GBG Challenge Update & What's Next

Welcome Gas Nation!

This week’s issue is really important so I hope you stay with me to the end!

We’re in the ‘hurry up and wait’ phase of our five gas station investments, meaning that we’ve done everything we can with our five locations and now we’re waiting on buyers, waiting on financing, waiting on permits and so on and so forth. This is going to take a few weeks so I’ll update you on what’s going on within the month. Hopefully we’ll have one of the locations sold by then and lots of other great news.

So what do we have in store today? I’m going to transition our newsletter to talking more about the details of running a gas station business. Every week I get dozens of questions from all of you about the nuts and bolts of running this business, things like “How do I get financing?”, “What are my best insurance options?”, “How do I negotiate a fuel supply agreement?”, “How do I deal with the local EPA office”, “Do I need to have a hot kitchen in my store?” and on and so forth.

So this week we’re going to talk about margins, profits and the softening economy that we all see around us and how to navigate that reality.

Remember: you can make money in any environment, but only if you’re self-aware and willing to face reality

Yes, this is going to be technical and pertinent for those of you who are either running a store or want to be in the gas station business. If you have friends who are interested, feel free to forward this issue to them.

We all know that revenue solves all known problems in business. Eric Schmidt, the long-time CEO of Google, famously said this many years ago. But the gas station business today is different from a high-growth tech company in 2 ways. First of all, in a softening economy, it’s often much harder to grow revenue. We just can’t get more dollars in the door. Secondly, the net profit margins in our business are much lower than in tech; 5%-8% depending on a number of factors.

But these low margins also means that if we can move the needle even a tiny bit on the cost side, we can drive radically more profits.

Let’s take a look at the math:

The formula to determine how much increase in revenue is equivalent to a certain amount of cost savings is:

This means that in a business where the net profit margin is 8.33%, saving $1 is equivalent to increasing revenue by $12 because the additional revenue would have the same impact on the bottom line as the $1 saved, after accounting for the profit margin.

All of this is a fancy way of saying that if I’m running a 5% net profit operation and I can save a dollar in expenses, that puts $20 on my bottom line. If I’m running at 8% and I save $1, that’s $12.50 in profit.

So in an economy when it’s hard to add revenue and everyone is spending less, the lever that you can pull, the lever that can make you profits, is saving on costs. A dollar in savings can go a very long way towards boosting your profits.

Alright, that’s all for this week.

The takeaway is that if we can drive more revenue, we can still drive profits by managing our costs well.

If you have any questions about the details of running a gas station business please reply to this email and ask them, and I’ll try to answer them in a future issue of the GBG newsletter.

Till next time!

GBG