It's not the fuel

Gasoline prices may be accelerating toward $4 a gallon, but most gas stations in Sonoma County have little cause to celebrate.

Nowadays, gasoline often is the least profitable item they sell.

Indeed, stations have seen their profit margins on a gallon of gas drained to their lowest level in a quarter century.

Selling that box of cigarettes, six-pack of beer or bag of chips has never been more critical.

"My store is the crutch you rely on. It sure is a nice constant to have every month," said Dan Lutz, owner of Lutz Chevron in Petaluma. "You can't rely on gasoline that much any more."

Gas stations may be the public faces of oil companies, like the Bay Area's Chevron Corp., whose profits have broken records in recent years.

But many of the nation's nearly 170,000 gas stations are independently owned -- even many with a familiar oil company's brand, such as Lutz Chevron -- and have no stake in the production of gasoline or crude oil. They simply buy fuel and sell it.

For them, soaring oil prices have increased the cost of buying gasoline and diesel. As more customers pay with plastic at the pump, higher credit card fees take a bigger chunk of every sale. And the spread of discount chains like Costco -- which sell gas at bargain prices to draw customers into their retail stores -- have forced the corner gas station to compete more aggressively for drivers' loyalties.

These days, gas stations register their greatest profits by selling coffee, soda and snacks.

The steady revenue stream increasingly is a hedge against ever more volatile fuel prices.

"You're looking for a little bit more stability and stores are more stable. It has become even more important," said Tom Robinson, president of Rotten Robbie, the San Jose chain with six Sonoma County stations. "Most everybody in the gasoline business is attempting to be less dependent on revenues from gasoline and diesel."

Ever since the 1980s, when mini-marts began replacing service bays, gasoline retailers have relied on stores first and then car washes to generate more income.

Today, gasoline accounts for about 70 percent of the typical station's revenues but only 33 percent of its profits, according to the National Association of Convenience Stores.

Stations typically aim for a profit of 2 to 7 percent at the pump. On Friday, when a gallon of unleaded cost $3.85 in Sonoma County, that could pencil out to between 8 cents and 27 cents.

Inside the convenience store, however, they can expect a 33 percent profit margin overall on the food, beverages and other items they sell, station owners said.

Put another way: its more profitable for a station to sell $10 of chips and soda than $50 of gas.

Nationwide, gross margins for motor fuels fell to 5.2 percent in 2007, their lowest level since 1983, according to the National Association of Convenience Stores.

There were days last week Rotten Robbie might earn about 5 percent per gallon, and Lutz Chevron made about 4 percent. But those profits can quickly evaporate when wholesale prices rise.

"There's so much volatility in the margin," Robinson said.

On Thursday, for instance, Rotten Robbie paid $3.85 a gallon for the gas it sold, including state and local taxes, shipping costs and credit card fees. To avoid losing money, the retailer raised its price for a gallon of regular from $3.77 to $3.85 the same day.

"What that tells you is retailers will be raising prices in this market unless wholesale prices were to take a big drop," Robinson said.

Rising prices have led California motorists to cut down on driving, resulting in declining fuel purchases the past two years. That further dampens gas revenues, yet retailers are reluctant to raise prices for fear of losing even more business.

Last year, Lutz sold 10,000 gallons a day. Now he sells 8,000 gallons a day.

"When it gets up close to $4 a gallon, the public becomes more price conscious. The cheaper the gas, the better for me," he said.

As wholesale prices rise, retail profits shrink. Station owners said they tend to make the greatest profits when refiners drop prices because retail prices come down slower.

"Usually you try to harvest better margins for awhile. They will come down, but they tend to lag," Robinson said.

Rising prices also mean higher credit card fees, since they are about 2 to 3 percent per gallon.

The fees, coupled with other rising costs, have brought many operators to their knees, said Tom Kloza, chief oil analyst at the Oil Price Information Service in Wall, N.J.

"I know there is a tendency to believe that every industry overstates their woes," Kloza said. "But in the case of pure gasoline retailers, they are truly woe-begotten."

Convenience stores can help generate fuel sales by drawing motorists, but a store often is a draw on its own.

"I have a lot of customers that just come in for the store. I have customers that come in every day," Lutz said.

Stores help station owners reach profit targets sooner. That is why Rotten Robbie purchased a former Shell station in Lakeport, complete with a convenience store and car wash.

"You're just a more popular destination," Robinson said. "Plus having a store gives you a place to walk into and it's usually more attractive. It can help us be profitable and it can also help us sell gasoline. People like the options."

The Houston Chronicle contributed to this story. You can reach Staff Writer Michael Coit at 521-5470 or mike.coit@pressdemocrat.com.