What determines the profitability of a retail gasoline outlet? A study for the Competition Bureau of Canada

An independent study was conducted to better understand the key determinants of profitability in the retail gasoline industry. The economic and financial analysis was based on pricing and other financial data collected by the Competition Bureau from representative retail outlets owned by vertically-integrated firms and independent retailers in the Greater Toronto Area and adjoining areas. This study combined economic and accounting techniques to provide an objective opinion regarding allegations of anti-competitive behaviour on the part of vertically-integrated gasoline firms. It evaluated the validity of complaints such as predatory pricing, collusion, retail price-fixing, and forcing the exit of smaller independents from the industry. This document described LECG's distinctive business model that was used to evaluate complex business and organizational behavior. It included a literature review, as well as a comparative economic and profitability analysis of retail gasoline stations. The study showed that movements in both retail and wholesale prices are largely dictated by corresponding fluctuations in crude oil prices. It also showed that there is serious doubt on the possibility of strategic behaviour by vertically-integrated refiners. It was noted that the final evaluation of station efficiency is limited because of missing data on costs incurred by site operators and revenues from ancillary services such as car wash and convenience store sales. It was concluded that the critical factor driving profitability is throughput, which impacts both revenue and average total costs. Since throughput is related to population density, local traffic and degree of local competition, the loss incurred by a specific outlet can be due to poor business strategy or circumstances rather than anti-competitive behaviour. 5 refs., 17 tabs., 21 figs