells subz, shakez, and fryz already.
Theodores 5y ago
It is a commodity! But it has always been one. Shell is not better for your car than BP or others, no matter what they say. I think there is more to the story including how profits are made upstream more than at the forecourt.
listenallyall 5y ago
Not sure how much to trust an article where most key data comes from National Assoc of Convenience Stores. The data at http://blog.opisnet.com/retail-gasoline-price-margins?hs_amp=true http://blog.opisnet.com/retail-gasoline-price-margins?hs_amp... looks more reliable and data-driven and discusses gross margins of 10 to 40+ cents per gal.
- zdragnar 5y ago
  5-10 cents max was accurate about 15 years ago, though I lost touch with those in the know since then. 40 cents on a gallon of gas sounds pretty exceptional- perhaps a geographic specific thing.
- refurb 5y ago
  It’s been a long time since I was close to the numbers but there are a lot of variables. Independent stations have much higher margins - you pay heavily for branding. When I did the books margins were 0.075/gal for regular and 0.013/gal (edit: should be 0.13/gal) for premium. I could see those as double for an independent station. This should not be surprising at all. Consumers are incredibly price sensitive and will drive 19 min to save $0.05/gal (save $0.75 and burn $0.60 of gas in the process). The supply chain for gas captures margins, not the gas stations. I would get calls from corporate for $0.03/gal adjustments several times a day if gas prices were volatile. It all came down to in store sales where mark ups were 50-100%. Youd be surprised how many people paid $5 for a bottle of mustard they could buy for $2 at Safeway. Cigarettes were the other huge sellers. On a holiday weekend we’d sell 12,000 gal of gas on a Friday, make $800 on the gas and $30,000 (after COGS) on in store sales.
  - jacobolus 5y ago
    > Consumers are incredibly price sensitive and will drive 19 min to save $0.05/gal My grandpa would drive all around town to save a few cents per gallon. It always seemed insanely wasteful to me.
    - steveBK123 5y ago
boplicity 5y ago
Another way to think about this: The cost of gas is subsidized by cigarettes, soda, lottery tickets, and candy. Bizarre.
mrfusion 5y ago
Check out Buc-ee's off of 95 in Florida for a gas station done right. It’s a gas station on steroids. It’s almost worth making a day trip to buy gas.
- AnimalMuppet 5y ago
  I'm a lot further than a day trip from any part of Florida. Could you tell me why you say it's "done right"?
  - ghaff 5y ago
    I gather they're basically big travel centers with a lot of food options, some of which is even decent. https://www.prnewswire.com/news-releases/buc-ees-to-open-first-georgia-travel-center-in-warner-robins-on-nov-18-301170343.html https://www.prnewswire.com/news-releases/buc-ees-to-open-fir... There are just off highway service plazas in many places which have various qualities of food. If I'm doing a drive, I might prefer to keep going but between rest and snack stops, something like this is better than a random convenience store.
    - mrfusion 5y ago
      Exactly. Really good food and fun stuff like homemade fudge and homemade? Jerky by the lb. Great sandwiches too. And fun to shop around.
    - seattle_spring 5y ago
      Sounds like Little America on I-80 in Wyoming.
alliao 5y ago
aren't they all land developers in disguise?
kumarski 5y ago
Look, I've been Indian my whole life. This guy 100% misses the boat and is clueless on how the real world works. Such naivete it's painful to read..... The reason gas stations run aggressively on cash is because they're running two different sets of books a majority of the time. Same for laundromats, motels, etc... Now guess which group of people runs these businesses? I used to ask my father why we didn't go get a "Brown" loan from a group of Indians and then go open a small business. My father replied "We don't break the law." He sat me at a Denny's across from a gas station, he told me to watch the people going into the store and count the items they walked out with. He explained to me that there are Indians who don't pay the tax man and pocket the cash and asked me to never be one of those. To this day, if I want to get a low or zero interest crowdsourced loan from a squad of Indians to go open a gas station or small convenience store, I should have no trouble doing so. I've never bothered. Years later, after sitting down with my father, I got access to cell phone movement data overlaid on gas stations. It was very revealing when combined with CC transaction data that was also purchased. 2 different sets of books and the author of this doesn't even bother mentioning it.
- gruez 5y ago
  > Look, I've been Indian my whole life. Why is this relevant? >The reason gas stations run aggressively on cash [...] they do? Most of the gas stations I see are pay at the pump, and inside the convenience store I'd say most people are paying with credit/debit.
  - kumarski 5y ago
    Still heavy cash transactions for the bootstrapped <15 location gas station franchises. ATMs, etc... 60% of the 130K-ish gas stations in the USA are Indian owned, but we only make up <1% of the population. (old metrics)
    - gruez 5y ago
      > Still heavy cash transactions for the bootstrapped <15 location gas station franchises. What counts as "heavy"? 5%? 15? 50%? Based on my observations it doesn't look like it's happening at a significant enough scale for it to meaningfully make a dent on gas station profitability numbers. >ATMs, etc... Why would someone use an ATM to pay for stuff? I don't think I ever saw a gas station that didn't accept debit. If anything gas stations offer a free "ATM" in the form of "cash back" transactions.
coliveira 5y ago
The reality is that big oil squeezed these operators as well as they do with consumers. They need to buy the gas anyway, but by contract they can only do that from a major supplier. In other words, because they don't have pricing power, big oil took from them almost all profit associated to gas sales.
- SilasX 5y ago
  Either way, I don't imagine gasoline retail having high margins even under ideal circumstances. It sells very predictably and reliably and requires virtually no overhead anymore due to self-service stations. It's a stream of money on auto-pilot and any non-trivial profits would quickly get eaten away by someone else who sees it as a the automatic stream of money it is.
motohagiography 5y ago
Econ 101 This generalizes as the business model is based on creating a "basket" of complementary goods: https://en.wikipedia.org/wiki/Complementary_good https://en.wikipedia.org/wiki/Complementary_good There are things like loss leaders and subsidies that are designed to create a funnel for customers, which you then convert into higher margin item sales. The popocorn at movies is a great example. Warranties and online shipping fees are another one, as they are almost pure margin. Sure, you may make a 10% unit margin on your $20 tchotchka (e.g $2), but you make 80% margin on your "shipping cost" of $10, so your gross margin selling tchotchkas is really $10 (or 50%). It's same as how printers are just a way to sell ink in cartriges, which has probably a 50x markup, or 5000% margin. This is only slightly different from the old music business, where you paid $30+ for a $0.10 blob of plastic wrapped in cardboard with a marketing machine on top of it. Social media has more of a publishing model, where their tech is "free," as a way to attract viewers to the ads they sell to advertisers. Most consumer software has this publishing model these days, whereas most enterprise software is really a channel to convert customers to high margin consulting and support services on top of the loss leader amortization of the cost of software development - which is why most of it sucks so badly. Like selling gas in stations, subscription revenue for tech is good, but it's monotonic based on users and inelastic, where what gas stations figured out is that their core "subscription" business was really just a funnel to get conversions for higher value users. For this reason, I'd speculate that gas stations periodically sabotage their pay at the pump machines, probably toward the end of a quarter, as a way to get a bump in people coming to the register and driving conversions to high-margin sugar/water products there.
ape4 5y ago
Its pretty crazy to think about how the gas is delivered to gas stations: in trucks that themselves burn gas (diesel). Almost seems impossible. I wonder if those trucks could be converted to electric vehicles.
- edot 5y ago
  If you think that’s weird, look at what they used to deliver gas with: https://mobile.twitter.com/shell_us/status/570962259897245696 https://mobile.twitter.com/shell_us/status/57096225989724569...
fensterblick 5y ago
This has been true for decades. When my dad ran a gas station, the profit came from selling goods like food and cigarettes, or repair services. But he stopped selling cigarettes in the early 1990s when my mom, a nurse, thought it was not right to be selling poison. My dad had a few angry customers, who asked him, "What kind of gas station doesn't sell cigarettes?" I was so fascinated by the business and life lessons he taught me. There are unscrupulous ways to make money, but fortunately these are not done by the majority. A gas station dealer has to buy gas from the company at a set price. Often times, there is a "black market" of gas, sometimes mislabeled, sometimes stolen, that is offered to dealers by unscrupulous people. You can buy this gas for cheaper and make more money on the margin. If the company catches you - and they have every incentive to catch you since you are not buying from them and selling an inferior product with their brand - you are in trouble.
WarOnPrivacy 5y ago
From the article: Gas stations have been in decline for several decades. In 1995, there were ~195k of them in the US; today, that number is down to ~115k. Contributors are Natural Gas, Electric Vehicles, Real Estate I think this leaves out the shift toward much larger gas stations with 2x-3x as many pumps. I'm generally okay with this trend. The odds of me waiting for a pump are low and we seem to have enough stations to compete on price.

80 points by Anon84 5y ago

tsjq 5y ago

overall nice interesting article. the actual "why" part is less than 5% of the content. TLDR: tight competition, highly price sensitive customers. most fuel stations have attached convenience store which brings in bigger profit margins. so they don't want to increase fuel price coz that will result in losing bigger profits from the convenience stores.

antattack 5y ago
Exactly - gasoline is a loss leader just like eggs and milk are in supermarkets.
AnimalMuppet 5y ago
It seems to be consistently true that people are only price sensitive on some things. People stop for gas at a place that has a good price on gas, then pay stupid prices for candy or chips. Is it because that costs less than the gas, so they optimize for saving money on gas? Is it because stations advertise the price of gas, but don't usually advertise the price of chips? Anybody know what's going on in our brains, that this works on us?
- ghaff 5y ago
  It's probably something along the lines of: You can easily compare gas prices and many/most people (correctly) consider it a commodity. So, while they may or may not go out of their way to find a cheaper price, it often makes sense to wait for a cheaper price so long as they have margin to spare. Whereas the chips and cold soda are something of an impulse buy. People probably don't think about the price too much. It's something they want and, if they do think about the price, they figure (probably correctly) that it won't be cheaper at the next convenience store. And, even if a supermarket is handy, they're not going to spend 20 minutes dealing with that.
- tsjq 5y ago
  wow. that's an insightful observation indeed. does this behavior come under the "mental accounting" topic that Richard Thaler talks about ?

h2odragon 5y ago

I've been told that few of those little "independent" gas stations own their gas pumps themselves; the operations get handled by a bigger outfit that pays the owner some pittance for the space. The insurance and environmental regulations on keeping a fuel tank, even without dispensing to the public, are often rather heavy and vary from town to town.

bombcar 5y ago

Interestingly enough this may mean that the electric car revolution may not hurt gas stations as much as you might think - as the convenience store aspect will still exist. It’ll be interesting to see (and I wonder if there’s been any studies on this).

esrauch 5y ago
Movie theaters don't make much of their money from the actual tickets, but if they stopped showing movies no one is going to pay them $20 for a popcorn. Gas stations might not be quite as drastic as that, but still seems like the same principle applies. Although conversely the convenience stores at fast charge stations probably do a lot better. If you have to wait for 30 minutes anyway might as well go in...
- snarf21 5y ago
  I think there is a huge win here for a first mover. Let's say McDonalds works out a deal to have EV chargers at all restaurants with a parking lot. You know have a known location to EV charge anywhere in the country. And as you say, might as well go get something to eat while you wait. Seems like a win-win. I think this is the thing that could take make gas stations less relevant. If I have to wait 30 minutes, I may want more than a candy bar or bag of chips. Obviously the EV transition is going to take quite a while so I expect convenience stores to slowly add "subway" style made to order subs, etc.
  - clouddrover 5y ago
    > Let's say McDonalds works out a deal to have EV chargers at all restaurants with a parking lot Already have: https://www.mcdonalds.com/gb/en-gb/newsroom/article/News.ev_rollout.html https://www.mcdonalds.com/gb/en-gb/newsroom/article/News.ev_... https://instavolt.co.uk/first-instavolt-ev-rapid-charger-goes-live-at-mcdonalds/ https://instavolt.co.uk/first-instavolt-ev-rapid-charger-goe...
  - galdosdi 5y ago
    Yes, in fact the gas chain Sheetz sells subz, shakez, and fryz already.

Theodores 5y ago

It is a commodity! But it has always been one. Shell is not better for your car than BP or others, no matter what they say. I think there is more to the story including how profits are made upstream more than at the forecourt.

listenallyall 5y ago

Not sure how much to trust an article where most key data comes from National Assoc of Convenience Stores. The data at http://blog.opisnet.com/retail-gasoline-price-margins?hs_amp=true http://blog.opisnet.com/retail-gasoline-price-margins?hs_amp... looks more reliable and data-driven and discusses gross margins of 10 to 40+ cents per gal.

zdragnar 5y ago
5-10 cents max was accurate about 15 years ago, though I lost touch with those in the know since then. 40 cents on a gallon of gas sounds pretty exceptional- perhaps a geographic specific thing.
refurb 5y ago
It’s been a long time since I was close to the numbers but there are a lot of variables. Independent stations have much higher margins - you pay heavily for branding. When I did the books margins were 0.075/gal for regular and 0.013/gal (edit: should be 0.13/gal) for premium. I could see those as double for an independent station. This should not be surprising at all. Consumers are incredibly price sensitive and will drive 19 min to save $0.05/gal (save $0.75 and burn $0.60 of gas in the process). The supply chain for gas captures margins, not the gas stations. I would get calls from corporate for $0.03/gal adjustments several times a day if gas prices were volatile. It all came down to in store sales where mark ups were 50-100%. Youd be surprised how many people paid $5 for a bottle of mustard they could buy for $2 at Safeway. Cigarettes were the other huge sellers. On a holiday weekend we’d sell 12,000 gal of gas on a Friday, make $800 on the gas and $30,000 (after COGS) on in store sales.
- jacobolus 5y ago
  > Consumers are incredibly price sensitive and will drive 19 min to save $0.05/gal My grandpa would drive all around town to save a few cents per gallon. It always seemed insanely wasteful to me.
  - steveBK123 5y ago

boplicity 5y ago

Another way to think about this: The cost of gas is subsidized by cigarettes, soda, lottery tickets, and candy. Bizarre.

mrfusion 5y ago

Check out Buc-ee's off of 95 in Florida for a gas station done right. It’s a gas station on steroids. It’s almost worth making a day trip to buy gas.

AnimalMuppet 5y ago
I'm a lot further than a day trip from any part of Florida. Could you tell me why you say it's "done right"?
- ghaff 5y ago
  I gather they're basically big travel centers with a lot of food options, some of which is even decent. https://www.prnewswire.com/news-releases/buc-ees-to-open-first-georgia-travel-center-in-warner-robins-on-nov-18-301170343.html https://www.prnewswire.com/news-releases/buc-ees-to-open-fir... There are just off highway service plazas in many places which have various qualities of food. If I'm doing a drive, I might prefer to keep going but between rest and snack stops, something like this is better than a random convenience store.
  - mrfusion 5y ago
    Exactly. Really good food and fun stuff like homemade fudge and homemade? Jerky by the lb. Great sandwiches too. And fun to shop around.
  - seattle_spring 5y ago
    Sounds like Little America on I-80 in Wyoming.

alliao 5y ago

aren't they all land developers in disguise?

kumarski 5y ago

Look, I've been Indian my whole life. This guy 100% misses the boat and is clueless on how the real world works. Such naivete it's painful to read..... The reason gas stations run aggressively on cash is because they're running two different sets of books a majority of the time. Same for laundromats, motels, etc... Now guess which group of people runs these businesses? I used to ask my father why we didn't go get a "Brown" loan from a group of Indians and then go open a small business. My father replied "We don't break the law." He sat me at a Denny's across from a gas station, he told me to watch the people going into the store and count the items they walked out with. He explained to me that there are Indians who don't pay the tax man and pocket the cash and asked me to never be one of those. To this day, if I want to get a low or zero interest crowdsourced loan from a squad of Indians to go open a gas station or small convenience store, I should have no trouble doing so. I've never bothered. Years later, after sitting down with my father, I got access to cell phone movement data overlaid on gas stations. It was very revealing when combined with CC transaction data that was also purchased. 2 different sets of books and the author of this doesn't even bother mentioning it.

gruez 5y ago
> Look, I've been Indian my whole life. Why is this relevant? >The reason gas stations run aggressively on cash [...] they do? Most of the gas stations I see are pay at the pump, and inside the convenience store I'd say most people are paying with credit/debit.
- kumarski 5y ago
  Still heavy cash transactions for the bootstrapped <15 location gas station franchises. ATMs, etc... 60% of the 130K-ish gas stations in the USA are Indian owned, but we only make up <1% of the population. (old metrics)
  - gruez 5y ago
    > Still heavy cash transactions for the bootstrapped <15 location gas station franchises. What counts as "heavy"? 5%? 15? 50%? Based on my observations it doesn't look like it's happening at a significant enough scale for it to meaningfully make a dent on gas station profitability numbers. >ATMs, etc... Why would someone use an ATM to pay for stuff? I don't think I ever saw a gas station that didn't accept debit. If anything gas stations offer a free "ATM" in the form of "cash back" transactions.

coliveira 5y ago

The reality is that big oil squeezed these operators as well as they do with consumers. They need to buy the gas anyway, but by contract they can only do that from a major supplier. In other words, because they don't have pricing power, big oil took from them almost all profit associated to gas sales.

SilasX 5y ago
Either way, I don't imagine gasoline retail having high margins even under ideal circumstances. It sells very predictably and reliably and requires virtually no overhead anymore due to self-service stations. It's a stream of money on auto-pilot and any non-trivial profits would quickly get eaten away by someone else who sees it as a the automatic stream of money it is.

motohagiography 5y ago

Econ 101 This generalizes as the business model is based on creating a "basket" of complementary goods: https://en.wikipedia.org/wiki/Complementary_good https://en.wikipedia.org/wiki/Complementary_good There are things like loss leaders and subsidies that are designed to create a funnel for customers, which you then convert into higher margin item sales. The popocorn at movies is a great example. Warranties and online shipping fees are another one, as they are almost pure margin. Sure, you may make a 10% unit margin on your $20 tchotchka (e.g $2), but you make 80% margin on your "shipping cost" of $10, so your gross margin selling tchotchkas is really $10 (or 50%). It's same as how printers are just a way to sell ink in cartriges, which has probably a 50x markup, or 5000% margin. This is only slightly different from the old music business, where you paid $30+ for a $0.10 blob of plastic wrapped in cardboard with a marketing machine on top of it. Social media has more of a publishing model, where their tech is "free," as a way to attract viewers to the ads they sell to advertisers. Most consumer software has this publishing model these days, whereas most enterprise software is really a channel to convert customers to high margin consulting and support services on top of the loss leader amortization of the cost of software development - which is why most of it sucks so badly. Like selling gas in stations, subscription revenue for tech is good, but it's monotonic based on users and inelastic, where what gas stations figured out is that their core "subscription" business was really just a funnel to get conversions for higher value users. For this reason, I'd speculate that gas stations periodically sabotage their pay at the pump machines, probably toward the end of a quarter, as a way to get a bump in people coming to the register and driving conversions to high-margin sugar/water products there.

ape4 5y ago

Its pretty crazy to think about how the gas is delivered to gas stations: in trucks that themselves burn gas (diesel). Almost seems impossible. I wonder if those trucks could be converted to electric vehicles.

edot 5y ago
If you think that’s weird, look at what they used to deliver gas with: https://mobile.twitter.com/shell_us/status/570962259897245696 https://mobile.twitter.com/shell_us/status/57096225989724569...

fensterblick 5y ago

This has been true for decades. When my dad ran a gas station, the profit came from selling goods like food and cigarettes, or repair services. But he stopped selling cigarettes in the early 1990s when my mom, a nurse, thought it was not right to be selling poison. My dad had a few angry customers, who asked him, "What kind of gas station doesn't sell cigarettes?" I was so fascinated by the business and life lessons he taught me. There are unscrupulous ways to make money, but fortunately these are not done by the majority. A gas station dealer has to buy gas from the company at a set price. Often times, there is a "black market" of gas, sometimes mislabeled, sometimes stolen, that is offered to dealers by unscrupulous people. You can buy this gas for cheaper and make more money on the margin. If the company catches you - and they have every incentive to catch you since you are not buying from them and selling an inferior product with their brand - you are in trouble.

WarOnPrivacy 5y ago

From the article: Gas stations have been in decline for several decades. In 1995, there were ~195k of them in the US; today, that number is down to ~115k. Contributors are Natural Gas, Electric Vehicles, Real Estate I think this leaves out the shift toward much larger gas stations with 2x-3x as many pumps. I'm generally okay with this trend. The odds of me waiting for a pump are low and we seem to have enough stations to compete on price.