Gas stations are everywhere, and if you have a car, you visit them all the goddamn time. And yet, for how familiar they are, they’re also enigmatic: Like, why is the price always changing? How much money are they actually making on all that gas they sell? Why are some stations suspiciously cheap and others extortionately expensive? What happened to all the service garages they used to have? Why does a station go out of business when they’re selling a product that most everyone who drives a car can’t live without? Alongside Don Strenk, a petroleum industry veteran who now consults on, operates and helps others buy and sell numerous gas stations, we gassed up some answers.
How do gas stations make money? Is it a stupid question to ask if it’s mostly the gas…?
Not stupid! Ever notice how most every gas station now has a convenience store and/or a car wash? That’s not by accident. “Nowadays [a convenience store] is almost a requirement,” Strenk says. A gas station can’t survive anymore just selling [gas] unless it’s on the perfectly located corner. Gross margins for gas stations, meaning profit minus cost of goods, is about 50-50 between the gas and the convenience store revenue.
The nice thing about convenience stores is the economy of scale with labor — you can have employees at the counter who are running both the station and the store, whereas at gas stations with service garages, operating the cash register means either adding an employee or taking someone away from working on a car.
Speaking of which, what did happen to all those garages that gas stations used to have?
Most went away beginning in the late 1970s. Arco led this trend, Strenk says, when they started converting most of their garages to convenience stores.
Because the oil companies weren’t making any money on the repairs done by the garages! So they offered the gas station operators help to convert their garages to stores in exchange for earning revenue and fees associated with the convenience store. By pricing its gas low, as Arco does, it drove customers to the pumps, and once people were there, the stores became wildly popular as a convenient place to buy smokes, lotto tickets, soda and candy (and, once upon a time, condoms).
“The real income for the oil companies was twofold: They increased their gas sales per site, so that gives them huge economies of scale,” Strenk says. “Imagine if you’re selling a million gallons and you sell it through three stores versus 12 stores — you’ve got a lower cost of operation from the oil companies’ standpoint. And you’re bringing in the additional fees from royalties in your C-store.”
What about those car washes? How profitable are they?
Wildly so! They’re expensive to install (with a price tag of around $400,000) but after that, their profit margin is about 90 percent, Strenk says. He recommends gas stations do a maintenance deal with the car wash manufacturer, where they come out and refill the colorful soapy chemicals and fix it when it breaks, because even then, you’re still looking at a 75 percent margin. (No one wants to go to those car washes that are janky and broken most of the time.) Car washes, like convenience stores, also drive lots of traffic to a gas station for more gas or more stuff inside the convenience store.
How important are lottery tickets to a gas station?
They’re hugely important because they bring in customers, but they’re a goddamn headache, Strenk says. They’re a very low source of revenue, and on top of that, you have to worry about theft from customers and employees. They’re a necessary evil — just like selling cigarettes.
“Gas stains don’t make a lot of money on cigarette sales because it’s so competitive out there, prices are so high and margins are extraordinarily thin — plus, they’re a high-ticket item, so theft from both your employees and customers is a major problem. You can lose a lot of money with that,” Strenk says. I mean, a pack is nearly $10 in California and elsewhere, and how hard is it for your guy behind the counter to stuff one in their pocket?
“However, you have to have them,” Strenk says of cigarettes and lottery tickets. “You can’t have a convenience store without them.”
What’s the maintenance like at a gas station?
Strenk says that unless it’s brand-spanking new, it’ll cost $3,000 to $5,000 a month. People abuse the pumps all the time: They’ll break the nozzles, or drive off with the pump handle still down their tank. So that money is for fixes, power-washing spills, cleaning pumps and leak repair. California, for example, does “tightness tests” all the time to detect any leaks.
California also happens to require a designated, trained environmental operator at your site. Most people don’t have that, so they pay an expert to perform that monthly duty. Then there are one-time fees like your alcohol license, occupancy license and operating license. There are also various monitoring devices the government requires in order to detect problems with your equipment and your underground tanks.
How much do gas stations mark up their gas?
Gasoline is obviously a volume industry, but it’s really up to the operator how much of a volume game they want to play. Do you want to sell a lot of gas at a low margin or less gas at a higher margin? High-volume stations will only mark it up by 10 to 15 cents per gallon (some might only mark it up by 8 cents a gallon). Others, however, might mark it up by 25 to 30 cents a gallon. It’s all a tradeoff, Strenk says, and certainly some of it has to do with what you can get away with: What prices your neighboring gas stations are offering, or maybe how great your location is.
“It’s a game,” Strenk says. “If you’re doing 300,000 gallons a month at a 10-cent margin, you’re bringing in the same amount of dollars as a station that does a 30-cent margin on 100,000 gallons a month. Now, the difference is, when you’re moving a lot of gas, that impacts your convenience store business and other ancillaries on your lot.”
Strenk favors the low-priced model that leans into the convenience stores, because the additional volume of gas sales means increased revenue in the convenience store relative to the convenience stores at higher priced gas stations.
So the price of gas is more important than the convenience store?
Yep. Lower-priced gas and a nice convenience store will earn way more money than a higher-priced gas station with the same quality level of convenience store. “You’d never go to a gas station and say, ‘I really love this, and I’m gonna pay a high price on gas because they have a great convenience store,’” Strenk says. “It’s the other way around!”
Does the profit margin on gas change with gas price?
Not usually. A gas station’s purchase price fluctuates too, of course: Often, if they mark up their gas 10 to 15 cents a gallon at $3 a gallon, they also mark it up by 10 to 15 cents a gallon when gas is $5 a gallon.
The price of gas is changing all the time. Don’t gas stations lose money when the price changes?
Yes, but that’s a dangerous game to play. If you buy gas to put in your tanks and then the price drops, it’s not a good idea to look at that as lost profits. Strenk says to look at gas in your underground tanks as working capital — the price is gonna go up, the price is gonna go down. Just accept it. Trying to time a price increase isn’t only useless, it’s also reckless, because the worst-case scenario is waiting too long and running out of gas, which means you have exactly zero dollars of working capital.
What the hell is up with gas prices being 9/10ths of a cent?
It’s a ridiculous tradition from the old days when gas cost pennies. There was a fractional-cent federal tax, and everyone figured that rounding up to the next cent — adding an extra penny, in other words — would have made everyone faint. It stuck around because it makes the price appear cheaper.
So gas stations can make a lot of money?
They can, but it’s hard work. People who jump into it as an investment and stay hands-off often find trouble, Strenk says. There are 2,000 SKUs in the convenience store and lots of vendors, so you’ve got to watch your employees like a hawk. There’s a lot of cash and a lot of detailed accounting to keep track of, in addition to myriad rebates, coupons and all sorts of stuff that needs regular attention. So while the vast majority of car owners in this car-loving nation of ours are enslaved to the gasoline pump, there’s money to be made in gas stations for sure — it’s just not necessarily easy money.