Facing change and challenges are major aspects of the job of a retail manager in the fuels marketing and forecourt retailing sector. Looking at the market now compared with where it was five years ago, there has been significant change and upheaval. There are, however, some things that never change the most important of which is that if you are not looking after your customers and keeping up with or preferably ahead of your rivals and market trends, you are falling behind.
At the end of 2012 there were 8,700 petrol sites in the UK with 5,160 retailing fuel under the seven main brands four of which (Esso, Total, Jet and Murco) were backed by UK refineries. Texaco had recently exited UK refining selling Pembroke to Valero and Total had sold its retail and commercial marketing operations to Rontec, who had in turn sold approximately 250 of the retail sites to Shell and the commercial business to DCC.
Supermarkets dominated the market with a 40%-plus share and 1,320 outlets, while the oil company owned sector comprising 2,200 sites was in the process of being sold off mainly to the large independent group dealers. As a result, site numbers and market share were growing in the dealer sector and the Top 50 Indies accounted for 1,300 of the total of 5,100 dealer sites. Petrol station real estate values were holding up well as the Indies competed for oil company disposals; and these values were generally reflective of the returns achievable in the market.
Significant structural change and consolidation was taking place against a background of falling site numbers, rising prices with both petrol and diesel above 140ppl, poor margins and weak volumes post the 2008 financial crisis. Retail managers’ focus was primarily on cost cutting and finding the right business model for survival, in addition to managing internal re-organisations, as oil companies looked to consolidate resources.
Focus on sites was increasingly on non-fuels shop retailing which provided solid margins and growth opportunities. Any investment in retail sites, other than for essential stay-in-business reasons, was directed towards shop rebuilds and retrofits, often in partnership with the symbol groups who were keen to expand in the sector. Costcutter, Spar, Budgens, Mace, Londis, Nisa, Co-op and Premier were examples of symbol groups actively looking at petrol sites. Branded franchise offers from companies such as Costa, McDonald’s, Subway, Starbucks and Greggs were increasingly prevalent. The major oil company chains were expanding their shop partnerships where locations were suitable, eg Esso/Tesco and BP/M&S. As always everyone was searching for the perfect retail combination amid changing customer expectations and no one could realistically justify that they had found it!
Among other things keeping retail managers awake at night were product mix and supply competitiveness. Traditional supply lines were being fragmented and inter-company product exchanges were being disrupted by refinery disposals and changes in terminal ownership. Importers such as Greenergy, Prax and Harvest were getting an increased foothold as the majors retreated. Diesel sales were growing and petrol declining, making diesel the most profitable product but creating configuration problems on retail sites with a shortage of diesel pumps and tanks and idle gasoline ones. Changing tank and pump configuration is never easy or cheap. Throw into the mix increased biofuels mandates and sites were having to cope with ’sludging’ with diesel biofuels mixes and scouring with ethanol in the petrol mix as biofuels percentages increased to meet RTFO (renewable transport fuels obligation) targets.
On the pricing front, while struggling to pass on rising product costs to pump prices, retail managers were looking for optimum ways of introducing biofuels costs to their pricing formulas, this was complicated by the fact that biofuels were not priced on the traditional Platts exchanges. Other pricing challenges emerging included the fact that some oil companies were outsourcing their transport operations and offering ’collect’ and ’delivered-in’ prices. Marketer importers and producers were struggling with passing on increasing CSO (compulsory storage obligations) costs into the market.
With the need to limit losses from petrol retailing, retail managers cut back on fixed margin and margin share deals for dealers and the market moved towards ’Platts product cost plus’ pricing daily or weekly lagged. In 2012 it was undoubtedly a tough environment for petrol retailing management with the market in transition as it responded to conditions.
Five years on and the decline in retail site numbers has slowed and appears to have stabilised at around 8,400. The seven major oil companies referred to in the 2012 analysis now only have around 4,700 sites in their colours and only two of them (Esso and Jet) have active refineries in the UK with Murco’s refinery sold to Trafigura and Total Lindsey being a merchant refinery with no UK retail branded activities. Essar have invested in upgrading Stanlow refinery, which it purchased from Shell, and have announced their intentions to be a strong player in downstream sales and marketing with ambitious retail growth targets.
Supermarkets have increased their market penetration to 1,550 sites with a market share of 45%, while the oil company company-owned sector, having shed 900 sites in the past five years, accounts for 1,300 outlets. The notable change in the market has been the growth in the dealer sector to 5,600 sites and a 37% share as independents purchased Co-op disposals. Within this sector, the Top 50 Indies now own over 2,500 sites. Two of the largest independents MFG and EG are in the list of top five of all petrol retailers by site ownership, MFG being number one with 930 sites. The top three independent groups, all backed by private equity investors, have been responsible for over 60% of all property transactions within the past three years. The landscape for retail managers now is very different to that of 2012.
It’s all change with products, five years ago diesel sales were advancing towards 50% of the retail mix at the expense of petrol, however due to well publicised reasons it has now fallen out of favour and is being legislated against resulting in sales at the pump declining as motorists shift back to petrol. Biofuels are now mandated to make up 7% of the retail fuels mix, around twice the percentage in 2012, and further increases are due in the future to meet the government’s target of 12% by 2030. The complications of increasing ethanol percentages above 5% in the unleaded mix and the uncertainties over the government’s mandates on the introduction of E10, provide a headache for retail managers and have many implications not least pricing and site supply and maintenance. Alternative fuels are the issue grabbing most column inches in the industry at present so retailers will need to consider their response and how this will affect the future of the petrol station.
The landscape facing retail managers today has evolved substantially since 2012 and although some of the questions posed on the future then have now been answered, not many would have forecast how things have turned out today. For example:
The pace and extent of consolidation has been more dramatic than forecast as the major private equity backed group dealers snapped up oil majors’ site disposals and proceeded to buy out smaller retail groups and independents looking to profit from high site values.
The economics of fuels retailing are now considerably better than forecast in 2012, with volumes recovering. Supply cost transparency and improved price management have resulted in pump prices more accurately reflecting product cost and the margins needed to cover site operational and investment costs and ensure economic viability for efficient retailers.
Whereas in 2012 forecourt branding, canopies and pole signs were exclusively fuel related, in today’s market there are a fast-growing number of retail sites branded in the shop symbol’s colours with fuel branding being restricted to pumps and a ’signature’ on the pole sign.
Technology and automation on forecourts have seen big changes as the industry tries to keep up with digitalisation in general and the corresponding changes in customers requirements on the forecourt, particularly when it comes to payment options.
Everyone assumed five years ago that diesel would continue to grow at petrol’s expense, the opposite is the case today and no-one quite knows where diesel will end up.
Premium super-unleaded and super-diesel grades have also grown as a percentage of fuel sales.
However, it’s alternative fuels that provide real question marks for retailers and they are now becoming a reality rather than just something lurking in the background. Forecourts are just one of a variety of places including the home, hotels, car parks and streets in urban areas where EV owners can ’refuel’. This puts in question customers need to visit petrol stations and will have a notable impact if/when sales of these vehicles grow.
Getting the right product strategy on retail sites with all this uncertainty and change is a very real challenge for retailers with a lot at stake over time if they get it wrong.
What about the next five years?
What will be the growth of alternative fuels? Will this be just EVs or hydrogen too? What percentage of fuels sold will be the traditional hydrocarbon-based fuels? How will the biofuels directive evolve considering Brexit and what will happen with E10?
How will petrol retailers respond to technological change as customers’ interactions are increasingly digitalised? Will the UK follow the trend towards unmanned sites as in most parts of Europe?
What will a petrol station look like, how will it develop to attract increasingly demanding customers who will have alternative locations (home, car parks, hotels, street charging etc) to charge up their EVs? Will petrol retailing become secondary to a site’s other retailing activities?
What will the ownership structure of the market look like? Will Private Equity exit with IPOs or outright sale? Will oil companies come back into the co-owned market to control declining hydrocarbon volumes? How will supermarkets respond?
What is the future for smaller independent retailers in the face of market consolidation and increased sector regulations? Will there be a major new market entrant?