Usually, when we observe how technological changes alter the value of other businesses, we pay attention to the changes that are absolutely fatal. The rise of cell phones with the ability to take pictures has demolished both the camera and film development industries. The iPhone bankrupted Eastman Kodak.
In giving so much attention to the changes in technology that are fatal to business models, we tend to pay less attention to the changes that are less than fatal but yet significant enough to alter the intrinsic valuation calculations for certain businesses.
Gas stations come to mind as a fair example.
In the 1950s through the early 1970s, being a gas station was a very difficult to earn a lower to middle class living. The profit margins on gas have always been razor thin on the retail side, and worst of all if you were an operator in your community, you would get blamed for the rise the rise in the price of gasoline as people thought you were profiting from the profits that were really going to the Exxons, Chevrons, Shells, and BPs of the world. The ignorance of the population at large—which generally believes that a 15% gas hike means that the gas station operator is making an extra 15%–compounded this obnoxiousness.
Beginning the 1970s, gas station operators began to expand their offerings of cigarettes, sodas, beer, candies, junk food, and even lottery tickets. These add-ons, which are considered chump change incidentals to most customers, transformed the gas station industry because those items carry substantial profit margins (it is not unusual for lottery tickets alone to account for 10-20% of a gas station’s overall profitability).
These incidental items raised the intrinsic value of gas stations. Gas became the draw to get you into the door to earn crazy margins on junk food, junk drinks, and gambling. In nearly all instances, these items in aggregate generate a majority of a gas station’s profits. If a gas station had no convenience store, it would be almost impossible to justify a valuation in excess of $100,000 absent being located in a high-traffic road or near-highway area.
The rise of card payment have dampened the lucrative nature of these add-ons as customers pay at the pump and don’t enter the store for the opportunity to contribute to the actual profit source of the gas station.
Consider this comparison. In 1997, the average owner-operated gas station in the United States earned $115,000 in post-tax profits, with $72,000 coming from the sale of non-gas items (including car washes) whereas $43,000 came from the sale of gas. Fast forward to 2017, and the average profitability is $103,000 with $58,000 coming non-gas items and $45,000 coming from the sale of gas. The gas portions have held up consistently while the snacks, drinks, and gambling portion have declined due to lower foot traffic.
It is wildly fascinating to analyze the indirect effects of technological change. The rise of e-payments doesn’t just mean you can buy things on Amazon. It also means you can buy gas without going inside, which in turn lowers foot traffic for the profit levers of the gas station. For investors, I would permanently attach a lower multiple to any gas station purchase or investment under consideration, as the historical data points include a proportion of profits that no longer exist and are not being offset elsewhere.