Investment Analysis

Gas Stations Fuel Investment

The 1950s service station is long gone, but the sector’s outlook is bright thanks in part to diversified revenue streams.

Growing up in a small town on the East Coast, I saw the corner service station as a refuge where the neighborhood kids could hang out and chat over an ice-cold soda. Our parents trusted the mechanics, and everyone knew each other's names. Fast forward to today, and small filling stations have all but disappeared, largely replaced by huge chains. Service bays have been supplanted by convenience stores, fast-food chains, and even roadside stops that resemble department stores. 

Considering these trends, why would gas stations appear as attractive investment opportunities? For operators, grocers, and chains, gas station investments have gained momentum in recent years, bolstered by high pool margins, meaning the profit beyond the cost of fuel, according to Bill Gilmore, a sales associate with Coldwell Banker Commercial NRT. Gilmore, who specializes in pad sites in Southern California, expects the trend to endure for the foreseeable future as convenience stores and grocers vie for creative revenue sources from fuel.

Fueling stations and convenience stores remain popular among investors, with more than $2 billion in transaction volume each of the past six years and nearly 4,000 properties changing hands. Additionally, cap rates remain favorable, averaging above 6.5 percent nationwide. Industry trends, however, are impacting the way in which investors and developers look at the future of this property type, due to the increasing popularity of hybrid and electric vehicles and looming shadow of autonomous transportation. Nonetheless, consumers are driving more than ever, despite high gas prices. The market, with $650 billion in total sales, nearly 40 percent of which is not at the pump, is rapidly changing for fueling centers. 

Gas Station

 

Even with the rise in electric vehicles and broad gains in fuel efficiency, gas stations still cover all corners of the U.S. However, gas-only stations have dwindled as consumers focus more on convenience and services. Fuel retailing has undergone a transformation, shaping the views of developers and investors. Non-fuel sales, which are typically more profitable, are major drivers of change. Higher-end food choices, more food selection, personal services such as hair salons and dry cleaning, car washes, and even electric-vehicle charging stations, are now regularly incorporated into new locations. 

While the golden age of the fuel station is gone, convenience stores with large pump banks are on the rise. Sites with 16 or more fueling positions are not uncommon, often alongside 5,000-square-foot stores cobranded with the likes of Subway and Starbucks. Unsurprisingly, gas station convenience stores are taking a bite out of fast food sales, with 56 percent of Americans making at least one purchase per month at these hybrid sites. Moreover, fuel may be a secondary purchase, if it's a purchase at all. As such, development sites have grown to accommodate more parking and larger stores. 

Wawa is at the forefront of the gas station transition, with a cult-like following drawn by its food and beverage selections. The 54-year-old chain has grown to become one of the top 20 U.S. convenience store chains despite its 850 stores being located only on the East Coast. While still providing consumer-favorite specialty sandwiches and Tastykakes, the company has also started offering Mediterranean bowls, kale and grain salads, and a variety of healthy snacks as consumer tastes change. 

Convenience Store

Investors have recognized these strengths, as stores often trade below a 5 percent cap rate. Wawa is planning on an additional 60 locations in 2019, with Florida leading the way. Corporate leadership estimates its store count could double by 2030. Similarly, BP, 7-11, and Shell are all experimenting with their own projects, ranging from craft coffee partnerships to uncommon cobranding and store upgrades.

Grocers and discounters have also become a part of the fueling landscape, with Costco, Sam's Club, Albertsons/Safeway, and Kroger actively playing a role. Typically, locations are on-site pad locations aimed at capturing gas customers with discounts via club memberships and loyalty programs.

Gas station convenience stores are taking a bite out of fast food sales, with 56 percent of Americans making at least one purchase per month at these hybrid sites.

Grocers remain keen on the connectivity of on-site fuel as opposed to off-site convenience stores, but large firms have exited the fuel business. Publix in Florida began its foray into off-site markets in 2001, but sold them off 12 years later. Conversely, while Kroger made news last year when it sold off its convenience stores to the U.K.-based EG Group, the grocer remains active, with more than 700 on-site locations, and is continuing to expand. In Southern California, Kroger-owned Ralphs expanded its entry into fuel in 2012, when a supermarket gas station was an uncommon site in Los Angeles. Several chains have followed suit.

Convenience station combos will continue to adapt to meet changing consumer lifestyle choices. Future trends include solar-powered sites, sit-down restaurants, online shopping pick-up facilities, and larger fueling points for electric and hydrogen vehicles. To better lure loyal, younger customers, stores are also turning to car-connected apps, enabling the customer to pay via the app, as well as get coupons from nearby retailers. As other retailers close, this segment appears to be adapting to stay relevant with today's consumer.

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