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That question is a no-brainer, isn’t it? Selling gas, of course!
Wrong!
Sure, gas stations aren’t charity organizations or government outfits. But at the end of this piece, you might be surprised that’s not really where all their money comes from. Let’s take a shallow dive into the world of gas stations and discover how they truly make their money.
How Profitable are Gas Sales?
Not very much. As of August 28, 2023, the US retail gas price was 3.931 USD/gal. What percentage of this price do you reckon belongs to the gas station as profit?
Let’s do some quick maths.
Crude oil, gasoline’s raw material, currently sells for $85.20 per barrel, putting it at about $2.03 per gallon, thus accounting for 51.6% of the total gas price. But that’s not all it takes to get gas—refining crude oil to gasoline costs about $0.70, which is 17.8% of the price per gallon. The refined crude oil must be transported via heavy-duty trucks to each gas station's underground storage facility, costing $0.30 and 8.1% of the total price. Finally, the taxes are about $0.70 per gallon, accounting for another 17.8% of the retail price.
With those, gas stations are left with $0.2, which comes in at about 5% – depending on the fluctuating wholesale prices — as markup. Mind you, they still have to factor in indirect business expenses such as credit card charges, employee salaries, insurance, utility, etc., and other incident losses like cashier theft.
That doesn’t appear very profitable to me. So, despite the public's heightened clamors for the fuel price reduction, it might appear that gas station retailers aren’t the bad guys at the end of the day.
Why Don’t Gas Stations Just Raise Gas Prices?
For one, the public will probably lose it. But It's not really like they care about the public. They have to sell at competitive prices to keep customers around.
The industry is highly competitive, and individual businesses continuously strive to gain market share as this is the key to how they truly make their money — we’ll get to that in a bit.
In addition, there is a growing popularity of electric vehicles and electric charging stations, which means fewer customers need gas by the day. The market is experiencing a decline, and current players are trying to hold on to anything their hands can grab just to survive.
They simply do not have the luxury of raising gas prices. Instead, gas stations strive to make just enough money to ensure they can run the business while keeping the customers happy in hopes of keeping them around to patronize other services they’d offer.
The Big Reveal: Convenience Stores Are the Real Profit Drivers
If you’ve been feeling so much pity for gas station owners with the financial breakdown in the previous section, you might want to give it a break. Although the maths suggests they might not make enough profit, gas stations have a unique business model different from other retail stores.
Once again, like every other for-profit business, gas stations ensure they get paid at the end of the day, and convenience stores are how they truly get their money. They continuously keep their prices competitive and just enough to run the gas aspect of the business for one major reason: keeping you —- the customer— around and loyal to their station.
You see, every time you pull up at the gas station and step inside to use the clean bathrooms or take a simple walk after a long drive, you get an opportunity to make an impulse or convenience purchase. Gas stations are counting on you to do that. According to the National Association of Convenience Stores, 44% of customers go inside convenience stores when they come to get some gas, and one in three end up making a purchase.
So, the actual profit comes from the items —- which have very high markups, by the way— you purchase in the stores. Some of the items with the highest markups include the following:
- Snacks
- Bottled water
- Beverages
- Self-serve beverage servers (coffee or soda),
- Cigarettes
- Pizza
The concept of convenience stores blows the whole idea open: The gas stations’ primary responsibility is building and maintaining a stable market by providing competitive gas prices. However, how much profit the enterprise makes now depends on what they do with that market.
While having a convenience store might be a great profit driver, gas stations can also get creative with the kinds of services they offer to their customers. They could also decide to offer restaurants, car repair, tire alignments, and engine oil changing services.
It all depends on the business model, the environment, and the market.