Gasoline marketing profit margin indicators explained

Nov. 16, 1998
Oil & Gas Journal begins publishing profit margin indicators for the gasoline marketing business in this issue (see Statistics section). These margins, which will be published monthly, are developed by Ernst & Young Wright Killen (EYWK), Houston, a management consulting group with expertise in the downstream energy sector.
Jason R. Williams
Ernst & Young Wright Killen
Oil & Gas Journal begins publishing profit margin indicators for the gasoline marketing business in this issue (see Statistics section).

These margins, which will be published monthly, are developed by Ernst & Young Wright Killen (EYWK), Houston, a management consulting group with expertise in the downstream energy sector.

The margins summarize marketing profitability for a composite U.S. gasoline market to provide an indication of overall wholesale and retail gasoline marketing profitability. EYWK also compiles monthly profit indicators for U.S. refineries, natural gas processing plants, and ethylene plants, summaries of which appear in OGJ.

This article outlines bases and methods employed to arrive at the EYWK gasoline marketing margins.


In the gasoline marketing business, oil companies can participate in many distinct channels of trade. Each segment has a particular gasoline sales price associated with it and a gross margin that is unique and indicative of the profitability level of a given channel.

The difference between the channel's gasoline sales price and the cost of gasoline for the channel of trade is defined as the gross margin. Table 1 [108,933 bytes] provides a description of major channels from an oil company's perspective.

Non-oil company participants realize different marketing gross margins from gasoline. For instance, an independent station owner's gross margin for gasoline is equal to the retail sales price (ex-taxes) less the dealer tank-wagon price. A convenience store chain or jobber who owns retail outlets will see a margin equal to the retail sales price (ex-taxes) less the wholesale rack price.

EYWK's margin indicators capture the gasoline gross margins for three of the segments. The margins are as follows:

  • Wholesale margin-Oil company unbranded jobber margin
  • Retail margin-Retail jobber/convenience store margin
  • Marketing margin-Oil company-owned outlet margin.
No attempt has been made to capture any gasoline marketing margins involving the dealer tank-wagon price. It is our experience that these prices are not readily and reliably available from public sources.

EYWK calculates these gross margins for four major metropolitan markets, which are intended to reflect the general gasoline marketing conditions for key U.S. population centers. Results from the four benchmark cities are then used to calculate composite margins for the U.S. as a whole. The four benchmark metropolitan areas are New York, Chicago, Houston, and Los Angeles.

Results for the individual cities are published in EYWK's Downstream Performance Monthly, a subscription magazine. Only the composite U.S. results will be published in OGJ.

EYWK's margins include contribution from unleaded regular, midgrade, and premium gasoline sales. The EYWK marketing margins are exclusive of any profit contribution from diesel fuel sales as well as any revenue from nonfuel sales such as car repairs, services, or merchandise.

Costs associated with operating a marketing business have also not been reflected in the indicators. Additionally, any marketing costs associated with transportation, favorable credit terms, allowances, rebates, or volume discounts are not accounted for in the margins.

Margin calculations

EYWK wholesale margins for a metropolitan area are the difference between the region's wholesale unbranded rack price and spot price.

Rack and spot prices are volume-weighted averages of the region's sales of unleaded regular, midgrade, and premium gasoline based on sales data from the U.S. Department of Energy's Petroleum Marketing Monthly. Table 2 [21,927 bytes] shows the approximate grade mix weights for 1997.

The wholesale rack price for each grade is the monthly average unbranded price. The unleaded regular, midgrade, and premium gasoline spot prices are the average pipeline spot prices for Houston, Chicago, and Los Angeles and the average barge spot price for New York.

EYWK regional retail margins equal the average retail street price less taxes and the rack price. These prices are also grade mix-averaged from sales data published in Petroleum Marketing Monthly. The retail prices are the monthly average metropolitan area prices collected by the U.S. Bureau of Labor for use in its development of the consumer price index.

Taxes deducted include both federal and state taxes and any appropriate county road taxes or sales taxes. Rack prices are the same as those used in the wholesale margin calculation.

EYWK regional gasoline marketing margins for New York, Houston, Chicago, and Los Angeles are a region's retail price less the spot price and any associated taxes calculated on a grade mix average basis.

Pricing data used to derive the EYWK gasoline marketing margins come from a variety of sources, including Platt's Oilgram Price Report and Oil Price Information Service.

Historical perspective

The next two sections examine gasoline marketing profitability on a historical basis. The U.S. composite margins for 1993-97 are analyzed in detail in the first section; attention is paid to price levels, volatility, and seasonality.

In the second section, annual 1993-97 wholesale, retail, and composite marketing margins are discussed for the four key cities used to derive the U.S. composite margins.

U.S. gasoline margins

Fig. 1 [75,690 bytes] presents EYWK's calculations of U.S. composite gasoline prices used in the margin indicator calculations for 1993-97.

During that period, spot and unbranded rack prices averaged 58.4¢/gal and 62.7¢/gal, respectively. However, both spot and rack annual prices in 1997 had increased approximately 23% from their low 1994 annual average levels. Spot and rack prices have been cyclical, peaking in the summer with demand and declining with gasoline consumption to their lowest levels during the December-February time frame.

Retail street prices and retail prices excluding taxes are shown in Fig. 1. During 1993-97, retail street prices demonstrated a slow but steady increase. The annual average of 118.9¢/gal in 1993 was approximately 12% lower than the 1997 average of 133.6¢/gal; the average retail price over the 5 year period was 126.6¢/gal.

On a seasonal basis, retail prices exhibit a pattern similar to the other prices shown, with prices peaking with demand in the summer and declining as demand slows in the winter. However, the seasonal lows in retail prices tend to lag spot and rack lows by 1-2 months.

Fig. 2 [79,948 bytes] shows EYWK U.S. composite wholesale, retail, and marketing margins. During 1993-97, wholesale margins averaged 4.3¢/gal. Wholesale margins have shown the greatest volatility relative to the other margin categories because spot prices are subject to the most fluctuation and variation in price levels.

Retail margins for the period averaged 19.2¢/gal and ranged from 16.6¢/gal to 21.5¢/gal. The composite marketing margin ranged from 21.2¢/gal to 25.1¢/gal and averaged 23.5¢/gal during the same time frame. Both the retail and composite marketing margins exhibit considerably less variability in margin levels relative to the wholesale margins as smaller changes in retail street prices dampen margin swings.

The U.S. marketing margins have definite seasonal trends, with profitability levels peaking in the late summer and fall and reaching lows in the late winter and early spring. The margins for the four benchmark cities exhibit similar seasonal patterns.

Regional gasoline margins

Although individual city margins will not be published in OGJ, a review of city margins can give historical perspective and provide insight into overall U.S. gasoline marketing profitability.

Table 3 [22,810 bytes] shows the 1993-97 average wholesale margins for New York, Houston, Los Angeles, and Chicago. Over this period, Chicago experienced the lowest wholesale margin, at 2.85¢/gal. New York was the most profitable at the wholesale level, averaging 6.00¢/gal. The Los Angeles margin was the most variable during the same period, ranging from 3.02¢/gal to 7.89¢/gal annually.

Table 4 [22,931 bytes] presents annual retail margins for the metropolitan areas. Chicago experienced the greatest profitability with a retail gross margin averaging 22.35¢/gal for the period analyzed. Houston had the lowest retail margins at 13.17¢/gal for the same period. Houston also had the most variability in retail margins, with a low of 8.51¢/gal in 1997 and a high of 20.32¢/gal in 1994.

Table 5 [23,437 bytes] shows regional gasoline marketing margins (the sum of the wholesale and retail margins). Houston has been chronically the lowest margin area, with marketing margins averaging 16.07¢/gal.

In recent years, Chicago margins have improved while Los Angeles and New York margins have remained relatively stable. For the period covered, Chicago led the other three regions with margins averaging 25.20¢/gal.

Gasoline marketing economics

The EYWK gasoline marketing margins constitute a tool that companies can use to assess relative market and channel-of-trade attractiveness over time. However, they represent only part of the overall analysis necessary to assess the financial performance of the gasoline marketing business.

Financial performance is dependent on the markets and channels of trade in which a company participates. Each has unique gross margins, expenses, and investment requirements associated with it. Three major channels of trade are assessed here: company-owned, lessee dealer, and branded dealer channels (Table 1).

The revenue and expenses in the following sections are presented in terms of cents per gallon of gasoline sales. Sample economics indicate relative operating income profitability of the several channels of trade. They also provide a quick method of converting the EYWK gasoline gross margins to operating income by presenting guidelines for particular expenses necessary for certain types of gasoline marketing operations.

Company-owned economics

Company-owned stations represent a relatively small percentage of retail outlets in the U.S. In this channel of trade, the integrated oil company participates in the entire value chain, and the EYWK marketing margins indicate gasoline margins realized as a source of revenue. The other major sources of revenue are ancillary income from diesel sales, convenience store sales, and car repair services.

The revenue contribution from diesel sales is relatively minor, with the exception of companies with significant truck-stop store populations. Within the company-owned channels of trade, there are numerous station formats that generate additional revenues, such as cobranding fast foods, franchising, and vehicle-emission testing. However, the major revenue contributors are merchandise sales and vehicle repairs.

The major expense categories for company-owned stores are distribution, direct station expenses, marketing overhead, and corporate overhead.

Distribution costs represent the oil company's trucking and storage costs to deliver gasoline from the wholesale terminals to the stations. Direct station expense represents out-of-pocket expenses incurred at the station, including labor, utilities, environmental control, and maintenance. Marketing overhead includes field marketing support, advertising, promotions, accounting, legal, credit card processing, and direct marketing overhead.

Lessee dealer economics

In the lessee dealer channel, the oil company owns the station and leases the station to a dealer.

The dealer pays the oil company monthly rent on the station, sets the street price, receives revenues from formats (e.g., convenience store and service bays), operates the station (and incurs all operating expenses), and purchases gasoline from the oil company that is delivered to the dealer's station.

The oil company maintains the station, provides business counseling services to the dealer, advertises, and develops promotional programs. The oil company establishes dealer tank-wagon prices that are charged to all dealers within a marketing geography and negotiates monthly rent with the dealer.

The components of revenues and expenses are different from the company-owned channel of trade. Since the oil company sells to the dealer at a dealer tank-wagon price, we impute the oil company's margin by subtracting the estimated dealer outlet margin from the EYWK gasoline marketing margin.

The oil companies charge the dealer rent, which varies depending on the level of investments and income-producing potential for each site. Ancillary revenues include tires, batteries and accessory sales, promotional fees, and sales of some convenience store items.

Direct station expenses are primarily maintenance and environmental expenses since the dealer incurs the station operating expenses.

For this example, we have assumed marketing and corporate overhead are the same as the company-owned channel of trade. Some companies are allocating overhead based on cost drivers for each channel of trade and distributing overhead based on these drivers.

The required investments by the oil companies are significant for this channel of trade. It is interesting to note that, for this case, the income before consideration of taxes, interest, and depreciation for the national average is essentially the same as that of the company-owned stations.

Branded jobber economics

The branded jobber usually serves rural areas and lifts the gasoline from oil company terminals. The jobbers either have directly owned stations or supply branded outlets owned by third parties.

The EYWK wholesale margin indicates the gasoline margin for the branded jobber channel of trade. Diesel sales are generally higher for jobbers and represent a significant contribution to oil company revenues. Since the jobber incurs the trucking costs, the distribution and overhead costs are lower than those of the company-owned or lessee dealer channel of trade.

The net income before tax is substantially lower than the company-owned or lessee dealer channel of trade; however, the investment in the jobber channel of trade is substantial. The investment is usually limited to signage and some limited investment allowances.

The Author

Jason R. Williams is a senior consultant with Ernst & Young Wright Killen. His work focuses on financial and strategic issues in the downstream energy business, including business valuation, financial performance measurement, and analysis of merger-acquisition and joint venture activity.

Williams holds BS (mechanical engineering) and MBA degrees from Rice University.

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