2022 Into 2023— Inside the Store and on the Forecourt

Lori Buss Stillman and Denton Cinquegrana discuss convenience retailing and fueling.

BY KEITH REID

When will we see a return to normal? The lockdowns have passed and demand is returning, nearing pre-pandemic levels. Supply chain issues triggered by the lockdowns are easing but remain. But now we have the supply disruptions linked to the sanctions against Russia over its aggression in Ukraine.

Fuel prices skyrocketed once the conflict began, though there has been some moderation. Inflation is also working its way into the picture, adding to operator costs and impacting customer behaviors.

The opening general session of the Midwest regional M-PACT show, held April 4-6 in Indianapolis, featured Lori Buss Stillman, NACS vice president of research and education, and Denton Cinquegrana, chief oil analyst of OPIS. They provided a perspective on business both inside the store and on the forecourt in 2022 and some possibilities for 2023.

Last year was solid for convenience retailers. “Through the end of Q3, all sales were up nationally in 2022 by about 30%, driven largely by fuel sales growth,” Stillman said. “The average national selling price jumped from $2.98 in 2021 to $4.18 in 2022.” Average fuel margins approached $0.35 per gallon.

High fuel prices tended to make “filling the tank” less common for some consumers, as they might just purchase $20 worth of fuel per visit. However, that change in behavior helped boost store sales to near pre-pandemic levels. “We saw an increase in transactions, because people were coming more often even though they weren’t putting as many gallons in the tank,” Stillman said. “We certainly see that they were spending significantly more inside. And whether it was driven by increased consumption or price inflation, inside sales benefitted from the increased frequency.”

Foodservice was a bright spot in 2022. “Foodservice sales were up 16.2%,” Stillman said. “Some of that is food inflation, some of that’s people getting back into morning dayparts and other routines that had diminished over the course of the pandemic. But then, as expected, we see cigarettes continue to decline. However, overall total transactions grew 4.2%— that’s encouraging.”

There were some strong headwinds as well, specifically cost increases with direct store operating expenses. Stillman noted this was the third year of double-digit increases. “If you look at wages and benefits, they are up another 14%, credit card fees are up almost 30%, utilities up 14%, repairs and maintenance up 16%—so total direct store operating expenses nationally are up about 16.2% total when you roll in facility expense.”

Despite gross profit growth in the top 10 convenience categories, the expense line is growing faster.

A particular concern that NACS continues to address is credit card fees. Stillman noted that they are up almost 80% percent since 2019. “It’s our top issue. We had our recent Day on the Hill event where we called on as many members of Congress as we could to talk about what this means to consumers. This was the single topic we addressed. It’s not sustainable,” she said.

Cinquegrana’s presentation on fuels in 2022 and going into 2023 noted that production has rebounded to 2020 levels, though it still trails 2019 by about 20% on a same-store basis. However, refiners are disciplined against overproduction and OPEC+ just announced a significant production cut of 1.6 million barrels per day. What will that mean for prices in 2023?

“Well, $100 per barrel is still possible, but so are prices under $70,” he said. China’s economic activity and the health of the world economy in general can influence demand in either direction, as well as further production disruptions. As far as street prices for gasoline are concerned, he doesn’t see a scenario for $5 gasoline this summer.

“Something can happen that you can’t predict, but all things being equal and even with this recent OPEC+ production cut of 1.6 million barrels I think we’re going to be pretty close to the current national average—a $3.60 or $3.30 type of number.”

Where distillates are concerned, Cinquegrana noted that EIA’s calculations seem to be recessionary indicators. A recession would impact demand for fuel in general, and most certainly diesel, which powers construction and logistics. “It’s been said you know you are in [a recession] maintained a strong foothold in the workplace. Census data from 2021 indicated 27.5 million people worked from home. A back-of-the-envelope calculation he provided on typical miles driven and various two-day or three-day schedules indicates potential demand destruction of up to 170,000 barrels per day.

What explains those unusually high retail gasoline margins in 2022 and going into 2023? While the previously noted increase in costs certainly provides an incentive to keep margins high, Cinquegrana cited recent, extreme volatility in the spot markets as a primary factor.

“After the invasion of Ukraine things got really volatile,” he said. “So big days up put downward pressure on margins and big days down upward pressure on margins. The average difference between the high and low RBOB futures contract price is typically about $0.04 and maybe $0.05. Last year it was $0.12. So, you have a lot of price movements.” six months after you’re already in a recession,” he said. “Those distillate numbers may be telling us that either we’re on our way to a recession or we might already be in one. So just keep an eye on that EIA data that’s coming out for distillate demand.”

With gasoline demand, despite a considerable recovery Cinquegrana doesn’t see it reaching 2019 levels. He cited vehicle efficiency as the primary driver, with some other factors. “I know everyone likes to think about electric cars, but it’s more than just that,” he said. “They’re coming, but it’s not now and it’s not tomorrow. It’s not even next year. It’s a couple of decades away. Yet we are looking at [CAFE standards of] 49 mpg by 2026.”

He further noted that the pandemic-driven telecommuting trend has

The industry is highly competitive with a product, gasoline, that the consumer typically has a strong emotional attachment to and will go out of their way to save even a few pennies per gallon on—especially with the price transparency provided by the large price signs at each outlet. Without the volatility, margins are traded for potential volume after the wholesale price swings downward (though typically somewhat more gradually than margin drops as prices go up). The volatility disrupted those more extended natural cycles.

Are these margins here to stay? “This may be the new normal,” Cinquegrana later clarified, especially if the volatility remains unchecked.

Keith Reid is editor-in-chief of Fuels Market News. He can be reached at kreid@fmnweb.com