“Gas retailers have made their case for immediate relief.”
— Sir Franklyn Wilson
One year ago, in this column, we discussed how inflation affects all of us. We have all experienced increases in the cost of virtually everything. No one is immune from inflation’s uninvited incursion into our daily lives. We have always maintained that inflation is a hidden tax the government collects without passing legislation.
Last May, we published a two-part series on the price of gasoline at the pump. At that time, the price of gasoline stood around $6.35 per gallon.
Today, although the price has decreased to between $5.72 and $5.92 per gallon, gasoline retailers continue to decry the escalating challenges they face because their price margins, which are set by the government, are too low and have not changed in over 10 years.
The gasoline retailers in The Bahamas have intensified the debate, insisting that the government should approve a higher margin than they currently earn.
Therefore, this week, we will Consider This … should the government grant gasoline retailers a margin increase?
The price of fuel
According to recently published reports, the price of automotive fuel is as follows:
Esso — $5.72
Shell — (FOCOL) $5.76
RUBIS — $5.92
So, what exactly is included in the price of fuel that consumers pay at the pump? Understanding that the government fixes gasoline wholesalers’ and retailers’ price margins is essential. This private sector industry is one of few whose price margins the government sets. Therefore, the price that the consumer pays includes several variables.
Firstly, there is the initial cost that is paid by wholesalers when fuel is landed in The Bahamas. Wholesalers must pay that initial cost to the international supplier, including transporting the fuel into the country.
Wholesalers also bear the government-fixed cost of duty of $1.16 per gallon, along with the inventory holding cost and the cost to transport the fuel to retailers throughout the country.
No matter how much the wholesaler pays for fuel, for every gallon of gasoline that the wholesaler sells to retailers (the gas stations), the wholesaler is limited by government regulation to earn $0.33 per gallon for gas and $0.18 per gallon for diesel fuel.
The retailer, by comparison, is mandated by the government to make $0.54 per gallon for gasoline and $0.34 per gallon for diesel. The consumer also pays the applicable value-added tax, presently 10 percent.
Implications
for wholesalers
Several important facts should be noted from these developments. Firstly, the government approves fuel price margin changes, and those margins for wholesalers have been fixed for over 20 years. Therefore, wholesalers earn no extra profit margins when fuel prices change in the local or international markets.
Secondly, wholesalers’ primary avenue to increase profits is to increase their sales volumes.
Thirdly, some wholesalers have encouraged and subsidized retailers to increase their sales volumes by expanding their products. However, despite this attempt to diversify their product lines, we have witnessed the closure of gas stations nationwide. This has become incredibly challenging for Family Island retailers.
Fourthly, wholesalers’ working capital requirements for inventory and accounts receivable are significantly higher with these substantial increases in oil prices.
Fifthly, as fuel prices increase, consumers tend to reduce their consumption. Again, this negatively impacts gross profits because margins are regulated on sales volume and not sales revenue.
Sixthly, the combination of operating on 20-year-old fixed margins against the increased cost of doing business over the past two decades is already a burden when considering the wholesalers’ responsibility for building, maintaining, and operating modern infrastructure across the industry, although these costs are passed on to the retailer. The challenges associated with higher fuel prices do not help with managing these responsibilities.
Implications for retailers
The government approves all fuel margin changes, and those price margins for retailers have been fixed for more than 10 years. Therefore, the retailer earns no extra profits when fuel prices increase in the local or international markets.
At first glance, it may appear that the retailer earns more than the wholesaler, but that observation does not tell the entire story. The retailer incurs costs that the wholesaler does not equally bear.
The wholesaler, who owns many gas stations, leases the premises to a licensed retailer. The retailer pays a monthly rent to the wholesaler for the use of the gas station, which could range from $15,000 to $30,000 per month. In addition, retailers pay the wholesaler a monthly franchise fee of $6,000 to $7,000. This fee is based on a percentage of store sales to customers.
Retailers are also responsible for maintaining their equipment. Retailers also bear the added labor costs, national insurance, general liability insurance, business license fee, training, repairs and maintenance, utilities, office and administrative expenses, and landscaping improvements.
And now, in this age of technology, dominated by digital payments, retailers are obliged to offer customers the option to pay for fuel with a credit/debit card. The associated bank fees on each transaction can range from 2.5 percent to 3.5 percent of the sale, which the retailer absorbs. So, as the rising price of fuel increases the credit card fee incurred by the retailer, at present, the retailer must also take this fee from his fixed $0.54 margin.
To augment its revenue, the retailer has expanded its products to include selling goods typically found in food stores. This generates additional revenue for retailers, without which they would normally incur a net loss from operations.
It is a fact that, as fuel prices increase, consumers tend to reduce their consumption. This reduced consumption has negatively impacted gross profits for retailers, as it has for wholesalers because their fixed margins are regulated on sales volume and not sales revenue.
Furthermore, the retailers’ business license fee is assessed on turnover, not on gross profit. Therefore, higher fuel prices result in higher turnover, which translates into higher license fees, all payable from the same fixed margin of $0.54.
It is not surprising that many gas stations in the country have gone out of business over the years because they cannot keep up with the inflationary pressures they face in their businesses.
The combination of operating on the same 10-year-old fixed margins against the increased cost of doing business over the past decade is already a burden when considering the retailers’ responsibility for maintaining and managing modern infrastructure across the industry along with changing business practices in the digital economy. Moreover, the challenges associated with higher fuel prices do not help in the face of stagnant price margins.
Another concern in this industry is the pervasive practice of wholesalers owning and running retail stations. This reality contributes to a perception of avarice by wholesalers on two levels.
Firstly, it enables wholesalers to double-dip by earning increased profits of a combined $0.87 margin per gallon of fuel, as both wholesaler and retailer ($0.33 and $0.54, respectively).
Secondly, it competitively pits wholesalers against retailers who franchise from the former.
The Bahamas Petroleum Retailers Association has brought greater attention to its plight regarding the fixed margins its members earn. It has maintained that the status quo represents an existential threat to its members’ ability to continue as a going concern. This is not a veiled threat, and they should be taken seriously. What is certain is that something must be done to address their concerns.
They have also intimated that they may have to reduce their operating costs by laying off gas station pump attendants and offering self-service options to their customers. This would be an unfortunate development because it would furlough thousands of employees operating at the economic ladder’s most vulnerable level.
The government’s
response
The government has responded to the retailers, maintaining that the political directorate is prepared to meet with them, but is reluctant to increase their margins. Unfortunately, the government’s response has resulted in an impasse that could have dire consequences. Only time will tell if there will be a mutually agreeable resolution to this impasse.
Possible solutions
Several possible solutions are worth reviewing. Firstly, if the government insists on keeping the margins unchanged, it should consider reducing its customs duty to the wholesalers and passing those cost savings on to the retailers by granting them a commensurate margin increase.
The wholesalers should not have a problem with this because they already earn money hand-over-fist from the present arrangement. As proof of this, we don’t hear them advocating for margin increases from their 20-year-old level.
Secondly, the government should look at the inequitable practices of the wholesalers and rectify them. For example, two of the three wholesalers are foreign-owned and make comparatively little contribution to the local economy compared to the sole domestic wholesaler. Moreover, whenever foreign-owned wholesalers invest, they reap enormous returns by charging the retailers for the cost of those investments.
In addition, the two foreign-owned wholesalers should be immediately charged a repatriation tax on their profits. This will partially offset the losses that the government will suffer from the reduced customs duty to wholesalers, as described above.
Thirdly, the question must be asked, why is the fuel cost at the pump generally lower for Sun Oil (Shell or FOCOL) than it is for the two foreign-owned oil companies? Given Esso’s and RUBiS’ enormous buying power and economies of scale that should result from their expansive market depth, they should not have to pay more for imported oil than the local importer.
Sun Oil has done a much better job of sourcing its fuel, possibly because the foreign-owned oil companies are not incentivized to obtain lower costs. The result is that Bahamians are screwed by the foreign importers whose prices are usually higher than the local wholesaler.
Finally, if the government intends to empower Bahamian businesses, it should persuade foreign-owned oil companies to amend their practice of indefinitely leasing their gas stations to Bahamians. For decades, foreign oil companies have had Bahamian entrepreneurs and consumers over the barrel because Bahamian retailers have indefinitely long leases without the option of ever owning their stations after a reasonable number of years.
To add insult to injury, the wholesalers earn yet another income stream in rental income from their retailers. No wonder they are not crying for higher margins. This monopolistic practice by the wholesalers must end, and it must end now.
The fuel industry in The Bahamas is a classic example of the adage that “all that glitters is not gold,” at least for Bahamian retailers. Unfortunately, the same cannot be said for wholesalers.
While it may appear to average consumers, as they monitor gas prices at the pump, that Bahamian retailers are earning excessive profits, a rush to judgment requires a deeper dive into the industry to fully appreciate what goes into the price of gas at the pump and the enormous costs incurred by retailers in this industry.
Conclusion
Bahamian fuel retailers are overdue for an increased margin for their products at the pump. However, we must balance offering a reasonable price at the pump to consumers, while affording a respectable profit for retailers to remain financially viable.
Like many challenges, there is more than one solution, as we have enumerated above. All should be explored thoroughly and fairly, with changes ultimately made that benefit all.
Philip C. Galanis is the managing partner of HLB Bahamas, Advisors and Chartered Accountants. He served 15 years in Parliament. Please send your comments to pgalanis@gmail.com.
