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Crystal ball cloudy on long-range future of petroleum marketing

By TED CARTER

Five years.

That’s the limit Gresham brothers Walton and Tom and cousin Bill McPherson say they can have in forecasting the future of their businesses and the regional petroleum marketing sector in which they operate.

They partly attribute the limited outlook to changes in consumer preferences and innovations in marketing to customers. A resourceful and nimble company can make adjustments to accommodate such things.

It can handle a drop by half in gas prices, even the fall pushes down customers visits by half.  You have to give them other reasons to stop in, said Tom Gresham, president and co-owner of Double Quick. “We have done a good job of finding other items to sell. Our industry has adapted well.”

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Other pressures are not eased as easily. For petroleum marketers, the federal government has handed down a list of rule changes on petroleum blending, prepared food display, overtime wages and the amount of fees retailers must pay credit card companies on each transactions.

Gresham Petroleum and Double Quick don’t disclose revenue number or the volume of motor fuels they sell to customers in either the agriculture sector served by Gresham Petroleum or through the 50 convenience stores owned by Double Quick. So they are keeping to themselves any projections on the cost of meeting the government mandates.

“This is one of the most competitive businesses around,” Tom Gresham said in explaining the close-to-the-vest policy.

He will say that should the store chain see a growth opportunity, it can make a move using its own money. “We went through some aggressive times and leveraged a lot,” he said of the early years after the founding of Double Quick in 1984. “When we went from 17 to 30 stores, we didn’t do that with internal money. But now we can fund our own” growth.

Double Quick can rely on credit facilities for its various lines, if necessary, Tom Gresham noted.

Walton Gresham, whose company provides the petroleum for the Double Quick brand of motor fuels, said he turns to Indianola-based Planters Bank and Trust, for which he is a board member, for credit needs.

“They have been a good partner with us,” he said of a relationship that goes back to the founding of both the bank and grandfather W.W. Gresham’s  petroleum company in the early 1920s. “We try to fund as much as we can internally. But if we are going to expand, they probably fund it.”

Such was the case with acquisitions of petroleum marketing companies in North Mississippi and Arkansas Gresham Petroleum made in 1995, 2003, 2010 and this year, according to Walton Gresham.

Meanwhile, a fix on the long-term outlook for the companies is elusive, the executives say

“With the way things are changing, you can’t think beyond five years,” said McPherson, Double Quick co-owner.

Likewise on the petroleum side, Walton Gresham said. “Five years. Like Bill, that is as far out as I can see.”

One prediction from Walton Gresham is that within those five years crude oil prices won’t climb back above $50 a barrel. And Mississippi should continue to have fairly low-priced fuels through its first-place position on the pipeline network, he said.

Tom Gresham agreed. “Barring an unforeseen event, the price of crude is going to stay low,” he said.

Walton Gresham, in fact, sees the price of motor fuels staying low enough to dissuade most motorists from switching to either electric vehicles or cars that run on propane. It will be hard for consumers to justify spending the extra money that either new generation vehicle would cost, he predicted.

Straight out of Washington

Mississippi’s 2,977 convenience stores handle 3.7 million transactions a day and had total sales of nearly $14 billion in 2013, say the most recent year of available figures from the National Association of Convenience Stores, or NACS. Of the total sales in Mississippi, fuel accounted for $10.5 billion, food $624 million and merchandise $3 billion.

More recent figures from the NACS show nationally convenience stores achieved strong sales and margins in 2014, according to Steven Montgomery, principal of Lake Forest, Ill.-based b2b Solutions, a consulting firm that specializes in working with retailers and suppliers in the convenience retail-petroleum marketing industry.

“The industry’s pretax profits grew significantly,” Montgomery said in an email.

In the Southeast, convenience stores in 2014 showed a 13.9 percent jump in foodservice, which helps to explain why Double Quick and other convenience retailers continue to extend food service options and continue to upgrade the appearances of their stores. Montgomery said.

“One of the lessons companies have learned as they seek to grow their foodservice sales is that ‘c-store clean’ does not equal ‘foodservice clean,’” he said. “If c-stores want to sell food they have to maintain the same standards as Quick Serve Restaurants,” he added, referring to fast-food outlets with minimum table service.

Montgomery attributes much of the growth in pre-tax profits to lower credit card expenses caused by the drop in the retail price of gasoline.

The credit card charge for retailers is a mix of a per transaction charge flat fee and a percentage of the sale.  “The lower cost of fuel means for the same amount of fuel sold the cost of processing the card for the retailer dropped significantly,” Montgomery said.

It dropped, but not nearly as much as the Greshams and McPherson would like. The convenience store industry’s payments on credit card fees surpassed reported profits in fiscal 2015, according to Tom Gresham. “It’s a big line item,” he said.

The Durbin Act, born out of the Dodd-Frank  financial reform bill of 2010, specified a 7-cents-to-12 cents range on interchange, or swipe, fees. The law, however, gave the Federal Reserve authority to set the fees, which it did at 20.75 cents, a significant drop from the 40 cents range charged before the federal financial reform.

Unhappy with that fee level, retailers sued to have the fees put at the range the Durbin Act specified. They lost.

“Every convenience store operator in Mississippi is facing the challenge in interchange fees,” Tom Gresham said.

Another big challenge for motor fuels retailers comes from a fuel-mix requirement few people outside of the industry have heard of. It’s called “Blendwall,” and it stems from the George W. Bush administration’s 2007 Energy Act that phases in mandates on specific amounts of renewable fuel that must be blended into the retail gasoline mix.

This was to be the year that hitting the Energy Act’s renewable fuel blend level, or the Blendwall, would have required the standard fuel mix by volume to go to 15 percent ethanol, alcohol produced from corn.  A nationwide waiver from the Environmental Protection Agency gave a year-long reprieve but still leaves fuel sellers such as Gresham Petroleum and Double Quick unsure of the consequences of meeting the Blendwall.

“This is a huge concern for us,” McPherson said. “Without the waiver this whole industry would be struggling and saying, ‘How do we meet these mandates?’”

Filling Double Quick’s underground tanks with 15 percent ethanol would void warranties on the tanks as well the below-ground piping and dispensers, Tom Gresham said.

Double Quick could retrofit but the cost would be overwhelming, he added.

The EPA waiver allowing the industry to stay beneath the Blendwall is expected to extend through 2016. “The EPA is starting soon after New Year’s (of 2016) on 2017 levels,” Tom Gresham said.

In that time, petroleum marketers hope the government will also come up with a solution to how they can continue to maintain Underwriters Laboratories, or UL, standards that only certify storage and dispensing equipment for up to 10 percent ethanol. “This is a major obstacle because several federal regulations, state laws, local ordinances and insurance policies require UL certified equipment,” the Petroleum Marketers Association of America says.

It’ not even clear Mississippi would allow that higher mix, Walton Gresham said. “Last time I checked, 15 percent ethanol is not legal in Mississippi.”

Meanwhile, new overtime rules for managers who don’t punch a clock will force Gresham Petroleum and Double Quick to put them on the clock.

Department of Labor rules will require petroleum marketing companies to pay employees now exempt from overtime rules to be paid a minimum of $50,440 in 2016 with automatic threshold increases every year thereafter. The proposal nearly doubles the current minimum salary, $23,000, needed to comply as exempt from overtime requirements, the Mississippi Petroleum Marketers and Convenience Store Association says.

With fierce competition and thin profit margins, Mississippi’s petroleum marketers “simply cannot absorb significant volatility, uncertainty and increases in labor costs,” the state association says.

The choice is to pay the higher salary or begin paying exempt managers by the hour and paying time-and-a-half for any work over 40 hours.

“You have to put them on the clock,” McPherson said.

Yet another mandate just around the corner requires labeling the calories of prepared food items in the same print size as the price of the item. The requirement also applies to fountain drinks.

The labeling rule covers operators with 20 or more stores and takes effect next December.

“We have bought a program and have an employee working on the calculations and labeling,”  McPherson said. “Some of the items may have to be sent away for calorie testing.”

Double Quick will add to its healthy food offerings, according to McPherson. “That’s the purpose” of the menu labeling, he said.

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