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Question # 1: I hear ExxonMobil is closing all of its service stations, sounds like a bad sign for the lubricated giant, right? (Paraphrased from Tatamwari)
Excellent question Tata, glad you asked! Indeed, ExxonMobil (XOM) will be phasing out its corporate-owned US gas stations over the next few years. That seems like an odd announcement, akin to General Electric’s recent announcement that it will cease selling appliances. But similar to GE, XOM is finishing a job it started a long time ago… and for a number or reasons.
First, let’s discuss what the release of these stations mean. In the grand scheme of getting oil from the ground to moving you down the road, operating service stations is a necessary but relatively unprofitable business. In the U.S. XOM has about 12,000 branded (i.e. display Exxon or Mobil) service stations. What most do not know is that all but approximately 2200 of them are privately owned as franchises. This is done for the same reason that most franchises are created, low margin operations (the actual operation of the stores) are better handled by independent owners whom have less overhead and bureaucracy.
So why sell the remaining 2200? It mostly comes down to the current pricing situation. As most of you know, gas prices are set to be well over 4USD/Gallon for the remainder of this year, but is less publicized is that the average gas seller makes roughly 11 cents per gallon sold. When coupled with the fact that credit card companies eat up 5 to 6 cents per gallon in transaction fees, this leaves the owner with only half their expected profits. Surprisingly, three or four years ago, service station owners were making significantly more than 11 cents per gallon when gas prices were only a fraction of today’s costs. Why, look to 135USD/Barrel oil prices. The price of oil has increased four fold in three years while gas has less than doubled. The downstream (the gas makers) has to pay for its oil in the open market, meaning XOM oil does not sell straight to XOM refineries and then to XOM gas stations, leaving the price increase to be absorbed the profit of gas makers and gas providers. This is not in the goodness of their hearts, but they simply cannot pass on the price increases to the consumer and still expect them to pay for their product.
The other reason to sell these stations is to ease public relation tensions. It is easier for XOM to go before congress and say, ‘don’t blame us for 5 dollar gas,’ if they are no longer in the gas selling business. One recent article recommended removing even the branding from the remaining stations.
So in conclusion, does this selling of service stations because of their diminishing profits signal a problem? I would say no, because that is the duty of any large corporation. Invest in the profitable businesses and remove the less profitable ones. It also must be considered that most likely only half of one percent of the $40B profits last year was earned through its service stations.
This was fun, so if you have any other questions, feel free to ask.
Question # 1: I hear ExxonMobil is closing all of its service stations, sounds like a bad sign for the lubricated giant, right? (Paraphrased from Tatamwari)
Excellent question Tata, glad you asked! Indeed, ExxonMobil (XOM) will be phasing out its corporate-owned US gas stations over the next few years. That seems like an odd announcement, akin to General Electric’s recent announcement that it will cease selling appliances. But similar to GE, XOM is finishing a job it started a long time ago… and for a number or reasons.
First, let’s discuss what the release of these stations mean. In the grand scheme of getting oil from the ground to moving you down the road, operating service stations is a necessary but relatively unprofitable business. In the U.S. XOM has about 12,000 branded (i.e. display Exxon or Mobil) service stations. What most do not know is that all but approximately 2200 of them are privately owned as franchises. This is done for the same reason that most franchises are created, low margin operations (the actual operation of the stores) are better handled by independent owners whom have less overhead and bureaucracy.
So why sell the remaining 2200? It mostly comes down to the current pricing situation. As most of you know, gas prices are set to be well over 4USD/Gallon for the remainder of this year, but is less publicized is that the average gas seller makes roughly 11 cents per gallon sold. When coupled with the fact that credit card companies eat up 5 to 6 cents per gallon in transaction fees, this leaves the owner with only half their expected profits. Surprisingly, three or four years ago, service station owners were making significantly more than 11 cents per gallon when gas prices were only a fraction of today’s costs. Why, look to 135USD/Barrel oil prices. The price of oil has increased four fold in three years while gas has less than doubled. The downstream (the gas makers) has to pay for its oil in the open market, meaning XOM oil does not sell straight to XOM refineries and then to XOM gas stations, leaving the price increase to be absorbed the profit of gas makers and gas providers. This is not in the goodness of their hearts, but they simply cannot pass on the price increases to the consumer and still expect them to pay for their product.
The other reason to sell these stations is to ease public relation tensions. It is easier for XOM to go before congress and say, ‘don’t blame us for 5 dollar gas,’ if they are no longer in the gas selling business. One recent article recommended removing even the branding from the remaining stations.
So in conclusion, does this selling of service stations because of their diminishing profits signal a problem? I would say no, because that is the duty of any large corporation. Invest in the profitable businesses and remove the less profitable ones. It also must be considered that most likely only half of one percent of the $40B profits last year was earned through its service stations.
This was fun, so if you have any other questions, feel free to ask.
posted by Anthony Jackson at 5:18 AM
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