It was not that long ago that branded outlets sold most of the fuel, but the past six or so years have seen a rise in unbranded outlets taking market share away from the branded outlets on a sometimes slow and steady basis.
As the peak of gasoline demand appears to be in the rearview mirror, it is imperative for retail chain operators to concentrate on market share to keep their customers. The market share advantage for unbranded appears to perhaps have peaked, but the difference between the two remains steady.
A study of OPIS monthly U.S. market share data from the past six years, which counts visits and the type of gasoline brand sold, shows that at the start of 2018, retail gasoline properties were mainly branded.
For the month of January 2018, the branded/unbranded breakdown was about 55% versus 45%. The advantage stuck close to 10% throughout the first quarter before slimming down throughout the rest of the year. By December, the branded market share dropped to about 51% and unbranded to 49%.
During 2018, the branded market share advantage averaged just over 7%. OPIS defines market share as visit counts to a site for a brand in a chosen market based on cell phone pings, in this case, the U.S.
There are advantages to being branded or unbranded. Branded dealers have the power of a brand behind them, but perhaps more importantly, there’s a guaranteed supply as the branded dealer is the last to be cut off in times of tight supplies. However, the most attractive aspect of branding is the upfront money offered by the brand. On the other hand, with being unbranded, there are no fees, all the margin goes to the retailer, and usually, being loyal to a distributor will bring supply reliability.
Branded outlets had the market share advantage for some time, but that reached an inflection point in June 2019 as unbranded market share topped 52% with branded slipping to about 48.5%. Unbranded market share has topped branded in the U.S. ever since then and has seen its advantage grow to as much as about 14.5%.
The peak difference between branded and unbranded market share took place at the beginning of the year, when unbranded market share topped 57%, with branded just inside of 43%. Branded market share has narrowed the gap a bit through October, but for the most part it has been running between 12-12.5% over the past six months.
Growing unbranded market share can come down to something as simple as price when it comes to selling more fuel. Drivers’ brand loyalty does not exist to a great extent like it once did, or consistently across all markets.
At the beginning of the data set, January 2018, branded outlets in the U.S. on average priced 1.74cts above the average which is in fact the smallest premium to the average in this sample of just under six years. At the same time, the unbranded average price in the first month of 2018 stood at 2.81cts versus the U.S. average. Like branded, this is the tightest price to the average that unbranded had, and, as a result, the difference between the two was 4.55cts.
It has taken almost six years for that variance from the average to peak as August 2024 saw the difference between branded and unbranded reach 8cts/gal in the U.S. while a move from 4.55cts to 8cts may not appear but it is a more than 75% expansion.
During August 2024, branded stations on average priced 3.15cts over the street average while the unbranded station was 4.85cts below the average. Since the beginning of this sample from January 2018 through October 2024, the price difference between branded and unbranded has averaged just over 6cts/gal.
The national trend of brands losing market share to unbranded outlets is evident on a regional basis as the six-year change in market share has been stark as multiple regions have seen double digit percentage point losses.
With the rise of regional chains, the Southeast and Southwest have seen the largest swings as branded market share has declined 12.7% in the Southeast and 12.4% in the Southwest. The Great Lakes has seen the smallest branded decline at 6.3%, though that can be due to a smaller geographic region. Meanwhile the West and Northeast saw branded market share down 11.7% and 10.9%, respectively.
Although the brands are losing market share, the number of branded stations does not appear to be materially declining.
In January 2024, branded stations had a nearly 61.5% outlet share. Outlet share is defined as the amount of locations a brand operates as a percentage of locations within a chosen market, in this case the U.S.
At its low point over the past six years, branded outlet share bottomed out at roughly 59.6%, which was in May 2020 and at the height of the pandemic lockdowns. The unbranded outlet share climbed to just over 40.2%.
Over the past six years, branded outlet share has averaged 60.4%, while branded averaged just over 39.4%.
Finally, branded and unbranded efficiency are on diverging paths. Efficiency is simply taking the market share and dividing it by outlet share. A higher number represents a site that is selling more fuel than its competitors in a market. A 1.0 efficiency rating should be the target.
The efficiency category can be argued as where the price difference between branded and unbranded chains is most evident.
Not once over the six-year sample period did branded outlets top 1.0 efficiency, while the unbranded efficiency has never been below 1.0. This could simply be the fact that there are more branded outlets than unbranded. A current OPIS count shows more than 76,000 branded outlets compared to just over 50,000 unbranded.
The first year of the data shows a tight spread between branded and unbranded efficiency. In 2018 the average branded efficiency was 0.88 with unbranded coming in at 1.19, a difference of just over 0.30.
The rise of large regional chains has put pressure on the branded market share in recent years as more aggressive pricing has seen the unbranded site take gallons away from branded. That trend is expected to continue as the chains grow and expand into new territories, but brands are still going to have a strong presence as upfront capital offerings can be too much to resist.
Evidence continues to mount that 2019 represented the peak for U.S. gasoline demand as a slow decline in 2024 retail volumes was noted.
There was a definite yin and yang of the retail gasoline markets to the recently completed summer driving season. That is while demand continues to struggle and the margins do not. As a result, it proved to be a profitable summer for retailers.
The argument that “40cts is the new 20cts” when it comes to gross rack-to-retail margins got another check mark as the summer average margin was 42.9cts/gal, according to OPIS data. All three months were comfortably above the 40cts/gal mark as well with June averaging 43.8cts, July 41.1cts and August 42.7cts.
It is also likely that those with scale and that are highly ratable would have exceeded that average. Those with size and scale can also absorb the loss of volumes much better than the smaller chains and “mom and pop” retail sites.
Average summer margins in 2024 were almost 50% higher than the 2019 average, so while demand goes down margins go up and that has been the case over the past few years.
While that is the good news, the bad news is that same-store sales are declining. It may not be that Americans are driving less. In fact, it’s the contrary. Vehicle miles traveled according to the Federal Highway Administration are ahead of 2019 on a year-to-date basis.
Data from the FHA from January through July 2024 shows that, minus small hiccups in January and again in June, growth in vehicle miles traveled is running ahead of 2023. On a year-to-date basis, through July, VMTs are just inside of 1.9 billion, representing a roughly 2% increase from 2023. The 2024 figures through July also represent a 1% increase from 2019.
So with vehicle miles traveled up and gasoline demand down, that points to a few factors.
The first and most important is vehicle efficiency, which continues to grow. Based on the most recent data from the EPA the preliminary real-world miles per gallon averages just shy of 27 miles per gallon, while 10 years ago it was just over 24 miles per gallon.
Some of the best strides have been in the pickup truck. Pickup trucks are amongst some of the most popular models in the U.S. and over the past 10 years, efficiency has grown by almost 20% to nearly 21 miles per gallon based on the 2023 preliminary EPA data.
Based on OPIS summer driving season data, U.S. retail stations sold 68,141 gallons per month during the three-month period. Of the three months, June and August were above 68,000 gallons and comparable to one another, while July was a bit of a laggard averaging just over 67,600 gallons.
2024’s rendition of the summer driving season based on same-store sales was down just over 3,200 gallons versus 2023 or about 4.5%. However, when compared with 2019, the loss in volume is eye-popping, dropping by more than 20,000 gallons or 24%.
When it comes to profitability though, margins more than made up for the softening demand.
While the combination of volume and average margin in 2023 made retail station profitability on par with 2019, 2024 blew both years out of the water thanks to the stronger gross rack-to-retail margin.
Based on OPIS data, the average profit for a site per month was $29,237 during the summer 2024 driving season. That is more than $3,000 per month more than in the summer of 2023 ($25,691) and 2019 ($25,754). The most recent summer driving season saw profitability rise by more than 13% when compared to the other two years.
Regional Roundup
All the regions OPIS tracks directionally matched the national trend, with higher margins but lower volumes.
Perhaps most concerning is how much same store sales are down from 2019, the peak of gasoline demand. Regional volumes versus 2019 are down by anywhere from 20-30% during the 2024 season. Year-on-year gasoline demand was off anywhere in the 4-5% area for the various regions.
As is normally the case, the West has the strongest margins in the country as the summer 2024 gross rack-to-retail margin at 67cts/gal, with the Northeast at a distant second averaging 42.7cts/gal.
The prevailing theory is that stronger gasoline margins are enough to offset lost gallons and lead to continued station profitability. Generally, that theory is correct, but in a few parts of the country, that is not necessarily the case.
In the West, the summer of 2024 saw the average station produce $54,496/month in profits. However, with station volumes down some 30%, a nearly 40% increase in margins was not enough to continue the upward trend in station profitability as the same metric in 2019 was $56,507/month. Overall in the West, station profitability was down by 3.6%.
Of all the regions, the West has also seen the sharpest decline in same store sales since 2019, at just over 30%.
Another example that goes against the prevailing notion is the changes in the Southeast from summer driving season 2023 to driving season 2024.
Station profitability this summer was largely flat at an average of $21,280 per month, down just $16 from 2023.
Like everywhere else, demand was down and margins where higher, but margins were not high enough in the summer driving months to offset the lost gallons. Average monthly volumes came in at 60,671 gallons, down just inside of 5%. Meanwhile, margins grew to 35.1cts/gal, an increase from last year of just over 5%.
These mostly flat movements in the Southeast present a potential argument that from a percentage standpoint, margins may have to grow a couple of percentage points more than volume losses to keep station profitability rising.
The above theory potentially shows in the 2024 versus 2019 comparisons for station profitability. Same store sales are down 23%, but margins are up 64%. As a result, station profitability is up 26.6% in the Southeast.
Major League Baseball playoff races are heating up and the importance of the offensive “big inning” is magnified in August and early September. It is also the time when marketers and gasoline retailers see some of the best margins of the calendar year.
Gross rack-to-retail margins over the course of this decade have started to grow and in some periods of the year quite significantly. The firming of margins over time has brought the axiom “40 cents is the new 20 cents.” Between 2014 and 2019, annual gross rack-to-retail margins averaged from about 22-24cts/gal, but that has all changed over the past five years.
Over time, retail gasoline margins tend to be unremarkable. Investors accustomed to quarterly reports that tout 20% to 40% gross margins for technology firms don’t get excited by the very limited returns on wholesale gasoline prices. However, the margin environment has been getting more attention of late and not only does it capture investors eyes, but also refiners and oil majors that left the retail side of the business some 20 years ago have become more involved through joint ventures.
Before 2020, profit margins on retail gasoline would barely crack 10%, more recently it is common to see that percentage rise to nearly 15% of the price of gasoline.
There are several theories as to why retail gasoline margins are on the rise, stemming from M&A activity over the years putting more stations in fewer hands, to increased labor costs and the current high interest rate environment in the United States. Market volatility is also playing a significant role as several global events have impacted margins whether that was the COVID-19 pandemic in 2020 or the Russian invasion of Ukraine in 2022, petroleum markets from futures down to rack have become much more volatile. Large swings in prices can have a massive impact on retail gasoline margins, more on that in a bit.
Typically the strongest margins come in the second half of the year when retail prices have a tendency to drop. Over the past 10 years from 2014-2023, eight times the best monthly average margin came in either the 3rd (3x) or 4th (5x) quarter. The strong autumn performance underscores one of the great myths of the U.S. gasoline business. Consumers tend to believe that gasoline retailers prosper when street prices rise, and conversely empathize with station operators as prices decline.
But the inverse is generally true. Wholesale gasoline prices have a tendency to drop late in the late summer and early fall and some of that can be attributed to a shift in the gasoline formulation from low RVP summer grade gasoline to high RVP winter grade gasoline.
The step down in prices at least in the futures market has been quite substantial.
Over the past five years, the average spread going from September to October RBOB futures averaged a 16cts/gal step-down in prices. The drop in price from September futures to October futures though in the past two years has been in excess to 20cts/gal. Currently, the spread between the two months contracts has been running about 18-19cts/gal, still above average but 3-4cts softer than the previous two years.
The excessive spread between the end of the 3rd quarter and start of the 4th quarter contacts in 2022 and 2023 are largely explained by the relatively low gasoline supplies compared to previous years.
It is not just in the futures markets, but also in spot markets where some of the higher RVPs begin to become the tradeable spec sometime in mid-September (depending on the market).
For example, in 2022 the higher RVP RBOB in the New York Harbor ushered in about an 8cts. In 2022, however, from September 15 to 18, 2023, spot prices dropped by 21cts. That was quickly reflected in Northeast gross rack-to-retail margins which, on September 15, were 31.4cts/gal, but just six days later the gross margin had grown by nearly 70% to 52.8cts/gal.
Sometimes market circumstances demand government action. California does not see the transition to high RVP gasoline until late October. But in each of the past two years because of refinery downtime and other markets no longer making low RVP gasoline that would meet California specifications making resupply difficult, action was taken to relax RVP standards a few weeks before normal.
In 2023, L.A. CARBOB was pricing almost $1.50/gal over futures and San Francisco about $1.10 on September 28, 2023, but after the RVP waiver was issued, premiums fell by almost $1 in L.A. gross margins in California reacted swiftly more than doubling from 58cts/gal on September 28th to $1.69/gal just a few days later.
2023 was just “deja vu all over again” when compared to 2022. On October 3, 2022, L.A and San Francisco gasoline were pricing at more than $2 over futures, but two days later after the government stepped in, waiving RVP requirements, the market saw about $1.50 cut off those premiums to around 50cts over futures. Rack to retail margins, you guessed it, nearly tripled over the course of five days from 43.6cts/gal on October 1 to $1.54/gal on October 6, 2023.
Those are just a few examples how the fall RVP shift can have a massive impact on gross margins for gasoline retailers and further evidence that the best time of year for the gross rack-to-retail margin usually lands in the last third of the year.
May can be a Jekyll and Hyde type of month when it comes to gross rack-to-retail margins, but the 2024 rendition is certainly the version that downstream marketers would like to see on a regular basis.
Based on the latest OPIS data, the average gross margin for the month of May came in at 45.9 cents per gallon. The May average margin was the strongest one-month average since November 2023 and it was easily the strongest May on record, as no other May has come close. Over the past 10 years (including 2024) the average margin for May was around 26.5 cents per gallon.
Although June is just getting started, the early returns for margins show a similar trajectory for this month, though that can change quickly, considering the volatility in markets.
The month of May certainly experienced some volatility in the average gross margin, but it was from a higher level. During the month, the daily U.S. gross margin averaged anywhere from a low of 33.4 cents per gallon at mid-month, and the high of 53.8 cents came on the last day of May.
Gasoline futures markets, as well as several spot markets, made the strong margins somewhat easy to predict.
The highest gasoline futures settlement of May was on the 2nd at $2.5965 per gallon, but by May 30th the futures market had tumbled by more than 19 cents per gallon, settling at $2.4046 per gallon.
Futures markets only tell part of the story that contributed to a strong gross margin environment as spot prices in several markets exceeded the decline seen on the paper side.
At the beginning of May, Los Angeles CARBOB was pricing around $2.825 per gallon, with San Francisco at $3.015 per gallon, OPIS spot market data shows. But by the end of the month, L.A. gasoline was almost 40 cents cheaper at $2.4275 per gallon with San Francisco more than 50 cents cheaper ending the month at $2.4975 per gallon.
That move, as you may have guessed, supercharged margins throughout the month. The California average gross margin started May at 73.2 cents but ended just shy of 92 cents, with the average gross margin about 6 cents below the highs at 86.2 cents.
A strong margin environment is necessary to make up for lost gallons as same-store sales are down compared to the previous year, based on OPIS monthly gasoline demand data.
With the summer driving season officially underway, retailers will be looking for some positives, and there are some if you happen to be a “glass half full” person.
2024 started the year with very soft gasoline demand, with January running almost 7% below January 2023. However, January is typically the softest month of the year when it comes to gasoline consumption. Since January, the deficits to 2023 have been narrowing.
Though month-to-month volumes are getting some traction, same-store sales versus 2023 are still looking soft. Final May gasoline demand was about 4.2% below May 2023, but if you are looking for the positive, the year-on-year trend is narrowing as the month of May saw the smallest loss in volume compared to a year ago. In fact, May was the smallest year-on-year loss since August 2023.
The monthly improvements are seen in most individual regions.
The heavily populated Northeast region has been consistent in its declines versus 2023 over the past three months with year-on-year declines in the 4.6-4.8% range versus 2023. While the Northeast sees the steady demand drops versus a year ago, the Mid-Continent sees a bit wider same-store sales losses on either side of 5% down.
Southwest is turning in the strongest demand with May running just 2.4% behind 2023. Other than in January when weather was poor, Southwest gasoline demand saw the largest demand destruction, but over the past 12 months, the Southwest has been in striking distance of year-ago levels.
While most point to sliding gasoline demand on the West Coast, the Pacific Coast region performed admirably in May falling 4.2% versus last year.
Based on the latest OPIS data, on a year-to-date basis same store sales are down by 5.3%. Individual regions range anywhere from down 3% to down just over 6%.
Year-on-year market share in May 2024 saw mostly minor shifts between branded and unbranded stations with unbranded stations in the U.S. grabbing a bit more market share against the branded outlets and perhaps to a lesser extent some of the big box retailers thanks to relatively calm retail gasoline prices.
During May 2024, unbranded stations in the U.S. garnered 56.09% of the market, compared with 55.58% during the same month a year ago. Meanwhile, branded market share slipped from 44.23% in 2023 to 43.69% in the recently completed month.
Although some of the big box retailers did see a bit of market share erosion, those, along with some of the grocery chains, remained some of the most efficient sites in the U.S., selling quite a bit of fuel considering much lower station counts than the brands and some of the large regional chains.
Buc-ees, Costco and Sams Club had the highest efficiency ratings, according to OPIS AnalyticsPro data, but in all three cases, efficiency was down nominally from a year ago H-E-B, Wal-Mart and BJ’s all saw efficiency gains, but even with efficiency figures north of 6, they are still about one-third that of Buc-ees. Kroger, Ingles, Frys and Fred Meyer rounded out the top 10 in efficiency in May.
Costco maintains its spot as the most aggressive when it comes to pricing, as the average Costco price was 32.9 cents below the local average, which is just over 2 cents more of a discount than last May. One of the bigger movers in average price discounts versus the local average was California-based Flyers. There are 23 brands in the OPIS database priced 25 cents below the local average, increasing the discount from last year by 18 cents.
With May 2024 priced several cents higher than May 2023, big box retailers and some chains used it as an opportunity to become more aggressive on street price.
Thanks to irrational exuberance on the part of oil speculators in the spring of 2022, comparisons for key fuels in the U.S. are now spectacularly striking.
The retail portion of the fuel chain is the most visible to the general public and likely the most complex to navigate.
Who Comes Up With Retail Gasoline Prices?
If you ask the average person who sets the price of gasoline at their local station, they might tell you that the station owner slaps the price tag on the pump – while shaking their head at how much their fuel bill eats into their monthly budget.
But that’s not really the case.
The following is an excerpt from Americas: Oil Market Outlook 2023.
1 U.S. gasoline prices will again command the consumer stage but for different reasons than in 2022. A majority of U.S. retail numbers will commence 2023 below $3/gal and beyond a seasonal higher priced interval and those numbers may disappear by spring only to return later in the year. Diversity in state-by-state numbers will continue with perhaps $1.50/gal separating the lowest and highest priced states.
2 The 2022 OPIS/AAA average price for gasoline was within a fraction of $3.97/gal. A reasonable projection for 2023 calls for $3.39/gal to $3.49/gal. Relatively higher prices in western states and the Northeast will offset many of the sub-$3/gal prices in the Southeast, Midwest and along the Gulf Coast and in the Southwest. The gasoline “cut” for U.S. refiners will continue to be subordinate to diesel and jet fuel returns for most of the coming year.
3 Whereas 2022 U.S. average gas prices varied from about $3.099/gal to just over $5.015/gal, the fluctuations in 2023 will be much tighter. California will march to the tune of its own drum, with prices racing to $5-$6/gal levels during episodes of refinery downtime or other intervals of tight supply. Most lower 48 states will see availability of sub-$3/gal gasoline in various portions of 2023.
4 U.S. gasoline consumption in 2022 looks to be about 8.7 million to 8.8 million b/d when final numbers are rendered, or about 600,000 b/d below the ~9.3 million b/d figures that were the norm from 2016-2019. Cheaper prices are not likely to alter new commuting habits, and better mileage standards will keep consumption flat to 2022. So, OPIS expects annual demand of about 8.8 million b/d or about 365 million gallons per diem to continue. That projection takes into consideration a shallow recession or some lower employment numbers in the U.S. in the second half of the year.
5 Thanks to the 2022 legacy, some dramatic price comparisons are likely. We suspect that between the middle of the first quarter of 2023 and the end of the second quarter, U.S. gasoline prices may be $1.50/gal or 30% below same week 2022 figures. This may present some of the most spectacular deflation across the commodity space.
6 Diesel price strength will abate but diesel will continue to be considerably more expensive than gasoline, thanks to fuel switching (diesel for some purposes instead of natural gas in Europe and SE Asia) and low inventories. However, the anniversary of the Ukraine Invasion and paroxysms in 2022 diesel prices should bring deflation for this product as well. U.S. diesel prices peaked at $5.8159/gal in mid-June 2022 and much of 2023 should see diesel about $1.50/gal lower.
7 The 2022 average price for WTI came in around $94.50/bbl. We suspect that 2023 will see a price only slightly below this number with $90/bbl a reasonable prophecy for a 2023 annual average, with Brent commanding $95-$96/bbl. Precisely how high these numbers move above the average will depend on the successful reopening of China and the ability of western countries to avoid a significant recession. The lowest numbers for crude are most likely to be recorded in January and February.
8 Talk of global refining shortages will ease and perhaps abate by the second half of 2023. Huge new refining complexes in Africa, Southeast Asia, and the Middle East will restore comfort in the ability to create enough gasoline, diesel and jet fuel in international markets. With the notable exception of the lame duck Lyondell refinery in Houston (scheduled to close in late 2023) all U.S refineries should survive and even prosper. Refiners should see consistent domestic demand, some further growth in export activity, and a substantial advantage versus much of the world that comes thanks to much cheaper natural gas, electric, and hydrogen costs.
9 A real test for diesel and jet fuel arrives early in 2023 via the EU ban on Russian imports of diesel, jet fuel and gasoline. It will not be easy for European countries to be weaned from Russian dependency, particularly if Mother Nature brings cold temperatures in the Northern Hemisphere. U.S. futures’ markets might have a very dynamic first quarter since the Phillips 66 Bayway refinery — perhaps the most critical plant for CME futures’ delivery — goes down for 60 days in February and March.
10 Retail gasoline will continue to be a hot sector in 2023 although margins may slip from the off-the-charts’ levels of 2022. At least three major oil companies – BP, Shell and Motiva (owned by Aramco) — will pursue joint ventures or outright purchases of North American chain retailers. Brisk M&A activity will persist, although transaction multiples may dip with rack-to-retail margins.
The US national average for gasoline as measured by OPIS on Dec. 12, 2022, represented deflation of 2.02% versus the same day 2021. It’s the fourth consecutive deflationary day after a span of 654 days where gasoline was more expensive than year ago levels.
Now that the summer driving season has come to an end, the scorecard from OPIS shows what was a very profitable period between Memorial Day and Labor Day 2022.
The First Driver of the 2021 Motor Fuel Panic
In mid-April, a special report by Oil Price Information Service (OPIS) sounded an early warning signal for gasoline. Subscribers were told that for the first time in four years, the US gasoline distribution system might be hard-pressed to keep stations “wet.” In the jargon of downstream distribution, staying wet means never running out of fuel.