Oil companies face a huge dilemma over their retail strategies, according to Greg Hodge, retail analyst at Planet Retail, which specialises in analysis of the major retailers and retail markets worldwide.
“The OFT’s approval of Tesco’s acquisition of 21 forecourt sites from Morrison’s has capped an interesting sequence of events in the UK forecourt market,” he said. “Both retailers and oil companies have been busy trading assets throughout 2005, as fuel prices have continued to escalate. But while specialist retailers – the supermarkets – see forecourt stores as an opportunity to circumvent planning regulations and expand their market shares, the oil companies appear to have mixed feelings on the best way to use this unique space.”
Hodge cites the example of US-based Chevron, which, through its UK arm, Texaco, has been busy this year selling off its assets, as part of its corporate goal to sell all of its company-owned sites in the UK by the end of 2006. Having agreed a deal with Somerfield in February, Texaco finally sold 118 sites to the retailer in April this year. A further 60 sites were divested to Pace Petroleum in September and then earlier this month it let another 14 sites go to Petrol Express. Having launched an exciting new forecourt concept called ‘ExtraMile’ in the US earlier this year, Hodge believes Chevron’s decision to reduce its controllable network in the UK is “somewhat surprising”.
As regards BP’s joint venture with M&S – which was first unveiled in May, followed by the opening of the first of the eight trial stores in Hammersmith in October – Hodge praises the fuel giant for leading the way in oil company-operated forecourt retailing through its Connect format. “Offering a broad range of convenience items plus excellent foodservice facilities, it has fully lived up to the claim that it is moving ‘from a fuel retailer to a true retailer approach,’” says Hodge. “The introduction of the M&S Simply Food concept can only improve BP’s retail offering; the idea of an M&S sandwich and a freshly brewed coffee will surely be enough to entice more customers into its stores. I am sure this joint venture will be a success and fully expect it be rolled out across the Connect network at some stage next year.”
BP’s main competitor in terms of oil company-operated forecourt retailing is Esso, through its On the Run stores. Following the success of its On the Run concept in the US, the company first launched the format in the UK in September 2003. Esso has spent most of 2005 rolling out this concept across its network, although progress to date has been relatively slow. On the Run stores exist in two different-sized formats, with smaller stores offering a reduced level of foodservice facilities compared to the larger stores. The larger stores also have the checkout located at the back of the store, making the On the Run concept unique in this regard, according to Hodge.
Total, meanwhile, has reinvented its Bonjour concept through a pilot scheme called Esprit de Sud back in March this year. Despite the sites still carrying the Bonjour fascia on the outside, the inside of the stores have had a complete makeover. Its special zones have different colours and timed lighting that are designed to coincide with peak purchase times. “This approach offers a comfortable shopping experience and is expected to be rolled out across its Bonjour network over the next year,” says Hodge.
With BP, Esso and Total all working hard to improve their convenience offering, Hodge thinks it may be surprising to some that Shell has decided to replace its Select format with its Shell Shop offer, as part of its controversial restructuring scheme.
“Its multi-site operation programme has received mixed reviews in the forecourt industry,” he says. “As did its decision to remove its Select format from the UK roadside. Having trialled a stand-alone store in central London at the end of the 1990s, Shell has turned full circle in its attitude towards c-store retailing. Its decision has been built mainly on the belief that customers visit petrol stations to purchase fuel first and food second. It has therefore decided to reduce its store offering and provide customers with distress purchases only. This process has been replicated across Europe, where Shell has not only reduced its store offering but also exited competitive markets such as Portugal, Spain and Ireland in the past 18 months.”
It is, of course, the major retailers that have benefited most from recent developments in the UK petrol market, according to Hodge: “Having rolled out petrol stations at their hypermarkets and superstores across the country, they have driven many independent petrol stations out of business. They are now looking to cash in on the retail opportunity that petrol forecourts offer them.
“Tesco’s partnership with Esso was the springboard to its Express format in the UK, and the retailer has returned to the forecourt through the acquisition of 21 Morrison’s sites that were part of the BP-Safeway joint venture. The buying power and retail expertise that Tesco possesses makes it almost impossible for the petrol companies to compete in the store. The oil companies are therefore left with a difficult dilemma. They can either try to improve their retail offering and reap the benefits of the higher-margin grocery sector, or they can reduce their controllable network and move gradually towards a wholesale agreement.
“The situation is being replicated in Western Europe, where all of the major oil companies have been forced out of specific markets where they have been unable to gain a large market share. If the competition continues then perhaps one of the UK’s five major oil companies will be forced to exit the market altogether.”
GENERAL TRENDS IN EUROPE:
The major oil companies are currently trying to achieve critical mass. As a group and as individuals they are looking to position themselves in markets (countries) where they can achieve market leadership. In general, major oil companies are looking to exit highly competitive markets such as those of Western Europe, where retailers have rolled out filling stations at their hypermarkets and margins are tight, and they are trying to enter high-potential growth markets such as China.
Hodge says Shell’s decision to exit Spain last year is a classic example of an oil company leaving a market that had become too competitive for it to achieve a strong market position.
“The Spanish market is dominated by regional players Repsol, YPF and Cepsa, who have a combined network of around 5,100 sites,” he says. “With retailers such as Carrefour and Auchan rolling out petrol stations at their stores, competition is very high. With a network of just 338 petrol stations Shell was unable to achieve market leadership so it decided to exit the market and concentrate on other areas. This situation has been replicated across Europe with Shell also exiting Portugal last year and Ireland and Romania this year. ExxonMobil is currently trying to sell its assets in Poland, while BP has sold up in the Czech Republic.”