It’s easy to look at gas stations and think that the owners must be loaded. People visit gas stations 24/7, so it has to be extremely profitable, right? Well, it isn’t as straightforward as that.
We tend to think that any business related to the oil industry must be overflowing with money. However, reality paints a different picture. IBISWorld states that the profit margin on fuel is only 1.4% for gas station owners. To put that in perspective, the typical profit margin across all industries is 7.7%.
In this article, let us explore some of the challenges that those thinking about a gas station business should be aware of.
1. Safety Is a Big Responsibility
Due to the presence of flammable fuels, heavy machinery, and a constant stream of customers, safety is a paramount concern. One of the most critical of these is the risk of fires and explosions. Gasoline and diesel fuels are highly flammable, and even a small spark can lead to a catastrophic fire.
Thus, a significant portion of your investment will go towards ensuring safety protocols are met. Don’t brush this factor away. From fire suppression systems to employee training, you will constantly be responsible for safety as an owner.
The reason you don’t hear too much about fires in gas stations is because of the extensive preventive efforts. Safety risks are everywhere, even in the most unassuming places. Even the fire extinguishers used are dangerous to the people who operate them.
That’s right! Fuel fires are often put out with extinguishers that use particularly toxic chemicals. These extinguishers contain the infamous PFAS category of chemicals. There has been so much controversy around them that over 6,000 AFFF foam lawsuit cases have been filed.
According to TorHoerman Law, most of these cases are related to the close link between cancer and aqueous film-forming foam (AFFF). Over ten different types of cancer have been linked to the use of AFFF-based extinguishers.
If your employees end up getting sick after using an AFFF-based fire extinguisher, they will expect compensation from you.
2. Heavy Regulation Woes
The gas station industry is heavily regulated at the federal, state, and local levels due to safety and environmental concerns. Gas stations are required to follow strict regulations related to the installation, maintenance, and monitoring of underground storage tanks.
These regulations aim to prevent the groundwater from getting contaminated. You then have to deal with zoning regulations that dictate where gas stations can be located. They also dictate the types of services the gas station can offer.
Receiving licenses can be a complex process, as you need to obtain them at the municipal, county, and state levels. Everyone knows how tough it can be to deal with the government, and running a gas station involves a lot of it.
3. It Isn’t as Profitable as You Imagine
At the end of it all, profits are nowhere high enough to justify the efforts you put in. It costs an average of $305,325 to start a gas station, but that could be more depending on location. Most gas stations don’t rely on gas sales alone. Instead, a lot of the income comes from convenience store items.
What’s more, you may think that finding customers is easy, but you actually have tough competition. The prime locations of busy freeway exits already have long-established gas stations.
You have to deal with the constant fluctuation of wholesale gas prices. When the price goes up, gas stations take the loss and keep prices steady. This is because raising it would mean losing customers to the competition.
It’s a ruthless business, and you have to hope that you can make up for losses when prices fall. Studies have shown that 59% of customers value lower prices over the quality of fuel, in-store items, or customer service. In other words, the price point is king, and you have to bend over backward to be competitive.
Starting a gas station is not for the faint of heart. It is a significant investment that will require considerable capital to sustain you until you recoup your investment. If you are hoping for a simple investment opportunity, look elsewhere.
There’s a reason that many oil companies have exited the retail business. Instead, most gas stations today are franchises that pay royalties as high as 14% to use an oil company brand name.
Alternatively, you could become one of the few independent operators that run no-name gas stations. This requires you to buy gas on the pern market, which brings its own set of challenges with it.