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Extreme lockdown measures and voluntary social distancing have
combined to hammer US gasoline demand. In fact, sales during the
final week of March were nearly 47% below the same period the
previous year, with the demand drop-off exceeding 50% in some
regions. IHS Markit believes this is near rock bottom, with retail
gasoline demand expected to average 48% below the prior year during
April. Moreover, gasoline sales will remain far below their
"pre-COVID" level for at least another year.
Interestingly, the collapse in gasoline sales has not directly
been a problem for retail stations thus far. Per gallon margins
have skyrocketed since oil prices collapsed in early March. Margins
will eventually come back down to earth - and indeed they have
trended downward since March 25 - but, for now, the average US
retail station's fuel earnings are actually higher than
they were before COVID-19.
Figure 1: Brent crude price and average US retail gasoline
margin
However, the fuel demand destruction - and the pandemic more
broadly - is also hurting retailers' "inside sales". Fewer
customers purchasing fuel means, all else equal, fewer customers
purchasing food, beverage, and other merchandise in the convenience
store. The average margin on non-fuel sales is at or above 30%, far
higher than the typical 5% to 9% for regular gasoline. However,
this non-fuel margin is relatively fixed so a decline in sales
causes a proportional decline in earnings. And all stations depend
on their non-fuel earnings to survive. In fact, selling gasoline
and diesel has become - even before the pandemic - something of a
secondary priority for many retailers.
Of course, not all service stations are created equal when it
comes to their non-fuel offering. Some stations receive the
majority of their convenience store traffic from customers who just
happen to be there purchasing fuel. Other convenience stores,
whether because of their location, their cleanliness, and/or the
quality of their non-fuel offering, are more "purposeful" shopping
destinations. Obviously, stations in the latter category will fare
better during the COVID-19 pandemic since they are not as reliant
on fuel volumes to drive their non-fuel sales. In fact, the
pandemic could conceivably mean an increase in non-fuel
sales for some stations. After all, most Americans live closer to a
gas station than they do a grocery store, and that geographic
proximity could make all the difference during an infectious
pandemic
The lockdown measures enacted to deal with COVID-19 will end in
a matter of weeks or (at the longest) months. This will help all
retail stations, but none more so than those that lack a strong
non-fuel offering. However, the nation is steadily marching towards
a future in which fuel demand will more closely resemble the
temporary conditions wrought by the pandemic. In this way, COVID-19
offers something of a "stress test" for the nation's retailers; the
stations that are suffering the most today are those that will be
most vulnerable to closure going forward. In fact, the hardships of
the next few months could very well end up accelerating network
rationalization that would otherwise have been spread out over the
next decade.
IHS Markit has an industry-leading retail fuel consultancy. For
more information or to discuss a project, please contact
us.
Rob Smith is a Director of the Global Fuel Retail at IHS
Markit.
