Fuel franchising continues to be resilient as economic indicators remain subdued

By: James Noble, Business Development Manager: Fuel Industry, Absa Business Banking

The South African fuel retail industry has grown considerably in recent years. In fact, it is one of the few sectors to weather the downgrading, rand volatility and negative growth rates recently experienced.

Fuel retail specifically is a highly specialised sector, with operating margins that are affected by a multitude of factors such as oil prices, labour costs, exchange rates and regulations, to mention a few.

In the current economy, only a small number of industries can claim to be recession proof. The fuel retail sector has proven to be just that; showing healthy profits in times of slow growth cycles.

Growth Indicators

Service stations in South Africa have a combined annual turnover in excess of R200 billion. The country remains the biggest consumer of fuel on the continent, claiming more than 20% of the market share. Satellite sectors create multi-channels of employment that generate economic opportunities for approximately 90 000 people locally.

There are roughly 4 600 service stations in the country, averaging 300 000 litres on a monthly basis, with the outlook for the South African fuel industry looking strong. The ratio of convenience store turnover to fuel volumes pumped is about R1.20 to R1.50 depending on the brand and location. Absa is the financial services partner to more than 30% of these service stations and can safely say it has a thorough understanding of the industry’s intricacies and challenges.

Although fuel gross profit margins are lower, fuel sales remain the primary income of a business, accounting for approximately 80% to 90% of an operation’s turnover and usually delivering greater profit than alternative profit opportunities, for instance, a convenience store, carwash, bakery and quick service restaurant.

Viability

As the fuel price increases or decreases and retailers work on fixed margins, it’s important for the service station owner to grow volumes. If turnover increases, expenses will also increase due to merchant service, cash handling and other turnover related costs. This will in turn impact profitability.

There are three ways to open a service station in the country:

• Investing in the physical building, land and associated assets (property company)
• Purchase of the business operation only (operating company)
• Purchase of both (property and operating company).

Setup costs for a service station property can range from between R10 million for an average site to R100 million for a doubled-sided highway site. The funds for a new service station operation payable to the oil company can range from R2,5 to R15 million depending on the projected volumes. The purchase price of an existing service station is based on profitability and normally ranges from R2,5 to R35 million. The average working capital required for stock and operational expenses can vary between R1,2 to R1,5 million. 

Given a growing middle-class population that owns more vehicles, we see fuel retail remaining healthy and profitable in the foreseeable future. However,  fuel retailers will still have to closely manage their budgets. 

Convenience Shopping

Alternative Profit Opportunities or APO’s is another revenue stream that is key to growing the fuel retail sector.

Convenience stores have become increasingly popular as South Africans find themselves working longer hours with less time to prepare meals. Being able to buy bread and milk, or stopping for a quick meal while filling up with fuel allows service stations to play on convenience more than conventional retailers. This gives fuel retailers a competitive edge - and an additional opportunity to penetrate a developing market. Well known retailers like Woolworths, Pick and Pay, SPAR and OK are partnering with oil companies and non-refinery brands to increase market share. Other APO’s include carwash services, restaurants, quick service restaurants and even ice-cream shops.

As oil prices hover around $50 per barrel, fuel demand in South Africa will remain stable. With the industry contributing more than 6% to South Africa’s gross domestic product (GDP), selling approximately 27 billion litres of petroleum products through retail and commercial activities and spending more than R70 million on corporate social investment (CSI) initiatives annually, one can see the significant role petroleum still plays in South Africa’s emerging economy.