Foreword
At Visa Franchise, many of our clients inquire about gas station franchises or convenience store franchises due to the assumption that they are a profitable, solid, and safe investment. We have spent considerable time researching the industry for investment opportunities on behalf of our clients. Through this research on gas stations and convenience stores, Visa Franchise has found these are less than ideal businesses to invest in the United States due to the specific factors and issues that the industry faces. These types of business models rarely have the characteristics that we at Visa Franchise actively look for in businesses for our clients moving to the U.S. through an eligible EB-5, L-1, or E2 business investment.
Industry Background of Gas Station Franchises
To understand the industry, its background needs to be understood. First, it helps to consider gas stations and convenience stores to be the same industry. This is due to the fact that the business model of the vast majority of gas stations is predicated on generating profits through their convenience stores instead of the gasoline, which usually only generates a few cents of profit per gallon sold.
Another interesting factor is the decrease of presence in gasoline retail from large integrated companies. Since 2007, these big brand names have exited the gasoline retail business to focus more on resource production and refining operations. Companies like ExxonMobil, Shell, BP and ConocoPhillips have either begun or completed the process of selling off all of their directly operated facilities. Since June 2016, they own less than 1% of the total industry nationwide.
Convenience Stores
When looking at convenience stores (c-stores) specifically, it is interesting to look at the individual ownership and operations of the stores. Most of the industry consists of single-owner operators or consolidated c-store companies that are not looking to franchise. Approximately 40.9% of the total convenience store industry is controlled by the Top 100 chains. Lack of standardized, franchised convenience store concepts makes it exceedingly difficult for anyone, including foreign nationals moving to the U.S. through an investor visa, to invest in a concept in this industry that has been proven in the U.S.
The few companies that are open to having franchisees require that the franchisees be American citizens or Green Card holders. Examples of these are Ampm, Circle K, and 7-Eleven. This makes it nearly impossible for a foreign national to become a gas station or convenience store franchisee. This results in leaving individuals interested in opening up a gas station or convenience store on their own to develop the concept from the ground up in a highly competitive U.S. market.
Difficult Financials of Gas Station Franchises
Most business-to-consumer (B2C) industries are prone to having a large amount of cash transactions, and gas stations are not an exception. While cash might seem positive to have in a business, as opposed to credit card transactions, it usually goes without being reported on a business’ financial reports. This is especially important for prospective buyers of existing gas stations and convenience stores.
When the time comes to review financials during the due diligence of a purchase of a business, most of the time this cash is very difficult to prove. Business owners tend to increase sales figures or lower cost expenses through these cash transactions, significant details that are only evident to the potential buyer after a long and costly due diligence has commenced.
Due diligences tend to be very long and difficult in these type of investment opportunities, at times running well into 4-5 months, if not more. Many of these due diligences result in lowering the initial offer on the purchase price or withdrawing from the business altogether due to the realization that the financials are not as strong on paper as the business owner had initially stated. The process of looking at an existing gas station or convenience store can lose an individual interested in doing the investment in order to obtain their E-2 or L-1 investor visa many months if they go through the process and find that the business owner misrepresented the financials.
Crucial Factor of Gas Station Franchises
An especially crucial factor to keep in mind in this industry is what makes the business profitable. Many investors are surprised to learn that the convenience store is where the real profit can be found. The most that business owners can expect to profit in gas sales is between 15-20 cents per gallon sold. Contrary to popular consumer belief that as gasoline prices rise gas stations make more profit, gas stations actually benefit little from increases in gas prices. In fact, usually the price changes are reflected throughout the supply chain, thereby negating the effects of price changes on profit.
Additionally, high competition levels play a role. When gasoline prices decrease, business owners have more room to decrease or increase their prices. With that in mind, gasoline sales are not what make the business profitable. As most business owners state, ‘gas sales help pays the rent.’ The real profit comes from the convenience store, with gasoline just helping to bring traffic to the store.
Expensive Investment for Gas Station Franchises
The purchase of an existing gas station usually requires a very high investment. A high quality, profitable gas station will most likely be over well over $500,000, usually between $700,000 to $800,000 all in. This approximation is without land included, which many gas station owners hope to purchase as well as a part of their investment. If real estate is to be included in the sale, the figures could run well over $2 million, depending on the location and size of the land. While it is possible to find gas stations for lower than these investments, either quality or profit – or both – will be compromised.
Another possible route is to try to locate a vacant spot where a gas station once used to be and open the business anew. This can certainly lower costs in the beginning but trying to open a business from zero is very costly and time consuming, especially in this specific industry. Another important detail to have in mind is that the prior gas station probably closed for a reason; probably too much competition nearby or location was not ideal – factors that will still be present once the new gas station is able to open.
No Support
Knowing what to look for when purchasing a gas station is crucial. Not having the support that only a franchise can provide can make this type of investments very risky to new investors in the U.S. as there are many benefits that come with a franchise investment.
Aside from reviewing financials, the lease and gas distribution agreements are critical. In regards to the lease, price is not the only thing to look out for. Clarifying who does the maintenance, repair, and replacement of the underground gas tanks is key given how costly this can be. There have been cases where tenants have been forced to replace a gas tank a few months into the acquisition of the gas station which have resulted in bankruptcy due to the unforeseen high expense this brought.
If an investor has successfully purchased the gas station, then they must deal with the transition period. Gas stations are prone to high turnover rates. Knowing how to manage employees’ schedules and scheduling the correct number of employees for all shifts – many gas stations are active 24 hours a day, 7 days a week – is imperative. New business owners with little to no experience soon realize how difficult it is to manage employees and often must personally be on call at any time of the day to solve an issue, whether that be an employee not showing up for work, conflict with a customer, solving technical problems, etc. These are issues that foreign national investors moving to the U.S. through an investor visa can easily avoid by choosing investments in other industries.
Inventory
At the same time as managing employees, new business owners need to learn the art of purchasing inventory as well. Seeing as how profit comes from the convenience store, it is vital that the inventory being bought is at the correct price and the right quantity. Beer & wine, tobacco, and food overall have the highest percentage of sales in convenience stores.
These items tend to have varying degrees of margin, meaning that quantity of sales could be key to turning a profit. Overpaying for items or not buying enough can be detrimental to the potential profits of the store.
Difficult to Operate
Gas stations are mostly owner-operated businesses. According to the 2017 NACS Retail Fuels Report, of the 123,807 convenience stores selling fuel in the United States, overall 59% are single-store operators, meaning more than 70,000 stores. Many of these small businesses may not have the resources to brand their stores separately from the brand of fuel they sell and promote on their canopies, often leading to consumer misperceptions that they are businesses owned and operated by major oil companies.
The reality is owners of these business can be found at various times during the day at the gas station or convenience store, with many working double shifts or more to oversee the operations of the business.
Summary
On the surface, convenience stores and gas stations might seem as attractive investments for foreign nationals looking to move to the U.S. through an EB-5, L-1, or E-2 investor visa. However, our research has shown that it is not the best investment option for new investors coming into the U.S. There are many other industries outside of gas stations and convenience stores that are much stronger investment options. Visa Franchise is here to offer services to find other types of investments that will be able to offer guidance, support, and clearer financials in a wide range of industries.
