November 28, 2022
If you’re wondering how to start a gas station, we’ve got some important information for you. Fuel can be an unpredictable source of income, so there are certain things you’ll need to consider before going ahead with your new company.
In this piece, we’ll look at why gas is so unreliable, and give you some ideas as to how to navigate this and ensure the profitability of your venture. Before we get into how to own a gas station, let’s see what the industry is like as a whole.
Gas Stations: An Industry Overview
The current market size in 2022 is $138.3bn, representing a growth of 10.4% in the last year. However, this figure can be segmented into various revenue streams with vastly differing CAGR. For example, the gas station equipment market – e.g., pumps, tanks, C-store equipment – is projected to accelerate at a CAGR of over 6%, 34% of which comes from APAC pumps.
This is in despite of rising fuel prices and a shift in demand towards electric cars and greener alternatives to fuel itself. These, and many other factors, go some way to explaining how profit margins on anything related to fuel are so volatile. Demand is all over the place, and technology advancements come in bursts.
Fuel demand is driven by a huge range of factors, not least the rate of motorization, the types of vehicles that people are using, and the quality of the roads and road infrastructure in the area. Both local and global economic factors are also at play, and the politics of whether road transport is promoted can change demand too. Even the weather plays a significant role in the demand for fuel at any given time, in any area.
Some of the key macro drivers are, therefore:
- Purchasing power
- Fuel consumption per capita
And some key micro drivers are:
- Urban density
- Highway density
- Intensity of competition
So, there’s a lot of cause for fluctuations. Still, many who take the risk do succeed. And those who do, are faced with some common challenges. These include:
- Motorization rates may be growing globally, but this relates to increased access to technology in developing markets, and more mature markets are facing much poorer motorization rates.
- Margins are very tight. Average net margins in US gas stations are between 1% and 3% recently, and this puts a reliance on strong demand for other products and services at gas stations.
- As fuel prices rise, gas station owners often, counter-intuitively earn less. Further, this fluctuation in prices makes it very hard to project financial situations with any certainty.
However, it’s not all doom and gloom. There are some promising factors at play that might make starting a gas station a good idea.
For one, the prices at pumps are expected to remain similar or drop, which should translate to an increase in the volume of sales. Also, the economy is improving as a whole, meaning more people are out and driving and this is expected to continue as more people return to work and participate in other activities that lead to more spending on gas.
In summary, the major factor affecting this industry negatively is the stiff competition, while the major positive factor is the expected increase in total vehicle miles.
Growth in the gas station industry is expected to continue but margins will stay very slim. This means that learning how to start a gas station is as much about how to start a convenience store as it is about getting into the fuel business. With that in mind, let’s look at some of the costs.
How to Open a Gas Station: Startup Costs and Revenue Streams
Startup costs will vary depending on the same factors that affect revenue streams, and the business model that you go with. For example, consumers will pay higher prices for stations that are more convenient. Obviously, those situated in areas with the heaviest flow of traffic will see the most customers, but the rents and taxes will likely be higher too.
The competition will also play a role: the more traffic there is in an area, the more competition, so finding a sweet spot is key.
Then, you’re going to need to decide on what other services you’ll be providing. Gas stations commonly provide packaged food, sometimes café services, and supermarket products. Some include perishable groceries, and this will create an issue of supply that needs to be considered.
Then you have repair and maintenance services, which require space and talent to run well, as do car washes or other similar vehicle-related convenience services.
So, the costs will depend on how much you’re planning to offer, and again, the margins on fuel are so low, it’s very common to have to include these other services. However, the finer details of this decision will need to be made based on your market research and your financial situation.
An example breakdown of costs can be summarized as follows, according to some of the figures from ProfitableVenture.com:
- Registering the business – In the US, this will cost $750
- Legal expenses – Licenses and permits such as from the health department, pollution control, etc. might set you back over $15k.
- Promotional expenses – This will include physical media, social media, websites, and any opening expenses up until the gas station officially opens. Expect to spend $3500 on these.
- Paying for a business plan – You can do this yourself with a business plan template, but if you pay someone else for consultation it could add on another $2500
- Insurance - $30,000
- Lease on property in a good location – This might be around $250,000
- Construction on the property – Remodeling or installing new tanks: $400,000
- Utilities - $7000
- 3 months’ worth of operational costs – Wages, bills, and so on: $60,000
- Inventory – Gas, repair tools, shop equipment, shop inventory, etc.: $565,000
So far, we’ve reached just over $1.3 million, and there are a few things left to consider, but this might give a useful guide, to begin with.
It’s also worth considering that this is a medium to large-scale venture, and it’s possible to start smaller. Simply selling gas in a single, rural location will require significantly lower startup costs, and may be possible with less than half of this figure.
On the other end of the scale, a large, franchise-model company with multiple outlets in popular cities across the country could be started with something along the lines of $7.5 million. If you’re looking to purchase a franchise and save yourself a lot of the hassle of starting up, the average costs will be the annual operating costs, at around $250,000, and an additional $160,000 for stocking products.
How to Own a Gas Station: Revenue and Profitability
Typically, half of the revenue at gas stations comes from fuel. This figure can be misleading, however, since the margins are painfully slim, and most stations rely on other revenue streams to make up for that. On average, only a third of gross margin dollars come from fuel sales, and so profits need to be sourced elsewhere.
In order to make your venture profitable, you’ll need to consider higher-profitability items. These include cigarettes, alcoholic beverages, groceries, and quick-stop snacks. There are also other sources of energy available to cater to the move towards renewable energy. Many gas stations are now making use of charging stations and other alternative fuel sources to stay competitive.
Net profit on gas is often around $0.03 to $0.07 per gallon for gas station owners, and there are many cases where stations are even selling at a loss, at least temporarily. Profitability on gas will likely always be in a state of uncertainty, so it’s better to compensate with more stable resources.
So, it’s impossible to list a fixed figure for profitability. With so many variables to consider, it really will be different for everybody. However, the early stages of learning how to start a gas station should give you the processes needed to find out what will make it profitable for you. So, let’s get started.
How to Start a Gas Station: Initial Steps
Starting a gas station is going to be a similar process as starting a convenience store, but with a lot of extra steps, as in many cases, that’s exactly what a gas station is for a significant number of its customers. Before you get started, figure out how big you want your company to be, what you’ll be selling, and roughly where you want to put it. Whether buying a franchise or starting from scratch, you’ll need to answer all these questions first.
Don’t worry too much about the finer details – you’ll be able to tweak the plan in accordance with the research you’re about to do. You may find out that your original plan is impossible and have to start over, and that’s okay. It’s simply important to have an idea of what you want to become before you start researching whether it’s feasible with the resources you can muster.
Once you’ve got an idea about the business model you’ll be using, it’s time to start writing up a business plan. This can be done yourself, but for something as complex as the fuel industry, it may be a good idea to get some expert help.
Your business plan
This document will be a significant contributor to your success for several reasons. The research that goes into it will tell you what your chances are, how to take your market share, and whether you can offer something competitive in the first place. Then, the completed package will be a testament to your rigor and honesty when it comes to attracting investment or borrowed capital.
A business plan can come in several shapes and sizes, but it should follow the rough format described below:
Page 1. The Executive Summary
This is an abstract that compiles the contents of your document as a summary of what’s inside it. It’ll be a factually-accurate report based on who you are, what you’re planning to do, and the results of your research. Compile this last, but make it count!
Page 2. Your Market Analysis
This is the first part of the meat of the document. You’ll have the industry overview, based on figures you’ve researched yourself, then you’ll have an analysis of the competition and a detailed description of your customers. This will be how you figure out where your company fits into the industry and what makes it stand out. This part of the document will take some serious time and effort to get right, and shouldn’t be rushed.
Page 3. Your Organizational Structure
This page will describe how your company is laid out, and who the key players will be. You’ll also describe the legal structure and list all the relevant experiences of your management team to highlight what they’re bringing to the table.
Page 4. Products and Services
As we mentioned, your gas station will likely need a little help from other products and services to stay afloat and weather the unpredictable nature of the fuel industry. Here’s where you’ll list everything you plan to sell, how much it costs, and how it fits into the bigger picture. Refer back to your customer profiles on page 2 for each segment of your market.
Page 5. Sales and Marketing Strategies
This will lead from your market research and products and services pages, and be a natural progression from there. It will detail how the information you’ve found leads to the strategies you’re proposing for marketing your products and getting them sold. List the media you’ll be using, the technologies, the locations of your campaigns, and everything in between.
Page 6. Your Financial Planning
For investors, this might be the single most important page. It’s going to have all your income statements, balance sheets, and cash flow statements, and the projections you are able to make from them. Your financial papers are another place where accuracy and presentation matter a lot. If you’ve done your market research well, these papers should show prospective investors that you’re reliable and you have your finger on the pulse of the industry you’re asking them to invest in.
For help with these, check out our gas station financial projection template. Using a specifically designed financial projection template for gas stations, you can create a professional-looking document that facilitates your accurate financial forecasts in a presentable manner. These come with free support and can be customized based on the specifics of what you’ll be selling.
Your funding sources
Now that you’ve put the right amount of work into your business plan, you should be in a good position to apply for a loan or an investment. Depending on the model you’ve chosen, you might be requesting anything from $250,000 to $2 million or more. This alone will affect where you look for it. If you are buying an existing gas station you might be able to negotiate a sellers note with the seller to finance a portion of the acquisition price.
Business loans from a bank are one place to look. If you’ve got previous experience and a great business plan, you might have some luck here, although the profit margins on gas are a very unattractive component to this venture, so don’t be surprised if you’re rejected, especially if you don’t have much in the way of alternative revenue streams.
Small Business Administration loans help secure your finances by backing loans by up to 85%. These are designed specifically to help small businesses like yours get started, and often require low down payments. They can have very attractive interest rates, too, but will take time and be difficult to secure.
If you’re looking for investment, consider finding angel investors, who might be willing to contribute more than just capital if they align with your goals. Finding the right investor with experience in the industry can be a huge help to getting started, but of course, this will come at a cost to your control over the company’s direction as they will ask for equity in return. An added benefit of investor capital is that the financial risk is on the investor.
How to Open a Gas Station: Making Sure your Investment Pays Off
Now it’s time to spend all the money you’ve gathered and get your venture off the ground. This can be a daunting task, but if you’ve come this far, it’s a good sign that your research and business plan are robust enough to take a financial risk, and that your investors or loan providers believe it can work.
The key to knowing how to open a gas station is not to lose momentum. You’ve done a substantial amount of work so far, so letting it all slide here would be a terrible waste and could land you in significant debt.
Focus on sticking to the plan, and lean heavily on supplemental revenue streams so that you’re secured when gas prices leave you in the lurch. On top of this, make sure you provide the service you promised in your business plan and keep your customers coming back.
A gas station is a risky enterprise. Margins on fuel are paper thin and can drop at any time. Consequently, many gas stations rely on other revenue streams to make a profit and survive when gas just won’t cut it. If you’re looking to start a gas station, you’ll want to consider this closely, as it may make the difference between whether your gas station is profitable or not in the long run.