If you’re considering investing in gas stations and convenience stores, you’ve picked an excellent time. The industry has been enjoying a decade of growth with no end in sight. When it comes to commercial real estate, many only think of the traditional areas of investing – multifamily, office, retail, and industrial. However, in today’s world of commercial real estate, alternative property types are growing in popularity with a high return opportunity for investors. Gas Stations and Convenience Stores are at the top of that alternative investment list.
Alternative Investments offer many opportunities as their traditional counterparts but face less competition. Alternative Investments offer a new and fresh element to the real estate world for investors interested in diversifying their commercial real estate portfolio.
Page Contents
- Gas Stations and Convenience Stores in the United States
- Buying a Gas Station Business
- Considerations when Investing
Gas Stations and Convenience Stores in the United States
Revenue from Gas Stations with Convenience Stores has risen an annualized 4.0% to $457.4 billion over the course of the past 5 years from 2016-2021. Profit yielded $11.4 billion with a growth rate of 5.8% from 2016-2021. A profit margin of 2.5% remained steady from 2016-2021, a historically high level for the industry.
2021 saw economic recovery due to a surge in consumer spending and traveling post-pandemic. With the lift of Covid and subsequent rise of crude oil prices, NACS reports that convenience store sales skyrocketed reaching $705.7 billion at the end of 2021, combining the $427.8 billion sales in fuel with the $277.9 billion sales from convenience stores.
Trends in this industry include the price of crude oil, consumer spending habits, inflation, location, electrification, and product expansion within the store. Key factors such as current gas prices and global events, the quality of financial and debt management, the supply contracts in place, disposable income, driving habits, and the addition of a c-store to a gas station all impact the profit of the gas stations with convenience stores market.
The majority of stations are owned by an independent operator; these operators have the choice to franchise their station or to independently operate, buying gas on the open market. Most locations feature convenience stores, auto repair shops, and/or car washes, among other products and services designed to boost profit. The most frequent consumers fall between the ages of 35-54. This age group consists of employed drivers earning higher wages, thus requiring and able to pay for gas. Individual consumers account for 97.2% of the gas stations with convenience stores industry— it is increasingly important to add value to a station through its convenience store.
Buying a Gas Station Business
Demand, Location, Revenue, and Services
With fierce competition among gas stations, the industry will seek to pair stations with c-stores and other services to increase profitability. Read on to answer some of the biggest questions surrounding this industry.
Is there a strong demand for gas station businesses?
It is no shock that the gas station industry is highly volatile. With the increased introduction of electric and hybrid vehicles, demand for gas has slightly decreased. Let’s dive into demand factors.
Increased Volume of Sales
With the high prices of gasoline at the pumps, sales have drastically increased within the past few months. This drives revenue up, while profit remains around the same.
Miles Driven by Consumers
With the lift of the pandemic, most consumers have returned to work and continued their regular activities- driving more. Many commute to work, filling up their tanks regularly. Assuming the employment trends stay steady, consumers will be spending more on gas.
Crude Oil Prices Rising and Falling
Increased prices of crude oil directly lead to raised gasoline prices. With the impact of foriegn tension, a supply gap has been created in the midst of strong demand. This makes oil expensive and prices at the pump high. Gas station operators have a tendency to pass savings to customers; that being said, competition is fierce and can potentially lead to operating losses.
Energy Efficiency Tax Credits
Consumers were encouraged to purchase electric vehicles with the incentive of federal tax credits over the past five years. This could contribute to a slight decline.
Where is the biggest market for gas station businesses?
Concentration is influenced by population and accessibility. Middle-aged consumers are the most frequent demographic. Take a look at popular market hubs.
Urban and Tourist Locations
With the competitive market, most stations are in high-traffic areas or locations that are busy. Tourist spots in urban areas are among the most popular, especially ones that are open year round.
Site Accessibility
Consumers are willing to pay more for gas stations that are easily accessible and not hard to enter and exit. Interstate and main street locations showcase this fact. High volume areas with easy access get the most business.
How do gas station businesses generate most of their revenue?
More businesses are relying on convenience store sales to drive profit. Gasoline contributes over half the revenue of a gas station; however, profit margins in the gasoline sector are slim. Read on to learn more.
Higher Profitability Items
With consumer spending increasing and gasoline profit sparse, businesses must increase the revenue of convenience store items to drive profit. Popular items such as packaged meals, cigarettes, and beverages yield higher profit margins and should be sold in high volume.
Refining Product Selections
With the growing popularity of electric vehicles, operators are encouraged to offer fuel alternatives to gasoline. Increasing the product range and refining the selection of c-store products will only add value to the station.
What types of services do gas station businesses provide?
Prepackaged Meals
Convenience stores have begun selling healthier meals and snacks, some offering ready-made orders. Consumers are deferring to healthier meals and becoming more conscious of what they are putting inside their bodies.
Groceries
Warehouse and chain stores are supplying gas stations along with their businesses. C-stores have started offering fresh fruit and other products as a result.
Automotive Repair Services
Minor services such as oil changes and tire alignments may be offered by some companies. Those featuring services such as car detailing and washing provide an added bonus.
Car Washes
Many businesses, such as HEB, offer drive-through washes to gain a competitive edge and increase attraction. Some may even provide this service for free as an incentive to fill your tank.
It is clear that the Gas Stations with Convenience Stores Industry thrives where market concentration is high and stations are easily accessible. As the industry has a high rate of volatility, operators and owners should increasingly shift their focus to convenience store operations. While revenue comes from gasoline sales, profit comes from the expansion of product variety and from a wider range of services.
Considerations when Investing
As gas stations with convenience stores require a large capital investment, there will be risks associated with the investment. Read on to dive into some potential risk factors and examine possible mitigation.
Due Diligence
With buying an existing business can come due diligence issues. This can include fraudulent or inflated financial figures. In addition, performing thorough due diligence can involve lengthy costs and time. Only those who are well-qualified should perform the due diligence; the documents can take time in processing between all parties involved. (This is why it is strongly recommended to have a trusted, experienced broker such as at Lumicre perform due diligence — this significantly cuts down the time to process with a focus on expediting.)
Scalability
Scalability becomes harder with this asset as it requires a high capital investment and additional stations available nearby. Operations require a heavy focus, causing the majority of owners to own 1 store as it becomes difficult to manage multiple. This is why it is important to choose which gas station to invest in wisely.
Owner-Operator Model
The gas station business operates with a different model than most businesses do. The owner must be willing to spend time working at the store as its operator and “general manager” so to speak before generating enough revenue and profits to hire a general manager themselves. The amount of time before hiring will depend on how an owner executes elements of success and a credible business plan within their station.
Competitive Market
It is no surprise that this asset competes in a highly competitive market. That being said, the business is a simple one that has drawn many business owners to it due to its simplicity. It is important to note here that an owner must be aware of the strengths of the station, the needs of the consumers, the location of the station, and how to increase profits through an attached convenience store (the real profit maker.)
Low Margin Business
This business is highly volatile, with gas prices fluctuating around oil prices and the economy. While gas brings in the most revenue, convenience stores bring in the highest profits.
The more services a station can offer in addition to its appearance and cleanliness significantly increases the likelihood and chances of drawing in a higher number of consumers and generating a higher amount of profit.
Environmental
Purchasing a gas station could potentially come with environmental liabilities such as contamination; to offset this, it is vital a potential owner obtains a Phase 1 Environmental Site Assessment (ESA) to screen for previous, current, and potential hazards. When an owner chooses to buy, the purchasing agreement should allow for an Environmental Contingency Clause, permitting the owner enough time to perform the ESA and cancel the contract if needed. Another key way to mitigate environmental contamination is the purchase and use of double walled fuel tanks at the station; these tanks monitor leaks, resist inclement weather, and automatically comply with EPA regulations.
Safety
Safety concerns include robberies and fires — these concerns can be mitigated through proper lighting inside and outside the store, adequate training of employees, and consistently maintaining a clean, appealing, and up-to-code appearance.
Evolving Market Landscape
The market is adapting and evolving in the realm of technology, with the rise of electric vehicles, ride-sharing apps, and driverless cars. With more companies manufacturing electric and hybrid cars, demand for gas will slightly decrease. However, this presents convenience stores a unique opportunity to capture electric customers with EV charging ports and green-efficiency marketing. (Read more about electrification in the market in the “What about Electric Vehicles?” article.)
High Investment Business
Gas stations clearly come at a high investment cost that ranges anywhere from a few hundred thousand dollars to over a million. It is important for an investor to evaluate the station, land cost, potential for success, and the convenience stores’ potential to generate profit before selecting a station to buy.
Traffic and Road
It is noteworthy to mention the potential impact of road conditions. As gas stations thrive near high-traffic areas, changes in traffic patterns will need to be examined as well as upcoming road construction. A detailed reporting service or trusted broker can provide this information.