Money Talk: Could a fuel retailing revolution be on its way?

T here have been several news stories from the petroleum retailing sector in the past few weeks that at first glance appear unrelated. There was Esso confirming its move towards a wholesale supply mode. Then major supermarket chains admitting that their fuel operations are hurting their bottom line. And now rumours of a possible major new player poised to enter the UK market this year. In the background, we have heard from several retailers currently operating oil company-owned sites that those sites have quietly been put up for sale (again). No wonder many individual site operators are wondering what the implications will be for their own businesses and whether there’s a major upheaval about to hit the industry.

The news that Esso is selling blocks of its network will not have surprised anyone who’s watched this industry for any length of time. It’s been a story waiting to happen for years the perennial questions being ’Who will it sell to?’ and ’Will it be this year?’. So now we know even if it’s only for one chunk of its portfolio at this time.

Esso joins the list of oil majors who’ve decided that retail isn’t for them or that the UK market isn’t for them. Many observers will welcome the fact that the firm is selling its sites to two well-known independent groups. This means that potentially there is scope for these sites to be run once again by self-employed commission operators or franchisees, with the associated initiative and effort that this brings to each individual site.

It also suggests that any further sell-off of Esso sites could be to similar independent groups but then, of course, that depends on whether there’s really another big corporate player waiting to enter the field, and if so, what its intentions might be.

Similarly, the drip-drip of calls from operators saying their sites were back up for sale wasn’t such a surprise, it happens every few years.

As before, the existing operators were being offered a potential opportunity to purchase the sites before they were formally put on the ’open’ market. Hence some of our informal conversations with people who’ve wanted to know how the figures they were being quoted stacked up in terms of a possible business plan. Naturally, a proper business plan isn’t prepared in 20 minutes on the back of an envelope, but the one common factor from those conversations was that the asking price for even quite ’average’ sites (’average’ in terms of recent volumes, shop sales, etc) seems to have risen quite considerably from the doldrums of a few years ago. If nothing else, it strengthens the feeling that there are already potential buyers out there actively looking for acquisitions.

Unfortunately it also places most of these sites out of the financial reach of their present operators, especially with so few High Street lenders left to approach about possible funding.

Perhaps, most surprising, was the spate of reports from the supermarkets mentioning the effect of fuel retailing on their financial performance. In the 25 or so years since they entered this industry, they’ve generally been very coy about any mention of the financial aspects of their fuel operations. So it’s certainly odd to find several of them now admit that they’re losing money on the fuel side. Of course, some of the supermarket chains have reported ongoing ’troubles’ for the past year or two Tesco and Morrison being the most obvious. This has led some retail analysts to suggest that the basic premise on which these were built is deeply flawed in today’s environment.

The era of the huge out-of-town hypermarket, with its associated multi-million-litre throughput forecourt, may be coming to a close rapidly. The buzz-word in retailing is once again ’local’. Added to this shift is the possibility that certain supermarket brands are now ’damaged’. Having been seen as all-conquering, the public has decided that there are alternatives and that rock-bottom pricing itself is only one factor in choosing where to spend its money.

Given this scenario, the simple business management case study solution for a supermarket chain would be:

Stop selling fuel at loss-makingprices

Open more local outlets

Change your brand/image.

The first point is relatively straightforward. After all, the rest of the industry is hardly going to complain if the supermarkets raise their fuel prices, and it’s unlikely that anyone else is going to adopt a suicidal pricing approach of trying to undercut whatever pricing point at which the market stabilises.

The second change sounds relatively easy. There are hundreds of abandoned or mothballed service stations around the country. Many are still there trading as used-car lots or ’hand-wash’ centres. Given the right investment they could be put back into petrol use relatively quickly. However, the supermarkets have little experience of running small forecourts and the associated higher cost base, not to mention the different supply arrangements. They are used to managers following company instructions, not retailers or entrepreneurs maximising individual site performance.

The third change could prove the most difficult. It would effectively be an admission of failure.

But it has been done before remember Ratners?

Might we see something along these lines starting to happen: a supermarket chain invests in an ’independent’ company with the aim of buying older, local, forecourts and re-opening them under a new, established or revived ’oil co’ brand? After all, there are dozens of once-famous, now retired fuel brands that could be revived with the co-operation of their respective owners National, Regent and Cleveland are just a few. Of course, if this were to happen, then the big question would be whether they took the logical step of handing the sites to individual operators with a stake in the business (franchise, commission operated, etc), or did it the only way they’ve known up to now and tried to run them as direct-managed operations.

Somehow it looks as if 2014 might be an interesting year.