Background; Patrick Hudson, left his job as Retail Marketing Manager for P66/Jet Uk and Ireland in April 2012. He is now Director and Co-owner of Fuel Supply Solutions Ltd and gives his view on how the challenges facing him and his Retail Manager peers in 2012 in the UK fuels retailing market have changed and what they look like today for the current incumbents.
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 5 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 competitors and market developments you are falling behind.
2012
At the end of 2012 there were 8700 petrol sites in the UK with 5160 retailing fuel under the 7 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 approx. 250 of the retail sites to Shell and the commercial reseller business to DCC. Supermarkets dominated the market with over 40% share and 1320 outlets whilst the oil company owned sector comprising 2200 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, the top 50 “indies” group dealers accounted for 1300 of the total of 5,100 dealer sites. Petrol station real estate values were holding up well as the larger “indies” groups 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 gasoline and diesel above 140ppl, poor margins and weak volumes post the 2008 financial crisis. Oil company retailers’ focus was primarily on cost cutting and finding the right business model for survival in addition to managing internal re-organisations as their companies looked to consolidate resources.
Focus on retail sites was increasingly on non-fuels shop retailing which provided solid margins and growth opportunities. Any investment in the sites, other than for essential stay in business reasons, was directed towards shop rebuilds and retrofits often in partnership with the symbol groups 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, McDonalds, Subway Starbucks and Greggs were increasingly prevalent. The major oil company chains were expanding their shop partnerships where locations were suitable, e.g.: 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!
Amongst 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. Importer/ Wholesalers such as Greenergy, Prax and Harvest were getting an increased foothold as the majors retreated. Diesel sales were growing and gasoline 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, whilst 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 accommodating the trend adopted by some oil companies to outsource their transport operations and offer both “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, Oil Companies 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. Discussions on premias in pricing formulas for unleaded and diesel intensified with greater transparency in the market and add-ons for pricing of super-unleaded and super diesel further complicated matters. In a highly competitive low margin market with rising product costs, pricing was well up on the list of Retail Managers’ concerns.
A myriad of other issues for consideration were floating around Retail Managers’ inboxes in 2012, some of these included: branding costs and value, co-branding with symbol groups, the value of loyalty schemes and promotions, cost and benefit of maintaining customer relations and entertainment, vapour recovery installation, tighter environmental standards on site, site rateable values, which retail automation package to install, how to reduce payment terms and increase security in a high risk market, unmanned and pay at the pump studies, fuel card co-acceptance, “push” delivery and consignment stock reviews, appropriate field staff cover, training etc etc. In addition to these, the old chestnuts such as “hot product”, credit card commissions and fees and bunkering issues to name a few continued to bubble.
2012 was undoubtedly a tough environment for petrol retailing management with the market in transition as it responded to conditions. The big question marks were: how to maintain volumes and reduce costs; how to create a business model that was sustainable; how many more sites the major oil companies would dispose of and as the market consolidated who would be the winners and who would be the losers; how the emerging large independent groups would change the market; what the future of the singleton dealers was and how best to grow non-fuels activities on site. Retail Managers were internally focused on survival whilst the larger independents and wholesalers were increasingly driving the retail agenda!
2018
5 years on the decline in retail site numbers has slowed and appears to have stabilised at around 8400. The 7 major oil companies referred to in the 2012 analysis above now only have around 4700 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 1550 sites with a market share of 45% whilst the oil company company-owned sector having shed 900 sites in the last 5 years accounts for 1300 outlets. The notable change in the market has been the growth in the dealer sector to 5600 sites and 37% share as independents purchased Oil Company site disposals. Within this sector the top 50 independents now own over 2500 sites. Two of the largest independents, MFG and EG, are in the list of top 5 of all petrol retailers by site ownership, MFG being number one with 930 sites. The top 3 independent groups, all backed by private equity investors, have been responsible for over 60% of all property transactions within the last 3 years. The landscape for Retail Managers now is very different to that of 2012!
With site numbers stabilising and record car ownership in 2018, volumes have returned to pre-2008 crisis levels and margins are typically holding out above inflation. Demand for sites is very strong, so much so that petrol station property values are reported to have increased by over 70% since their low point of 2011/12. We are seeing growing levels of investment in the sector including around 30 new- to-industry sites since 2016 and an increasing number of closed sites coming back into petrol station usage. Investors and retailers have over the last few years been competing hard for sites driving values up to a level that many see as being overblown. There are some deals recently reported to have been completed at values corresponding to earnings multiples in excess 10 times EBITDA. These high site values together with the reduced quality of the assets remaining for sale are now causing many investors to be more cautious and selective.
Whilst investors have undoubtedly liked rising property values, relatively stable fuel margins and good cashflows, the real upside is being seen in shops and brand partnership and this remains where most site investment is going. The challenge is finding the right shop/brand partner and whilst the BP/M&S and Esso/Tesco partnerships are showing both longevity and growth, others are testing various solutions including own branding (MRH/Hursts), supermarket link ups (Rontec/Morrisons and EG/Sainsbury) and symbol and brand partnerships (Spar/Subway/Greggs/Starbucks) with varying degrees of success. Vertical and horizontal consolidation in the sector with e.g.: Sainsbury’s/Asda, Tesco/Booker, Co-op/Nisa together with the demise of companies such as PandH, Nisa and Conviviaity, makes this a complicated landscape and a difficult one to get right for Oil Companies. Customers’ expectations of forecourt shops have evolved considerably in the last 5 years and addressing their needs in areas such as food-on- the-go, coffee, promotions, wi-fi etc is key to success.
On the competitive front, the supermarkets continue to grow steadily and be competitively priced however perhaps not to the extent that they were five years ago. This is probably because fuel makes up a large percentage of their turnover and with massive competition from Aldi, Lidl and other discounters on their non-fuels products, fuel needs to show an acceptable return. BP and Shell have moved from site disposals to well targeted additions to their networks and strengthening their dealer offers. Esso, now having disposed of all but 200 of their owned and operated sites, remains very focused on dealer sites through its jobber partners and resellers such as Greenergy. Whilst these companies grow their presence and strengthen their brand offers, brands such as Texaco, Jet, Gulf, Murco (now owned by MFG), Harvest (now owned by Prax) and Essar (recent new market entrant) compete for those sites not suited to the major brands. This has resulted in fiercely competitive deals for these much sought after Dealers. With supply cost build ups now highly transparent, relationships remain important but probably not to the extent they were in 2012. With over 40% of the dealer market owned by the top 50 indies who typically have a high level of marketing intelligence and buying experience, success or failure in securing supply contacts with these groups can have significant consequences for Oil Company suppliers.
As everywhere, Technology is changing fast in the retail market not just with site automation but also in the areas of price management, buying options, payment alternatives, loyalty systems, delivery ordering and scheduling software, shop information and stock and margin management. These developments result not just from the continued march of digitalisation and smart software but also in response to customer needs and demands. Retail Managers now have access to an overwhelming amount of management information from all these systems and the trick must be to narrow this down to a usable format rather than drown in it. These technological developments undoubtedly increase efficiency, save cost and improve the speed of reaction improving customer satisfaction. They also benefit retailers with operational, working capital and margin improvements but are rarely simple to install and integrate to other software systems on sites. Choosing the right technology and getting it to work on site is right up on the list of Retail Managers’ concerns and the landscape is considerably more complex and rapidly evolving than it was in 2012! Any Retail Manager with responsibility for both Company Owned and Dealer sites faces a constant challenge in balancing solutions that might suit the COCO operation but face resistance from dealers, if not managed carefully this lack of consistency can devalue the brand.
It’s all change with products also, 5 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 of diesel cars and sales at the pump declining as motorists shift back to petrol. The changes in pump and tank configurations on retail sites made to accommodate the rise of diesel will almost inevitably now need to be reversed. 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 and with the UK government looking to ban hydrocarbon fuelled vehicles by 2040 and many UK cities likely to ban them before then, retailers will need to consider their response and how this will affect the future of the petrol station. Many (BP, MFG and Certas being publicised examples) are already installing electric chargers on selected sites and Shell has recently added a hydrogen filling facility at its Beaconsfield site. There are differing views about the impact of EVs and hydrogen fuelled vehicles and their likely market penetration, but they are unquestionably a game changer that cannot be ignored by retailers as they will not just impact on the fabric of sites but also their appeal as customer destinations. Complacency and ignoring the impact of alternative fuels on petrol retailing would be the worst strategy in the current environment.
Summary, what has changed in the last 5 years
The landscape facing Oil Company 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.
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 who were looking to cash in on high site values. Not many would have expected that MFG, with 58 sites in 2012, would now be the largest UK retailer forecourt owner operator with 930 sites or that EG, who had 120 sites in 2012, would have expanded to Belgium, Holland, France, Italy, Germany, Australia and USA and now have a worldwide portfolio of over 2500 sites. Whilst many forecast the slowdown in the number of site closures, few would have anticipated the current levels of investment in the sector including over 30 new to industry sites in the last 18 months some of these being built by the major oil companies.
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. Forecourt shops have moved a long way in size, quality and the range of goods and services they provide. Retailers have partnered with symbol groups and brands to meet the challenges of providing food-on-the go, fresh food and the comprehensive ranges of convenience items that todays customers expect to find at a petrol station. For most retailers the economic returns from shops outstrip those from fuel on site and levels of professionalism continue to improve as retailers allow symbol and other groups greater access and influence on their sites.
Whereas in 2012 forecourt branding, canopies and pole signs were exclusively fuel related, in today’s market there are a quickly 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. Supply security and choosing the right shop partners are however more difficult than they were in 2012 as the general retail environment adjusts to competition with the weakest falling back and others consolidating. Few five years ago would have anticipated the recent demise of Palmer and Harvey, Nisa, and Conviviality or the merger of Bookers and Tesco and probably Sainsbury and Asda.
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. Payment options such as; contactless, “BPme”, “Applepay”, and other mobile device centred options now need to be integrated into retail automation systems on site. Pay-at-the-pump facilities are now on most UK forecourts with unmanned growing steadily and no longer seen as intimidating by customers. Cash sales are decreasing fast and both credit and fuelcards now make up most of sales on site. Fuels site operations have been increasingly automated with web based integrated pricing, fuel purchasing inventory and ordering and sales management available in real time through fast evolving POS and BOS systems. The same is the case on the shop side with sales, inventory, price management, loyalty and promotions systems all available providing levels of management information not available a few years ago. There is no doubt that getting the right technology and automation combinations on site that work together and meet customers evolving needs is a lot more challenging now than it was 5 years ago!
Products, including alternative fuels, have changed considerably from 2012 and this is arguably the most challenging area for a current retail manager to manage and get right. Everyone assumed 5 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 which was not widely predicted and throws up issues with branding, pricing, pump configuration and supply. Increased biofuels in the product mix had been anticipated but the uncertainty over government mandates over E10 is not helping retailers in planning for the future. Alternative Fuels provide real question marks for retailers and they are now a 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. Retailers are installing and testing EV charge points but as most UK forecourts do not have much space and with current infrastructure it takes typically 30 minutes to charge a car this throws up problems. Some think Hydrogen may be the solution and it has been rolled out on a UK forecourt and we will surely see more of this over time. 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.
Questions for the next 5 years……
The changes that have occurred in the petrol filling station market in terms of ownership structure, fabric, operations and customer expectations will continue and it is now more difficult than ever to predict what it will all look like in another 5 years’ time.
What will be the growth of alternative fuels and will this just be EV’s or will Hydrogen have a significant part to play. What percentage of fuels sold will be traditional hydrocarbon-based fuels (petrol and diesel) we now see on forecourts? How will the ‘Bio-Fuels’ directive evolve considering ‘Brexit’ and what will happen with E10?
How will petrol retailers respond to technological change as customers’ interactions are increasingly digitalised centred on hand held devices and petrol stations become more and more automated? Will the UK follow the trend towards unmanned sites currently witnessed 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 EV’s. Who will retailers need to partner with on site and will petrol retailing become secondary to other retailing activities on site as is already the case in some countries.
What will the ownership structure of the market look like, will Private Equity exit with IPO’s or outright sale, will oil companies come back into the company 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 perhaps be a major new market entrant?
The shop supplier structure continues to go through major change and consolidation. What will be the impact of the mergers and acquisitions of wholesalers, symbols and supermarkets?
Plenty of food for thought for Retail Managers, there will be some fascinating challenges, but life is unlikely to get any easier for them in the next 5 years as they handle change and respond to customer demands and fuel purchasing habits.