By DAVID MOON, Moon Capital Management
There is something that draws me to
extremes. I love convenience stores and Wal-Marts.
One is just a little
bitty version of the other. They each sell magazines, fresh quasi-pizza,
baseball caps, CD players, toilet paper and gasoline.
Families across our great
nation are enjoying the summer, continuing traditions that span generations.
Things like beach vacations or Disney World. Camping trips and mosquito bites.
Visits with grandparents.
And higher gasoline
The relationship isn't
perfectly predictable, but retail gas prices normally increase about 10 to 20
cents a gallon from January to June.
That's why I was so
surprised when the independent gas station-convenience store down the road from
my house closed a few weeks ago.
How could a business fail
when its most visible product is increasing in price?
More easily than you might
Most people don't realize
it, but the retail profit in a gallon of gasoline ranges from negative 2 percent
to positive 7 percent of the pump price. The average for a well-run company is
about 3 percent. For every gallon of gas you purchase at the corner Pilot
station, the company probably makes less than a dime.
The average price of a
gallon of regular gas in Knoxville is about $2.82. The largest part of
that amount pays for the cost of the crude oil. At $70 a barrel,
$1.60per gallon of the
pump price simply pays for the stuff in the ground. It costs another 80 cents a
gallon to refine it. Then there are state taxes, federal taxes and distribution
costs. The bank that processes the credit card transaction makes 2
You pay $2.82. The
gas station is left with 8 cents.
The bank gets 6 cents,
almost what the gas station makes.
And as the pump price of
gasoline increases, the retailer actually makes less money.
When the price of crude
oil increases, that price is immediately reflected in the cost to the
refineries. But it typically takes seven to 12 weeks for the wholesale price
increase to be fully reflected at the retail level.
During that adjustment
period, the retailer experiences smaller margins.
With that piece of
information, it becomes a bit easier to see how that gas station down the road
from me failed. Oil prices increased, as did the pump prices, but the small
businessman who owned the station was actually making less money. And if any of
his customers reduced their driving because of higher prices, his problem was
When you're selling a
product with a 1-percent profit margin and that margin is declining, it doesn't
take much of a decline in sales to shrivel your bottom line.
I'm guessing that this
little gas station wasn't selling enough cappuccino and gross
cheeseburger-flavored things shaped like hot dogs to compensate for the decline
in fuel profits.
As consumers, it's pretty
easy to mistakenly assign all the blame of retail price changes to the folks who
actually hand us the goods we buy.
But if the product is readily
available in many locations, if the retailers are selling the same product and
if consumers have knowledge of their shopping alternatives, it's a good bet that
changes in the retail price reflect changes well up the
manufacturing-distribution channel, not at the retail
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).