As of 9 AM March 24, 2020 there are 50,206 confirmed cases of Coronavirus (COVID-19) in the United States representing 12% of global confirmed cases. Approximately one third of the United States population is experience a socio-economic impact under “shelter in place” and “social distancing” executive orders. These unprecedented orders have had a disastrous effect on the U.S. Economy. Industries most affected include; hospitality, restaurants, energy, and the airlines with large scale financial bailout support already in discussion. But what about gas stations, convenience stores (c-stores) and car washes? Retail Petroleum Consultants (RPC) interviewed market participants to include lenders, brokers, buyers and sellers in an effort to support our thoughts on impacts seen in the marketplace. As imagined, responses were limited with no transactional data to support a trend or provide substantiated insight as to how the commercial real estate markets are reacting to the crisis.
Gas station, c-stores and car washes are special use properties. They are typically owner occupied and sold fee simple including the operating business. These special use properties cash flow based on a variety of differing onsite profit centers which can include but are not limited to fuel sales, c-store sales, car washes, quick serve restaurants and more. They are not dependent on income generated through rents, as with most commercial real estate and therefore will be impacted differently.
Global fuel inventories were at record highs before the outbreak in part due to the geopolitical activity involving Russian and Saudi Arabian oil markets entering a price war. This oversupply was reflected in declining prices throughout the world. US gasoline dealers benefited as retail prices trended down at a slower pace than costs allowing for unprecedented fuel profits. Typically, when the cost of fuel goes up, profit or margins go down. If costs go up, volume tends to move in the opposite direction.
Fuel profit margins achieved record levels in 2017 and 2018 primarily due to strong economic conditions and low crude price. As we end March 2020 the economy is now “frozen” for lack of a better word. What will the effect of this be on fuel volume and margin?
We believe retail patron fuel volume will be adversely affected given the paralysis of the economy due to COVID-19. This we believe is linked to a significant decrease in typical commuter traffic, but more critical is uncertainty of how long? The loss in commuter traffic will not be regained or re-seen once the executive orders have lifted and commerce begins again in a new normative state. This volume will be lost to the year. We do expect a ‘bounce’ in fuel volume sales, especially in conjunction with low pricing, as individuals re-enter normative society functions including potential post isolation spending. In other words; we believe for a short time individuals may travel more than they would have in light of the isolationist measures. On the flip side; commercial jobbers including parcel delivery, freight, etc. may see an increase as online orders, grocery and general stores are seeing high performance in this time of uncertainty.
Although the situation is extremely fluid, based on the current political environment recovery bills will eventually be passed. President Trump in an interview the morning of March 24, 2020 “…is hoping to have the Country opened up and rearing to go by Easter”, which is April 12, 2020. Given the context of the situation; this may be an optimistic target. Even with a “green light” to return to normalcy it will take time to re-stabilize the economy. Additionally retail fuel sales trend with local economies which means different areas may not be impacted the same. The economic effects of COVID-19 are expected to last well beyond containment.
In an effort to support fuel consumption trends over the next 12 months we looked to various articles and our own experience including that of which stems from the 2008 financial collapse and post 9/11 impact. Using the Presidents timeline, we may begin to see signs of economic recovery as early as May 2020.
Given these conditions we anticipate a 25% to 50% drop in annual fuel volume with volume ramping up to near historic levels by 2022 assuming full economic recovery. This estimate assumes fuel margins are static.
Potential 12 Month Fuel Volume Projection – 25% to 50% Decrease
C-Store or inside sales are typically facilitated by fuel volume. As more fuel is sold, more inside c-store sales are generated. This is supported by general retail relationship principle between cross retail synergy and is further supported and quantified by NACS (National Association of Convenience Stores) analysis of various relationships including those between inside sales transaction vs total transaction charge supports approximately $3.50 in convenience store sales per transaction charge. In general practice approximately 30% of all pump transactions lead to inside c-store trips. An interesting note is the NACS 2018 data suggests inside c-store trips declined (8.9%) in 2018 while at pump transactions rose 5.9%. Compared to 2014 which saw shoppers visit a convenience store 3.6 times per week, in 2018 that number had dripped to 2.5 times per week. This is likely due to online retailers (Amazon, etc.) reducing consumer driving consumption (literal fuel volume reduction), other retailers catering to convenience products and sales, higher marketing by cross competing retailers specifically in quick serve restaurants, and slowly rising fuel prices over the immediate years.
Fast forward to today; in times of uncertainty and doubt, convenience store operators via RPC interviews are reporting superb inside c-store sales as patrons are seeking alternatives to prime grocery store and general outlets which are running out of supplies. In a variety of areas including urban and rural locales; the c-store may be the primary shopping point for many individuals.
We therefore do not anticipate a drop but stable to increasing c-store sales over the next 12 months. It is likely the retailer will increase margins as well. A reasonable increase might be 500 basis points, or say from 30% to 35% for a typical operation trending back to pre-COVID-19 levels as the economy stabilizes in 2021 – 2022. An alternative view is the economy continues to falter and patrons seek refuge in lower margin items such as tobacco products, alcohol, lottery and other items. These are generally lower margin products and as seen in depressive economic market states tend to increase in consumption. This may balance the margin scale on a whole.
Potential 12 Month C-Store Sales – 0% to 15% Increase
Potential 12 Month C-Store Margin – 500 Basis Points Increase
Gas stations and c-store serve a need regardless of economic conditions. They are less susceptible to economic downfalls compared to other special use property types. Car washes on the other hand are more of a luxury item. This is highlighted in the March 19, 2020 California Executive Order N-33-20 which provides a general outline for quarantine measures and identified essential critical infrastructure workers via the U.S. Department of Homeland Security Cybersecurity and Infrastructure Security Agency (CISA) identified essential critical infrastructure workforce. Among those sectors such as healthcare workers, law enforcement and public security, public works, etc. are essential petroleum workers including “retail fuel centers such as gas stations and truck stops, and the distribution systems that support them.” Car washes and related operations are not listed on this essential critical infrastructure workforce list.
Put simply we do not need to wash our cars to go to work, shop, or perform any other typical functions in society.
Car wash operations which are largely driven to profit through volume is typically a function of disposable income. When an economy is strong and consumers have significant disposable income luxury services such as car washes go up in demand. Conversely, when there is economic turmoil and money is tight along with higher unemployment fewer cars are washed. We witnessed car wash volumes nearly cut in half after the 2008 financial crisis and have observed a variety of patterns and trends in both volumes related to defined economic eras as well as customer base preference to wash style which is largely linked to pricing.
Prior to COVID-19, modern exterior express car washes were trading at record highs with many new properties coming on line. The car wash industry was certainly undergoing a dynamic transition from full-service labor intensive washes to more automated, non-labor intensive automated exterior express washes. The modern exterior express car wash is a super high volume operation with intensive development costs built to wash 500 to 1,000 cars per day. In order for new modern express washes to “break even” they must wash upwards of 300 to 500 cars per day, depending on the cost of the project. If wash volumes are reduced by 50% many operators will be upside down and not able to cash flow the property or pay their mortgage or note. Similar conditions were also witnessed after the 2008 financial crisis. It took car washes several years to re-stabilize to pre-2008 levels.
Today the car wash market is much different than a decade ago. The cost of financing is relatively low with many new projects coming on-line. Modern washes that were available for sale traded at record high prices pre-COVID-19. Activity was so abundant that the car wash market was beginning to show signs of being overbuilt/oversupplied with even more projects in planning coming on-line in the near future. Average prices per wash have been trending down with an increasing popularity in monthly club pricing programs.
We anticipate significant reductions to wash volumes during COVID-19 economic recovery. Similar to what was witnessed after the 2008 financial crisis, RPC anticipates up to a 50% reduction in wash volume over the next 12 month period trending back to pre-COVID-19 levels as the economy stabilizes in 2021 – 2022. This drop assumes pricing is static; some operators may discount pricing to increase volume with similar net effect.
Potential 12 Month Car Wash Sales – 50% Decrease
The United States has experienced abrupt market traumas in the past including recent events such as a the Savings and Loans/Great Recession financials crises, 9/11, etc. RPC is positive necessary recovery bills will be enacted that will assist impacted businesses, including those in the retail fueling and car wash sectors. Unlike restaurants, hospitality, entertainment venues and the like c-stores appear to provide a layer of protection for a typical gas station going-concern but often are comingled with fueling and car wash profit centers and therefore a downturn is inevitable. We suspect stand-alone car washes to be at greater risk especially those recently constructed and needing to stabilize to cover debt service payments.
RPC will update this article over the next few weeks as new information becomes available. We appreciate your patronage in these tough times.
Stay safe and healthy.