It’s no secret that gas stations lure you in with cheap gas and stick it to you with $1.35 for gum, $1.50 for a 20oz Dr. Pepper, and don’t even get me started on beer. But can it really be that simple? If it were, there wouldn’t be more paragraphs to read below.
We’ll get back to those high priced goods in a second. I’m actually going to start you off with the most interesting way gas stations makes money. And I should preface this with a warning: this is how SMART gas stations make money.
From a supplier standpoint, gas stations don’t have much power over the companies that supply the gas they sell. The pretty much have to buy it at the price they’re selling it for. But that doesn’t meant they can’t help play some numbers games to make a buck.
Why is it that when oil drops from $100 to $50, gas doesn’t go from $3.00 to $1.50 just as quickly? Oil companies make a similar profit at any price point, and so the actual price of oil isn’t their primary concern. Gas stations however live and die by price. When the oil companies start selling it for cheaper (say $2.90 wholesale) the gas station has no incentive to reduce prices. They’ll draw this out all the way down to the bottom of the current run on prices (say $1.40 wholesale). But once prices start increasing for them do they move just as slowly? No chance. They hike those gas prices quickly.
Have you heard of making money on volatility? That’s the idea. When prices fall, gas stations drop the price slowly, making their margin as the price is moving. When prices increase, they jack them back up quickly to keep in lock-step with the price they pay from the wholesaler.
Sneaky right? But how can that work on a busy street with 5 gas stations? Someone is bound to cut their prices and start a price war. Yeah this happens from time to time, but not as frequently as you’d think. Coke and Pepsi don’t EVER compete on price, Miller and Bud keep in line too. This isn’t collusion, but the companies know that competing on price will kill both their profits. Better to profit and compete on “branding” than compete on price and lose profit. Most gas stations realize this too.
But of course this isn’t including the convenience stores at all. Well they’re called convenience stores for a reason. They’re close by. Most of the country lives closer to a gas station than a grocery store. There’s also more of them, and you pass more of them on your commute. It’s easy to stop in for cigs, lotto tickets, Colt 45s, Red Bulls, Milky Ways, and some orange juice. This is what college kids call “breakfast”. These items are all overpriced (excluding lotto tickets which are a whole other post) when compared to grocery stores and Wal-Marts and all that. The price of any item you pay for has certain costs and taxes built in. Naturally Wal-Mart can buy Red Bulls for cheaper than your local Shell. But much of the mark-up is what I call the “convenience tax”. It’s the tax you pay for the privilege of having the items you desire near by. They can’t charge whatever they want because it would eventually get too high and you’d be willing to get back in the car and go to Wal-Mart, and the stations know this. Convenience items can be so profitable, some stores just stop selling gas because they already have enough foot traffic.
Should we hate the gas stations for charging so much for this stuff? Of course not. You don’t have to shop there, and when you absolutely need to then it’s worth your money. But what about the gas pricing game? They’re screwing the customer right? No. They’re making a buck. Chances are you work for a for-profit company. Should your company be hated for using their profit enhancing tactics?
One final note, when gas prices spike, gas stations really do get screwed. Their margins get squeezed because you and I buy less gas and so they have to lower prices enough to keep people coming into the stores. We ALL lose when gas prices go higher, except the oil companies which, as I said, can pass on much of that cost to gas stations and us. Don’t damn them, buy stock in them.
Photo: raindog
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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