Gasoline price blues weigh on dealers, too

The Baltimore Sun

Sajid Chaudhry sells gasoline for a living, so with pump prices approaching $4 a gallon, you'd think he'd be celebrating.

But the 10 stations he and his partners own in the Baltimore-Washington metro area aren't making them rich, as frustrated motorists assume they are.

In fact, he says, profit for gasoline retailers can actually fall as gas prices go up, thanks to rising credit card fees, increased costs and intense competition for customers.

The lucky ones make up for thin profits on gas by boosting sales of sandwiches, cigarettes and bottled water to motorists. Others are turning in their keys and calling it quits. Industry officials warn of a new wave of consolidation in the business that could reduce competition and drive prices even higher.

"Sometimes customers are very angry and think ... we're profiting from these increases," said Chaudhry, who came to the U.S. from Pakistan in 1983 and built his business from one store. "But they don't understand that when they put this plastic in the pump - the credit card - how much it costs us."

Consider this: On one recent day Chaudhry sold 7,800 gallons of gas at his Osprey store near Security Square Mall in Woodlawn, bringing in about 7 cents gross profit per gallon. So he made about $546 selling his unbranded gas that day.

But much of it went to the credit card companies, which take 2 cents to 3 cents of every dollar per transaction. With gas averaging $3.72 per gallon of regular unleaded in Maryland, that comes to roughly 7 cents to 11 cents per gallon for the card companies - as much as or more than Chaudhry's gross profit from gas sales.

Granted, not all sales are by credit card, and his profit per gallon can vary greatly by day and location, depending how much he paid for that day's supply and what price he is able to charge to stay competitive. One of his Prince George's County stores fared a little better that day, selling 8,000 gallons and clearing about 10 cents a gallon, or $800, in gross profit. But even so, he said, $418 went for credit card fees.

Retailers say things were better for them when gas was $1.50 per gallon: station owners cleared 10 to 20 cents gross profit per gallon, while credit card fees on the lower-priced gas added 3 to 5 cents per transaction.

Industry officials say Chaudhry's story is not unusual. High prices and structural changes in the industry have retailers grumbling about gas prices as loudly as their customers.

"Every day we get dealers calling in here who are at wits' end," said Paul Fiore, director of government affairs for the Washington, Maryland, Delaware Service Station and Automotive Repair Association. "They're turning in the keys to their location. Grown men in tears."

So if retailers aren't getting rich, who is?

Crude oil - now at more than $120 a barrel - accounted for nearly 72 percent of the price of a gallon of gas in March, the Energy Information Administration reported. That's up from 47 percent in 2004, when crude was $36.98 a barrel. Taxes account for 12.3 percent and refiners take 8 percent, leaving just 7.9 percent left for marketing and distribution.

The latter category includes retailers, who take a small slice of the 7.9 percent. In 2004, marketing and distribution accounted for 12 percent of the price.

Retailers are asking Congress to take steps to increase the nation's oil supply and to address credit card fees charged to gas retailers.

Major credit issuer Visa Inc. says the cost of accepting credit card payments is generally set by large oil companies, which negotiate a merchant discount with their financial institutions and then determine what to charge their franchisees.

The company said those costs are "more than offset" by the benefits to station owners and their customers, such as the convenience of paying at the pump. Retailers can manage their credit card fees by offering customers a discount for paying cash, the company suggested.

Speaking before the House Judiciary Committee last week, Bill Douglass, a Texas gas distributor and former chairman of the National Association of Convenience Stores, said retailers paid $7.6 billion in credit card fees in 2007 while generating only $3.4 billion in pre-tax profit.

Retailers in some cases are forced to borrow money to buy their next load of gas, further adding to costs.

Douglas said 10 of the 150 retailers he supplies fuel to in Texas turned their deeds over to his company in the past four months as a result of financial pressures.

Selling gas has always been a tough business, retailers say. Most stations are owned by small-business people, who might work 12-hour days, seven days a week. Often, the stores are leased from an oil company or so-called "jobbers," middlemen who distribute gas to retailers and charge rent.

The jobbers and oil companies dictate the wholesale prices retailers must pay for inventory. In Maryland, wholesalers use something called "zone pricing," in which some retailers are charged higher prices than others based on where they operate.

For example, a wholesaler may give a lower price to a station owner who faces stiff competition, and a steeper price to someone operating in an area that commands higher prices. Many retailers complain that the system leaves them with little discretion and contributes to low profits.

"You will find a lot of dealers out there who are intimidated," said Fiore, the trade group director. "The service station dealer is contractually obligated to buy all his product from his landlord."

Diana Kavey, a Carroll County resident who operates two Exxon stations with her husband, longs for the days of 99-cent gas. With prices high, more motorists are paying with credit cards. Card fees that years ago were $6,000 a month are now $20,000, she said.

Customers are also less likely to buy premium gas, which earns a higher profit margin. And they are bringing coffee from home and eating out less, cutting into in-store sales, which typically generate more profit than gas.

"This is a pennies business, and all those little pennies add up," she said.

Larry Jackson, who owns three gas stations in Columbia and Ellicott City, figures he isn't making much of anything off his gas sales. He is trying to make up for it by offering discount car washes and $5 Subway sandwiches. He advertises the promotions through a revamped Web site aimed at boosting customer loyalty. To further cut costs, he has daily store sales processed through a site in India, saving paperwork costs.

Those are helping, but expenses continue to grow even as customers cut back on spending, he said.

"You try to do more business, but with the economy slowing down, people are putting off repairs to their cars, so that's down, too," he said. "What affects the customer affects us, too."

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