high gas prices impacting cstore profitability

With credit card fees eating away at fuel margins, NACS is promoting an alternative.

While in-store sales are flat, retailers’ biggest concern is profit margin erosion triggered by escalating credit-and debit-card processing fees.

Beset by record-high gas prices over the past two quarters, convenience store and petroleum marketers are struggling to maintain profitability. In addition to losing fuel volume from hypermarketers like Wal-Mart and Albertsons, convenience retailers are facing a twopronged attack that has them experiencing unprecedented fuel and in-store sales losses on one front and facing increased credit-card network processing fees on the other.

“These are challenging times for the fuel side of the business and convenience marketers need to monitor the business closely to make sure they are cutting any and all waste out of their fuel supply system to make sure they are running as lean as possible,” said Todd St. Romain, president of St. Romain Oil Co. Inc., which operates six Wash-n-Go units under the Shell brand in Mansura, La.

“With supply and profit margins under constant attack since Hurricane Katrina, it’s becoming more and more difficult to fend off discount fuel operators and stay profitable. It is a day-to-day grind.”

Losses on the fuel side of the business are two-fold. First, overall-fuel volume is down, which is a common occurrence as fuel prices rise. Customers become much more price-conscious and purchase less in and out of the store on each trip. And, as fuel prices rise, the margin on a gallon of gasoline also goes down. Retailers these days are operating in the 5¢ range on a gallon of fuel.

The profit margin goes down primarily because the cost at which retailers buy fuel from their distributors either remains static or goes up. Rather than increasing pump prices, marketers are sacrificing margins to avoid losing customers to lower-cost providers.

While the rising cost of fuel impacts the market in many ways, none is more prominent for c-store owners than the increased usage of credit cards. For convenience stores, credit-and debit-card fees, as a percent of gross profit, now equal 6.1% of gross profit dollars. For stores accepting plastic at the pump, processing fees cost the stores an average of $30,996 in 2004, a figure approaching the average per-store pretax profit of $36,095, according to the National Association of Convenience Stores (NACS).

On an industry-wide basis, the total cost of credit and debit fees was a staggering $3.3 billion, with some high-volume operators reportedly paying more than $1 million per month in processing fees.

Particularly with the rising cost of gasoline and the higher transactions atthe pump, these fees are taking an enormous bite out of profitability. Nearlyfive months since Hurricane Katrina devastated the southeast, the average costfor a gallon of gasoline in January ($2.327) sat more than 53.4¢ per gallonhigher than it was in December 2004 ($1.793), and approximately 72¢ morethan it was in December 2003 ($1.609). Credit card usage jumped right alongwith it.

NACS estimates that plastic was used for about 55% of fuel sales prior to Katrina. Since September 2005, that number is now greater than 85% in some markets. Previously, on a 10-gallon fill-up at $1.50 per gallon, a retailer would pay about 3% in fees on the $15 transaction, which equates to a processing cost of about 4.5¢. Now the same customer is spending about $23.27 to get the same amount of gas, but the retailer’s processing cost jumps to 7 cents. The 2.5¢ difference in processing fees for every 10 gallons sold comes out of the retailer’s margin further diminishing the paltry 5 cents they were already stuck with.

“The increased cost per transaction compounded over thousands of transactions per month is enormous,” says Jeff Lenard, director of communications for NACS. “And it is coming directly from the retailer’s overall profitability at a time when they are facing unprecedented competition and market pressures. Many of them simply can’t afford this increased cost of doing business.”

NACS cost-savings options
What can retailers do to save money? Thereare a number of options, ranging from regulatory to simply putting pressureon the processing companies to be more industry friendly.

NACS has a program for their member retailers across the U.S. to participate in an industry-exclusive credit card processing program. This program, launched in 2003 through a strategic partnership with the processing firm First Data, gives retailers the option of choosing a flat processing fee plan over a bundled percentage-only plan. NACS’ interchange plus 6.5¢ per transaction program is an alternative to some existing percentage-based programs, where fees grow at a much higher rate as the dollar value of the transaction grows, as is the case with rising gasoline prices.

To date, the NACS program is set up to accept Visa, MasterCard, American Express, Discover, Diner’s Club, Voyager and Wright Express fleet purchases.

Dan Vaughan, president of Stimson’s Inc. in Ogden, Utah, was one of the first marketers to sign up for the NACS program. He called the solution a “positive step” toward getting processing fees under control.

“Whether it is payatthe-pump or in-store purchases of cigarettes or a sandwich,a flat processing fee could be the solution for decreasing transaction feesand boosting overall gross profit margins,” says Vaughan.

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