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By Mitch Morrison - 07/17/2002
Unsympathetic diesel fuel margins, as low as 2 cents a gallon, couldn't clot the hemorrhaging that not long ago threatened to retire Palace Truck Stop.

The 15-acre, full-service facility located off Interstate 10 outside downtown New Orleans found itself fighting a futile battle against predatory competition, sacrificing pennies per gallon to woo patrons.

Employee turnover jumped, fleets and truckers parked elsewhere, traditional services waned.

It seemed a matter of time before the mom-and-pop truckstop would be crushed by the biggest threat undermining travel-plaza operators, c-store retailers and petroleum marketers: Fuel as a commodity.

If not for a paradoxical strategy, Palace would also have fallen victim to the fate of all too many family businesses, wiped out by deep-pocketed corporate behemoths and underselling petroleum marketers.

"It was going down," said Shirley Maurer, who joined Palace four years ago as a consultant. "The video poker here was the only thing keeping it open. Poker was going strong, but the truckstop wasn't doing too great. It wasn't looking good."

Dropping margins on diesel — the lifeblood of any truckstop operation — boosted sales but left the outfit financially maligned. "Sales were there, but we weren't making money. We had to go with a new strategy," Maurer recalled.

Palace took the unusual strategy to raise prices — not just of diesel and regular fuel, but general merchandise, too. The price of virtually every item in the store jumped a nickel, and a few cents were added to the pump price at the 14 diesel and eight gasoline fueling positions.

"We have so many so-called truckstops with video poker that make their money off the poker and had no problem going down to no profit on their fuel," said Maurer. "We tried to follow but couldn't. So instead of battling them, we raised our prices, and guess what? It's working."

Since the strategic implementation, fuel sales dollars have fallen by tens of thousands of dollars. But declines have been easily offset by higher pump margins. And inside sales are strong as well, with few customers noticing the price spike.

"We've gone from red to black. We're now showing a profit in every category and we're getting 10 cents a gallon on diesel and gas," said Maurer. "It took a while but the truckers keep coming back because along with the price increases we also improved on customer service and customer friendliness."

Shifting Profit

While Palace lifted margins, one big player in the travel-center business lowered its per-gallon intake to drive traffic and prop up other areas of operation.

So far, the strategy has shown some success at Petro Stopping Centers L.P., the operator and franchiser of 55 locations. Most recently, the El Paso, Texas, outfit reported a first-quarter loss of $886,000 — not bad when compared to more than $3 million lost a year ago.

Nonetheless, it is a net loss. And the culprit is an obvious one. "Margins on fuel have gone down from representing 80 percent of our total revenues to 50 percent," said marketing director David McClure.

Diminishing margins have imposed greater strains on the company's other profit centers, which now yield half of Petro's net profit. "Our truck repair, restaurant, fast food and travel merchandise all have to do that much better to make up for what we're losing on fuel," said McClure.

"Falling [fuel] margins have led to needing larger locations to generate more traffic," he said. "The last five locations we've opened have been larger in terms of parking. We're building more stand-alone c-stores on our lots. We're adding more MPDs [multi-pump dispensers] for the four-wheeler."

To stimulate traffic at its other profit centers, Petro has dropped fuel margins in a bid to attract more customers. "If you can drop your fuel margin from 8 cents a gallon to 4 cents and double your volume, you have twice as many customers coming in," he said. "You're cutting your fuel margins to double your volume and they're spending just as much money in the store. So in the end, there's a net gain."

Like the rest of the travel-center industry, Petro has been hurt by trucking consolidation that has given fewer, yet larger fleet companies enhanced leverage in negotiating diesel deals. In addition, these operators have seen third-party credit/debit fees jump substantially, further cutting into already slim fuel margins.

The result of these shifts has been seismic.

"Fuel used to make up 60 to 70 percent of profit. Now, if they get any take-home they're very happy," said Burt Newman, president and CEO at Professional Transportation Partners LLC, a Brentwood, Tenn., organization that represents 165 truckstops.

"Unfortunately, fuel is now a commodity. Truckstop margins are down to 4 to 6 cents in many markets; it used to be 10 to 12 cents a gallon."

Truckstops have only themselves to blame, said Newman. "We are our own worst enemy. We've allowed ourselves to be beaten down by the big carriers. The big truckstop chains can stand it, but the little guys can't."

While Newman speaks in national terms, some markets continue to deliver double-digit margins. Operators in much of the Northeast and the West Coast say that even though margins are thinning, they continue to capture 10 to 20 cents per gallon of diesel.

Industry players attribute this to lack of major chain competition in those markets. Additionally, most hauls begin on the coasts, with hotly contested battles for diesel share in the Rockies and Midwest.

"The coasts have not allowed themselves to get beaten down and it's not nearly as competitive there," Newman said. "On the West and East Coasts, smaller stops have kept the big chains out the way they've kept Wal-Mart out."

Newman added that land costs in those regions make it prohibitive for chains like Petro, which builds on 30-acre sites.

Despite superior market conditions, operators on the coasts acknowledge worsening conditions. "It's a tough business right now," said Sean Flynn, manager of Flynn's Truck Plaza, a multi-generation operator of a single unit in Shrewsbury, Mass. "If it weren't in their blood a lot of guys wouldn't be in this business anymore."

To defray some of the lost diesel margin, Flynn's has added Dunkin' Donuts and a convenience store. "Fuel is the biggest dollar category you've got," Flynn said. "If you're not making money on it, then you're turning over a lot of product that you're not getting much for. If you don't have something else making money for you, then you're in for some bad luck."

Picture This...

The boom days of robust diesel margins are over, agreed a half-dozen operators interviewed for this story. Today's truckstop players are lucky to ring close to a dime on the gallon — barely enough to cover infrastructure investment and employee salaries.

With diesel profits depressed, something has to give. Petro's McClure predicts further consolidation and greater dependence on other revenue points. And he offered another prediction: Traditional truckstop freebies — parking, coffee, soda, showers, a TV lounge — may soon come at a cost.

"With margins being 8 cents or so a gallon, a typical fill-up is only a $6 or $7 margin," he said. "The cost of coffee, shower, soap, loyalty-card discounts eats that up. Suddenly you've brought that 8 cents a gallon down to 3 or 4 cents and you haven't even paid for the asphalt and the petroleum equipment. What I'm saying is you might not see those things being free anymore."

Fred Kirschner, operator of the two-unit Bordentown Truck Stop in Bordentown, N.J., envisions a more radical picture.

"The problem is truckstops and trucking companies are trying to keep the status quo without providing the revenues," he said. "If I take out my crystal ball I see something different — truckstops won't sell diesel fuel."

Before anyone reading this goes apoplectic, Kirschner added the following caveat. "The key word is 'sell.' For instance, banks hardly cash checks anymore. You want cash, you go to an ATM. I see the same thing with us. Truckstops will dispense fuel but there will be large conglomerates putting fuel into truckstops and we'll dispense it for a fee.

"This way we'll be guaranteed some profit without dealing with the ups and downs of fuel prices."