Gas cuts into store profits

Fuel costs force small owners to sell while big players look for advantage

Those towering gas-station signs sporting bigger-by-the-day dollar figures tell most people all they need to know about gas prices. Gas goes in the car; more cash comes out of the billfold.

But a more tangled tale of diminishing returns is emerging below the signs.

The gas prices that are pinching consumers are sapping profitability from gas stations, nudging some small owners to sell their businesses and properties at a time when tight commercial lending is making it harder for mom-and-pop investors to buy in.

The dynamics appear to be forcing the prices of gas-station real estate down for the first time in more than a decade, creating new opportunities for investors who have the strength to borrow and buy.

"The big are getting bigger and the small are getting out," said Terry Monroe, president of American Business Brokers, a St. Louis company that helps investors buy and sell gas stations and convenience stores.

Waheed Haq is among those hitting the exit.

In June 2005, when a gallon of regular unleaded gasoline averaged $2.10, he paid $430,000 for a gas station at 2938 Capital Blvd. in North Raleigh.

At the time, the station was bringing in about $36,000 in profit annually, boosted by sales at the associated convenience store.

"We thought we'd keep it for a long time," Haq said.

Gas stations already have low profit margins, typically between 1 and 2 cents per gallon annually, according to the National Association of Convenience Stores.

But now that rising oil prices have pushed retail prices above $3.25 per gallon, Haq's customers are buying fewer candy bars and sodas in the convenience store, where most his money is made.

The station is on pace to pull in just $12,000 after expenses this year.

"Basically we have to fight for the pennies," Haq said. "I'm not fit for that."

So he's trying to sell the property for $650,000. That's 51 percent more than what he paid -- a slight gain, considering that the average price of Wake County convenience-store gas stations almost doubled between 2005 and 2007, according to data from Koonce Realty Research of Raleigh.

Prices for deals closed this year were off 18 percent from last year, averaging $1.12 million through March 31, Koonce's data show.

Nationally, the average price of convenience-store gas stations sold through March 26 was $1.42 million, down 12 percent from last year's average, which was a decade high, according to data from Marcus & Millichap, an Encino, Calif.-based brokerage.

Prices are dropping as it becomes harder for small investors, who make up more than half of the country's gas station-and-convenience store operators, to secure financing.

There's still plenty of people who want to buy, said Patrick Schultz, chief executive of Realty Exchange Group, an Apex company formed last year to focus on energy-related property deals. "But that's very different than being able to buy things," he said. "With the credit markets as tight as they are, one of the greatest challenges today that sellers have are finding qualified buyers."

Some see a chance

The softness is allowing those investors who can easily secure loans to bolster portfolios.

A private equity firm, for instance, recently hired Realty Exchange Group to help it locate and invest $200 million in unbranded gas stations and convenience stores.

The investment group, which Schultz would not identify, is taking advantage of the softer market to build a portfolio and create and operate its own brand.

Bigger buyers face the same profit pressures as smaller operators, but to a lesser extent. They can use their girth to reduce wholesale prices of gas and snacks, widening margins.

The Pantry, a Sanford company that operates 1,600 convenience stores under Kangaroo and other brands in the Southeast, reported gas profits of 10.6 cents per gallon in the fourth quarter.

The company last month snapped up 14 convenience stores with gas stations in Mississippi. The seller probably would have held if margins were better, said Pantry CEO Pete Sodini.

"We continue to look for good properties," he said. "Obviously the prices are substantially lower than they would have been 18 months ago."

But that doesn't mean the company is going on a buying spree. The Pantry predicted sales of merchandise at stores open more than a year might be flat or slightly down for fiscal 2008.

"We're being very cautious," Sodini said. "We want to see where this market shakes out in terms of energy -- how long these high costs are going to persist and how people react to them."