The UK forecourt sector is healthy, with independent operators leading the way, according to Arthur Renshaw, Catalist’s UK and Ireland sales manager, speaking at the Energy Institute’s inaugural Forecourt Strategies and Trends conference last month.
With sites currently disappearing at the rate of about 300 a year - there were 9,570 forecourts trading at the end of 2006 - Renshaw said: "Falling site numbers often grab the headlines as an example of a failing sector, but adaptation is the key. You don’t need me to tell you that the forecourt industry in the UK is changing really fast, but the sector is very much alive and kicking. It’s very resilient and is adapting to that change. In our view it’s on the rise again."
As the oil companies have retracted from retailing, independent operators have risen to the challenges of static fuel volumes and competition from the supermarkets - and are winning, said Renshaw. Between them the dealer groups (those, operating three sites or more), which number around 150, now have a 16% share of the UK’s total motor fuels volume, according to Catalist figures. This is equal to BP’s market share and considerably bigger than either Shell’s or Esso’s. "Independents are now major players," he said.
The oil companies currrently operate less than half the number of sites they did in 2000. The best of those sites having been sold off to the dealer network. "The traditional independent with just one or two sites is disappearing fast," warned Renshaw.
For those who have managed to adapt, the market is said to be vibrant, with convenience operators showing strong interest and demand for sites driving up property prices. Profit-driven third-party investors, Renshaw added, are also showing increasing interest in the sector, where they are proving to be effective operators who can control their costs. He confirmed that the most successful operators would continue to be those with a well-developed shop (see box above).
While the UK industry has slimmed down and evolved into a more efficient and profitable network, Europe lags behind in comparison and is "over-pumped". Using a simple ratio of cars per site, Renshaw explained that the UK was in a very good position compared to most of continental Europe and Ireland, where large numbers of sites will inevitably need to be lost. Ireland for example, currently has just 701 cars per site, compared to the UK’s 3,124. It would need to lose 78% of its network to match UK rates.
The idea that rural areas have borne the brunt of site closures was also challenged. Citing figures from the Commission for Rural Communities, Renshaw said that in 2006, 88% of rural households still had access to a forecourt within 4km, a drop of less than 2% since 2000. People living in rural areas are more likely to be near a forecourt than they are to a doctor, bank or supermarket, the statistics showed. "There are actually some urban locations where it can be more difficult to find sites as petrol stations have been disappearing off traditional inner-city routes. But there aren’t really as many fuel deserts as some people have been saying. Generally motorists who want to buy fuel will still find somewhere quite easily," Renshaw commented.
Looking at price trends and operating margins, Stephen Brooks, vice president of downstream research at consultants Wood Mackenzie, said that fuel margins throughout Western Europe had proved relatively resilient to rising oil prices, since increases could be passed through on to the consumer. However, he highlighted the negative impact of price wars in driving down margins using an example from Sweden, where the leading players had attempted to protect volume share that was being lost to the unmanned discount sector. "The worst is now over, but we don’t believe the margin will recover to peak levels. Price wars and the entry of hypermarkets tend to drive down fuel margins long term," he warned.
Assessing the attractiveness of different European markets in terms of net cash margin per site, he said the UK benefited from high fuel throughputs per site, although it was weaker in terms of net cash margin per litre. Based on his assessment, France and Germany appeared to be the weakest markets and Norway the strongest.
PRA director Ray Holloway also predicted that future margins would be robust for both suppliers and retailers. "That’s the first time I’ve been able to say that since around 1970," he commented. Holloway said a key shift for the industry had been the move towards Platts deals, which mean retailers are increasingly responsible for their own pricing. "The benefit has been that the retailer can control the margin themselves. This has resulted in greater stability, and fewer sites going for the lowest possible price. In the long run profit sustains a business, not volume," he said.
Urging delegates to "think indies first", Holloway reckoned that dealers would continue to grow their share of the market, despite ongoing changes in the mix of fuel grades and the emergence of biofuels. Highlighting some of the best dealer sites in the network, he said: "The forecourt convenience sector is growing at around 6% per annum and indies can offer the same level of service as the multiples. I’ve looked at shops all over the world and I think we already have some of the best standards in the UK, and I include the US in that."
The growth of convenience retailing and food-to-go were themes that ran throughout the conference, with speakers agreeing that their development would continue unabated.
Greg Hodge, retail forecourt analyst at Planet Retail, said he expected to see oil companies around the world continuing to team up with stronger brand partners, particularly in foodservice: "Starbucks has been slow to get in on the UK market, so maybe we’ll see something from them going forward. The future also looks good for Subway. The company has said it wants 400 forecourt sites by the end of 2010 and it pushes the right buttons with fresh and healthy options," he said.
Somerfield’s head of formats, Steve Tremlett, meanwhile outlined the latest developments for its forecourt stores. This included the decision to replace counter service for hot food and coffee with self-service fixtures and Coffee Nation vending machines, which he said had reduced operating costs and increased sales. This forms part of an overall strategy that aims to provide simpler ranges targeted at specific shopping occasions, such as the evening meal.
An oil company perspective of the changing market was delivered by BP’s new fuels marketing manager, Janet Ashdown, who stressed that BP remained competitive and committed to the UK.
"People have questioned BP’s long-term commitment to downstream now that we no longer have a UK refinery, but we have maintained an incredibly strong infrastructure and logistics," she said. Looking at challenges ahead, Ashdown questioned the future for oil companies as fuel retailers, but gave little away about BP’s plans. "Are we the natural owners of our real estate? Can we compete with private equity owners who are looking for just 5-6% return? Possibly not," she said.
Premium fuels were highlighted as one area where oil companies could successfully distinguished themselves from the hypermarkets and other new entrants.
"We had allowed ourselves to commoditise our category, but we are now building it and developing distinction. The indications are that the more consumers understand the premium fuels market, the more they use it," said Ashdown.
On alternative fuels, she said BP was working on the next generation of biofuels and a product called bio-butanol. "We believe this second generation of biofuels will be the most powerful", she said.
BP’s retail business will continue to focus on a differentiated fuels and convenience offer, said Ashdown, highlighting the success of this strategy with some impressive figures - BP Retail’s global store sales now stand at $5.9bn compared to $1.3bn in 1996, with sites serving 13 million customers a day. And while convenience, speed and quality are all important, recent research found that the thing UK customers wanted most was clean toilets.
As a result BP has invested in upgrading its facilities.
=== the winners ===
The forecourt shop is crucial to a site’s success, according to Arthur Renshaw of Catalist.
He reported that:
? 86% of UK forecourts have a shop and the ’winners’ are the 3,555 sites with c-store or multiple association.
Between them these sites have:
? 62% market share of motor fuel volume - their average is 5.7mlpa
? 74% market share of shop sales - average is £950k
? 64% share of shop area - average is 101sq m