Fill up the tank, then your tummy Gas stations seek to nourish profits with fast-food

THE BALTIMORE SUN

Faced with shrinking profit margins on fuel and intensifying competition for their convenience stores, gasoline stations are scrambling to find other ways of attracting more customers: dry cleaning drop-offs, check-cashing services, even tanning beds.

But they appear to be finding the most success by reversing an old joke: Get gas, they are telling customers, and eat here too.

Nearly 2,000 of the 120,000 gasoline stations nationwide have already installed mini-fast-food outlets, such as miniature Taco Bells, McDonald's and Dunkin' Donuts. And more are being added every day because many of the major oil and fast-food companies have embraced the idea.

The parent company of Subway sandwich shops, for example, has installed 1,000 mini-delis in gas stations or convenience stores in the last four years, and expects to double that number in the next four years.

The gas station mini-delis, which can be squeezed into as little as 150 square feet, sell a lot of sandwiches because gas stations tend to have extremely convenient locations and lots of traffic, said Subway spokeswoman Michelle Klotzer. "This is the way of the future."

The big oil companies are equally eager. Texaco is rebating a penny a gallon to dealers who add the restaurants. The goal: fast-food outlets in at least 20 percent of its 7,000 stations.

While Maryland has been slow joining the gas/food craze, the idea is picking up momentum here, too, now.

The state's only big oil company, Crown Central Petroleum Corp., has just opened its first few fast-food pilots to see if it should sign nationwide contracts with fast-food franchisers.

And while only about 20 of the state's 2,200 gas stations have opened fast-food franchises, so far, scores more are now rushing to negotiate contracts with franchisers, and nearly every dealer is considering the idea.

Carolyn Wheeless, who opened a Subway shop at her Baltimore Crown gas station last month, making hers the first combination gas and fast-food station in Baltimore, said she expects dozens of curious dealers to check out her operation.

They'll all be interested for the same reason that Ms. Wheeless decided to add the small sub shop: Costs and competition have cut gasoline profits so much that dealers are searching for other ways to eke out every possible penny of profit from their roadside real estate, she said.

The gasoline business "is the only business in which 1 cent makes a difference" between making or losing a sale, she said, eyeing a Citgo station just down the street from her corner of Harford Road and Northern Parkway.

She should know. Although she declined to say whether she was making money on her gasoline, Ms. Wheeless was underpricing her nearby competitors by selling unleaded gasoline for 1.09 a gallon last month, 2 cents a gallon less than dealers reported buying their gasoline for in a trade association survey.

"We've looked at other things," such as a dry cleaners or a photo finisher, to make up for the lost gas profits, she said. A previous manager of the station opened and then closed an automatic teller machine, she noted. But "food is a good opportunity" because it ties in with her convenience store, she said.

The trend toward adding more services strikes some in the industry as ironic.

Frank Rosenberg, vice president of Baltimore-based Crown, noted that his company was one of the first to make the shift away from traditional service stations with repair shops to "gas and go."

But increasingly price-conscious consumers drove pump prices down just as laws requiring more leak-proof underground gasoline tanks and installation of equipment to reduce air pollution raised retailers' costs in the 1970s and 1980s, he said.

So oil companies started looking for other services and products to offer. At first, oil companies stuck to the automotive theme and tried things like car washes.

"The early ones did quite well," he said. But soon, the market was glutted with car washes, he said.

Then, convenience stores became the rage. Today, more than half of all gas stations have convenience stores, and almost all stations sell at least the few most popular items such as cigarettes, soda and snacks.

And now, he said, many believe there's a glut of combination gasoline station and convenience stores, too.

So he and other oil executives are looking for the next draw that will persuade drivers to turn into their driveways.

"We're looking into check-cashing services, or having a small retail bank operation" inside a convenience store, he said.

Restaurants profitable

But fast food, he said, may be the best idea so far because it fits Crown's revamped mission. And the restaurants tend to show a steady -- and hefty -- profit.

Crown executives say they are trying the restaurants because ++ they've realized they must redefine their mission to survive.

Their 348 gasoline stations throughout the Southeast sell convenience, not fuel, Mr. Rosenberg said. Customers like the idea of making only one quick stop to fill up their cars, their refrigerators and their stomachs, he said.

Mr. Rosenberg conceded that Crown is one of the last oil companies to try out the idea.

One reason for the slow start here: West Coast stations, being generally newer and bigger, have more room for additions such as small restaurants.

And fast-food companies have expanded quickly by making a few deals with big oil companies. Since Maryland and other nearby states bar oil companies from owning and operating their own stations, the fast-food companies have had to negotiate with individual dealers, which takes more time.

But perhaps the key reason for the slow start is this: No one can say for sure that the restaurants will bring in more customers for gasoline. "We wish we had an answer to that question," Mr. Rosenberg said.

Increasing gasoline sales is crucial to Crown, which has lost more than $50 million in the last four years primarily because its stations can sell only about a third of the gasoline that its two Texas refineries make.

Crown has been criticized for its slow response to trends. But in this case, it is in good company. The 800-pound-gorilla of the fast-food world -- McDonald's -- is equally leery of the trend. So far, the king of fast food has installed only about 50 mini-McDonald's around the country.

But those cautions aren't stopping enthusiasts. Jim Smith, president of Baltimore Subway Systems Inc., said he expects to have a half-dozen combination gas station/sandwich shops in the Baltimore area within a few years. And that's not all. The next big thing will be gas stations with two or more fast-food franchises, he says. He's already started construction on a combination Mobil, Taco Bell and Subway at 28th and Sisson.

Likewise, Dunkin' Donuts' new Baltimore-area franchise recruiter, Jim Bannahan, is working on plans to put in combination doughnut shops and Baskin-Robbins ice cream stores in gas stations throughout the region. The two, owned by the same company, are good companions because ice cream sells best in the summer, while doughnuts sell best in the winter, he said.

But he's not insisting on joint ventures. His goal is to put doughnut shops -- alone or combined with other fast-food chains -- in "as many [stores] as possible."

Nor is Ms. Wheeless haunted by doubts.

She has talked with other gas station/Subway owners who've told her the shops not only made money on their own, but increased gas sales anywhere from 5 percent to 40 percent.

While she hasn't seen a boom in gas sales in the first month of the sandwich shop's operation, the restaurant is already almost covering its costs, she said.

"We are already saying it is a success" that deserves expansion, she said. "We are looking for a second location."

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