The Impact of Gas Price Volatility

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The Impact of Gas Price Volatility

Last year, most retailers' ability to predict gasoline prices took a holiday. By Election Day 2006, c-store operators saw gasoline retails plummet more than 80 cents a gallon in just three months to a national average of $2.20, their lowest level since Christmas 2005. By Thanksgiving, though, the average had edged back up to $2.24.

As many in the convenience industry tried to predict the unpredictable and maintain the lowest price on the street while keeping their tanks at just the right level, profits at the pump were often nonexistent, especially when increased use of credit cards ballooned transaction fees. Others, though, maintained their margins and saw record sales and healthy profits.

Before the election – results of which guarantee a new take on Big Oil regulation and taxation – OPEC cut production by 1.2 million barrels, as the price of oil dropped nearly 30 percent since a summertime peak of $78.40. But a funny thing happened: prices fell a bit and refining supply grew, but demand in the United States didn't increase. The Hurricane season was tame. There were no new terrorist strikes. Oil futures fell.

Later, in mid-December, OPEC reduced production by another 500,000 barrels per day, as participating nations judged the effects of the previous cut and eyed world inventory levels and the U.S. economy.

What does this mean for 2007? Executives of the Pantry Inc. told Wall Street analysts they expect lower gasoline prices during the 2007 fiscal year to hurt profits. The Sanford, N.C.-based chain of nearly 1,500 c-stores in the Southeast, projected 2007 earnings would be less than 2006 results, which CEO Peter Sodini called the best "by a wide margin."

The past year's unusually high gas prices — and, for some, profits – can't be counted on, he said. "I would encourage you not to focus too much on the short-term ups and downs of the gasoline business," Sodini told analysts. "Our focus internally is more on growth of merchandise sales."

Whether we are a headline away from $4 a gallon or refinery surpluses send prices down to $2 a gallon, retailers need a compelling inside offer more now than ever before. Regardless of their gasoline pricing strategy, operators will have to generate profit growth from inside the store. If gas retails climb and consumers' spending power is squeezed again, impulse purchases, like candy and snacks, will be especially hard hit. A more compelling inside offer may allow a more favorable margin at the pump without jeopardizing loyal customers' business.