Lack of competition, other factors keep gas prices in Grand Forks higher
GRAND FORKS, N.D. -- While filling up his Chevrolet Impala at a Grand Forks gas station on his way out of town for the holiday weekend, Mark Samuel said he couldn't help but notice a big difference between here and other stations in the area.
"I almost always try to fill up in Fargo when I go through there," he said. "But I didn't have quite enough to make it that far today."
As most gas prices in Grand Forks sit at $1.89, those filling up in Fargo are paying around 30 cents less than the city 80 miles to the north.
The drastic difference in prices have left some people like Samuel wondering why there's such a disparity between Grand Forks and other towns and cities in the area.
Experts said the reasoning for that can be complex and dependent on factors such as the number of local competitors and the types of gas stations in the immediate area.
In total, Grand Forks has 29 gas stations, according to GasBuddy, but two of the bigger players in town--Simonson Station Stores and Valley Dairy--combine to own 10 gas stations. That type of dynamic--where a few companies own a large share of the market--would tend to drive prices up, said Jeff Pelton, who worked for nearly 10 years for Hess Oil and Speedway configuring prices for gas stations and now works as a senior petroleum analyst at GasBuddy.
The main determinant in gas prices is the competitors in the immediate area, Pleton said.
"If you have 30 gas stations with 30 different owners, you would definitely have more price flexibility," Pelton said. "But to have just a few people making decisions makes it a tough market."
Phone messages and emails sent by the Herald to officials at Simonson Station Stores and Valley Dairy were not returned by press time.
According to Jeff Lenard, a spokesman for the National Association of Convenience Stores, gas stations in Grand Forks are making more money than usual on fuel. Though Grand Forks stations unusually haven't been profitable over the year, margins now are higher than they are in other areas, Lenard said.
"If there's a lack of competition or not the same pressures, you might see margins expand, and it looks like Grand Forks is an area where right now margins are a little bit higher than the industry average," Lenard said.
"In markets where there aren't significant competitive pressures, retailers may hold onto those higher margins a little longer," he said. "And that sounds like something that might be happening in Grand Forks. The margins haven't constricted down to traditional levels yet."
Fargo, on the other hand, has some of the lowest gas prices in the country. At some stores, stations are selling gas for almost 40 cents less than the national average of $2 per gallon. The North Dakota average gas price as of Friday was $1.94 per gallon, according to AAA.
But in Fargo, the average price for gas as of Friday was $1.68 per gallon, with the lowest price at $1.62, according to GasBuddy.com.
At prices that low, Lenard said, it's hard to see how stations are making money off gas.
"Seeing gas sold at $1.62, it sure seems like no one is making money in that market," he said. "My first thought when I saw prices that low is that there might be a price war going on in Fargo. Everybody is playing a game of limbo to see how low you can go."
That sort of price war is used as a means to get people into convenience stores, where stations make considerably more money off items such as coffee and soft drinks. Gas stations oftentimes use lower gas prices as a loss leader that helps drive customers into their convenience stores.
Gas prices will typically decrease for two main reasons--a station has too much gas on hand or they go down as a reaction to other people lowering their price. That reaction to other prices can cause a gas war.
In Grand Forks, however, with many stations owned by just a small number of people, gas wars are less likely to happen.
"If one guy doesn't move, the other big players aren't going to move," Pelton said.
Making money inside the store
The types of gas stations in a city can also influence the pricing of gas. If there are major brands in an area, such as Exxon, Mobil, Shell, Chevron or British Petroleum, markets tend to see higher prices. Those brands have stood the test of time and have established brand-name recognition, so they're able to run ads touting their gas as superior, Pelton said.
Conversely, if it's an area where the competitors are retailers such as Sam's Club, Costco, BJs or independent stations, the prices are oftentimes lower.
Smaller towns with just fewer gas stations rely on lower-than-usual prices in order to drive people inside, Pelton said.
"The thought is that an attractive gas price will make people pull over and, in turn, drive people into their store," Pelton said.
In the end, industry experts said most stations don't make nearly as much money off gas as they do with items they sell inside convenience store.
After credit card fees and payment for products such as equipment and other expenses, gas stations could end up making just 50 cents per fill-up, whereas if a customer goes into the store and buys a cup of coffee, a gas station could make closer to a $1.50.
Lenard said the average convenience store gets about 70 percent of its revenue dollars from gas, but 70 percent of its profit dollars come from inside the store.