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Added benefits of convenience stores in fuel stations

  • Different types of fuel stations with attached convenience store format
  • Success factors for the business model
  • What is more profitable? Fuel station or convenience store? 

 

Convenience stores usually have an area of 2,000 to 4,000 square feet. A fuel station normally has an ample space and can accommodate a convenience store, ATM, fast food takeaway or a small restaurant to generate additional revenue.

There are different types of fuel stations with an attached convenience store combination, few are independent mom and pop type retail outlets with a single facility. The second type is company-operated retail chains for fuel stations with an attached convenience store. These companies may have as low as 10 facilities or as many as 10,000 or more facilities. The third type is oil companies that have forward integrated to open fuel stations and operate an attached convenience store.

Marathon Petroleum Corporation operates convenience store chain; Speedway at 2,730 locations in the United States.

The fourth type is a partnership between an oil company operating a chain of fuel stations and a company running a chain of convenience stores.

British Petroleum (BP) partnered with different companies in distinct nations.  In Germany, it tied-up with German retailer REWE. In Australia, it is considering to collaborate with Caltex and Woolworths. Shell has a partnership with Waitrose and ExxonMobil with Tesco.

In the United States, there is a presence of the major global oil firms and retail giants. It is considered a fair and representative market for the study of fuel station with an attached convenience store business model. There are 127,590 fuel stations with attached convenience stores in the United States. These fuel stations account for roughly 80% of the fuel sales in the country. The breakup as per the number of stores is illustrated in the below chart. The independent retailers account for the majority of the stores in the United States. Addedly, 58% of the fuel stations with attached convenience stores are owned by independent mom and pop type retailers. The business model of fuel station with attached convenience stores is yet to evolve in an organized form. 

Moreover, these firms usually source fuel from a single or multiple oil company or their distributors. The companies may then have a fuel station with the brand name of an oil company. For instance, an independent retailer may have a supply contract with a distributor of Shell and vend fuel under the brand name of Shell. Hence, a fuel station will display a signboard of Shell along with its logo. The branded contract gives a prioritized supply of fuel to the retailer when the market supply is low and the retailer also gets a price advantage. Alternatively, they may choose to sell unbranded fuel as well. The big retail chains such as 7-Eleven and QuikTrip sell fuel in their brand name. Further, roughly 50% of the fuel stations with convenience stores in the United States sell branded fuel.

Televisory evaluated the results of companies operating retail chains for fuel stations with attached convenience stores. The analysis was based on the Casey's General Stores, CST Brands, Murphy USA Sunoco, Alimentation Couche-Tard and Applegreen.

Casey's General Stores, CST Brands, Murphy USA and Sunoco operate in the United States. Alimentation Couche-Tard runs from Europe and the United States. Applegreen operates in Europe and commenced its operations in the United States (2014).

A major portion of revenue for these companies arises from fuel sales. This accounts for 60% to 90% of the revenue. Casey’s General Store’s revenue was nearly 40% from convenience stores, this was the highest among the firms. Sunoco merely had 10% of its revenue from convenience stores, which was the lowest value amid the companies. There was also a correlation between the proportion of revenue from fuel sales and the average revenue per facility/day. The companies that realized a large proportion of revenue from fuel sales generated huge revenue from a facility/day. Casey’s generated the least revenue per facility/day, whereas Sunoco realized the highest revenue per facility/day. This was due to the fact that fuel sells faster than the merchandise in a convenience store. The highest days in inventory for fuel were 8 days and the average were around 5 days as seen in the below charts. However, the highest were 38 days and average days in inventory were nearly 20 days for convenience stores. There was a high proportion of revenue from fuel sales for all the companies on account of relatively higher sales volume and faster sales of fuel than convenience store merchandise.

The performance of these companies also largely depend on their fuel purchasing behaviour, fuel inventory management practices and pricing strategies. Gasoline prices are highly volatile. Hence, purchasing the right quantity of fuel at the right time can positively impact the performance of the fuel segment. The cost at which the fuel purchase is made depends on whether a firm sells branded or unbranded fuel, the contract with a supplier and the wholesale price on a given day. There is a high competition among the fuel retailers. Therefore, there is a limit to the markup at which they can sell the purchased fuel. Occasionally, there is a price war among fuel retailers. The companies analysed, earned a low margin from fuel stations in comparison to the convenience stores as shown in the below chart. The gross profit margin for fuel sales was around 5% for all the firms. However, the gross profit margin for convenience stores exceeded 30% for most except Murphy. In addition, customers visit supermarkets to buy in bulk to meet their household needs. However, customers visit convenience stores to quickly buy a product or two without wasting their time shopping in a supermarket. Therefore, supermarkets mostly sell their products with a discount, whereas the convenience stores sell these products at a premium. Hence, convenience stores operate at high gross profit margins. The total gross profit margin was the highest for Casey’s, which had the highest proportion of revenue from convenience stores. 

The fuel stations can be fully automated and can function with minimal human assistance. This model has been adopted in many developed nations. The only manpower these fuel stations require is in the attached convenience stores. The automated fuel stations can help save significant employee cost. 

The Selling, General and Administrative (SG&A) expense margin is relatively low in this industry, Therefore, the companies that operate on a high gross profit margin also have a high EBITDA margin. The highest gross profit margin was the reason for the highest EBITDA margin for Casey’s, this was despite the highest SG&A expense margin among all the companies.  

According to the 2015 NACS Consumer Fuels Survey, around 35% of the fuel customers visit the store. This survey revealed the following break-up as reasons for visits to convenience stores.

In conclusion, most of the fuel stations with attached convenience stores are an independent mom and pop shops. This business model is slowly getting evolved in an organized retail chain format. The competition among the retail chain operating in this industry is oligopolistic. Thus, from the above analysis, it can be stated that having an attached convenience store is a wise use of space for a fuel station and helps in generation of additional revenue. This may not be significantly incremental. Secondly, there may be a constraint in terms of the prices at which a fuel station can sell fuel but it can always sell the products at a premium in its convenience store. Therefore, an attached convenience store can be beneficial in improving the margins of a company. 

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