Everybody wants a piece of the action. That was among the key messages my father taught me when he was running his business. Though he only had three pumps and four service bays, there was no shortage of business partners or associates who wanted a cut when times were good, but were nowhere to be found in times of trouble. As he recalled, the oil crises of 1973 and 1979 showed him who his friends in the industry really were.
For him, trust and honor were everything. He understood the way the game was played, but was never comfortable working with people that displayed self-interest in his sweat. As a result, he did more business on intuition and a handshake in a week back then, than I’ll probably do in a lifetime. But then again, he never had to work with the credit card companies.
According to NACS, industry sales jumped to $577.4 billion in 2007, with sales almost doubling the 2002 total of $290.6 bullion. But despite the strong sales growth, industry profits decreased nearly 40%, falling to $1.4 billion largely because of higher credit card fees ($7.6 billion), which were more than five times higher than profits. No misprint there…more than five times industry profits.
In other words, industry retailers have made the capital investments, built up the land, meandered their way through the zoning processes, invested in solid infrastructures and hired on employees that are dependent on them for food and sustenance, but the card companies profited to the tune of billions more than they did. And for what? Routing card payments to the appropriate bank? Something seems amiss. This is not the work of a business partner, let alone a friend.
Trust and honor have left the building.
But who can blame them? The industry is operating from a point of weakness. Stores have very little choice whether to accept credit cards, especially as gas prices soar to all-time highs. Customers are much less likely to use cash for fill-ups these days so deciding not to accept credit cards would be business suicide. Accepting them is slow death.
NACS, through its work with the Merchants Payments Coalition (MPC), is fighting for a more competitive and transparent credit card fee system that better serves consumers and merchants alike. About 100 national, international and state organizations representing 2.7 million stores are involved in MPC offering a glimmer of hope that the trend of profit dollars leaving the industry will be reversed sooner rather than later.
I bring this up because during the reporting process for this month’s Sales Trend Handbook the issue of rising costs is among the dominant themes for every industry category. Virtually every retailer interviewed reported how hard they were working to keep prices down to help the American consumer. But there are certain hard costs built into the system that are making it nearly impossible to keep costs down and still pay the bills.
While the industry continues to remain profitable, revenues increased just 1.4%, leveling off a decade of robust growth that saw industry revenues climb more than three-fold from $174.2 billion in 1997.
While fuel costs are up, profit contribution from fuel sales is down largely as a result of credit card fees. The average fuel margin for 2007 increased just .6 cents to 14.3 cents per gallon, up from 13.7 cents in 2006. But after credit card fees were factored in the margin plummeted 4.2 cents per gallon to 10.1 cents.
The news wasn’t all bad. Customers will spend money if retailers can deliver fresh food and innovative, new products. Healthy fare, energy drinks, flavored waters and smokeless tobacco are among the high growth area category managers must be focusing on. Please review The Handbook and don’t hesitate to contact me with emerging trends or credit card payment alternatives in your market.