Gas stations are turning to convenience stores to make up for rising credit-card fees that are cutting into fuel profits.
Leah McKane's fresh sandwiches help make her St. Paul gas station a food destination as well as a fuel stop.
That's good, because despite soaring gas prices, McKane makes more money on a $3 sandwich than she does on a gallon of gas costing $3.23.
These are tough times for gas stations such as the Como Raymond BP where McKane is manager. Even though the price of gasoline has soared, the amount of profit that station owners get for each gallon has stayed the same. But the transaction fees that gas stations must pay Visa and MasterCard when customers use those cards to buy fuel have gone up.
As a result, gas stations have turned to in-station convenience stores to help pay expenses. McKane's convenience store was remodeled and expanded within the last year.
"For most gas stations, it's the convenience store that makes the money," said Sue Nelson, who with her husband operates Fridley Amstar Auto Care. "You need to have an alternative profit center, whether it's a convenience store with a deli, a car wash or a repair center."
For McKane, the service station math on selling goodies vs. gas works this way: Her fresh deli sandwiches sell for $3 and generate 90 cents in gross profit (profit before expenses), or 30 percent. A gallon of gas sells for $3.23 and generates 14 cents in gross profit, or 4 percent.
But because gas is purchased mainly with credit cards, McKane's BP station must pay transaction fees of roughly 6 cents a gallon (1.75 percent per gallon) to Visa or MasterCard.
That cuts the gross margin on gas from 14 cents to 8 cents a gallon, or a profit margin of just over 2 percent.
"You can't run the place on that," McKane said. As a result, her convenience store looks like a cross between a grocery store and a delicatessen: cold sandwiches, hot cheese curds, doughnuts, fruit juices, milk, eggs and flour -- products on which gross profit margins range from 10 to 40 percent.
The service station profit squeeze comes at a time when consumers already are buying about 1 percent less gas than they were last year, presumably because of high prices, said Lance Klatt, executive director of the Minnesota Service Station Association in Little Canada.
The problem afflicts the 95 percent of service stations that are privately owned rather than owned by major oil companies, said Dan Gilligan, president of the Petroleum Marketers Association of America, a Virginia-based trade group. Some oil companies have been selling their stations to independents.
Why are credit-card fees a bigger problem than before? Credit-card charges increase as a percentage of the total gas purchase, but service station gross profit margins are fixed at about 14 cents a gallon or less, no matter what gas costs.
The practical result is that the 14-cent-per-gallon gross profit is being eroded by escalating credit fees. At $2 a gallon, the 1.75 percent fee cost the service station operator 3.5 cents a gallon, cutting his margin to 10.5 cents. But at $3 a gallon, the fee cost 5.25 cents a gallon, reducing his gross margin per gallon to 8.75 cents. If gas prices rise to $4 a gallon, the fee will be 7 cents, and the station's gross profit will drop to 7 cents a gallon.
Other credit cards, often used by businesses that own fleets of trucks or other vehicles, charge even higher transaction fees than Visa and MasterCard, McKane said.
"They eat up any gas profit that's left over," she said.
Nationally, the picture is much the same.
"Most gas retailers would love to have a one-penny net profit on gas [the rough equivalent of a 6-cent gross profit]," Gilligan said. "It's that tight."
Despite the credit-card fees, service stations can't afford to refuse cards and demand cash, because at least 70 percent of gas purchases are made with credit cards, Gilligan said. Some retailers say it's more than 80 percent.
The Petroleum Marketers Association is pushing legislation in Congress that would force Visa and MasterCard to negotiate the credit-card transaction fees that gas stations pay.
With profit margins on gas this tight, the occasional theft of fuel can be devastating, said Ned Wesenberg, owner of Park Service in St. Paul as well as the BP station that McKane manages.
"A drive-off who doesn't pay for $40 or $50 worth of fuel can wipe out your profit on a whole load of gas," he said.
Steve Alexander • 612-673-4553