01.04.2020

Fuel Retailing – Changing Landscape

Looking back on 2019, Madderson points out that the roadside forecourt retailing sector had outperformed almost all other retail sectors in the UK. Now in the throes of the coronavirus pandemic, with plummeting oil prices, tighter margins and reduced fuel and shop throughput, nobody can predict what the future will hold. Though the fuel stations are being kept open as an essential service.

‘Property asset values increased and cash flow was very strong and steady in 2019’, he says. But lockdown and self-isolation today is likely to have a marked negative impact while it lasts. Talking to Petroleum Review recently, Madderson says: ‘The big note is that yet again there has been no reduction in the number of forecourts operating around the UK (totalling 8,390 petrol stations at year-end 2019 compared to 8,396 at year-end 2018), because new-to-industry (NTI) and return-to-industry (RTI) newcomers have more or less balanced those going out of business.’

The newcomers building NTI sites are hypermarkets like Asda that have built relatively small filling stations on existing car parks, and dealers like Kay Group, which built a couple of sites. Euro Garages has gone for the ‘big model’ of transient motorway, edge of urban centre filling stations. Like the 4.5 acre site at Blackburn, which opened in early 2019 and features a two-lane, drive-through KFC, Starbucks for food-to-go, a massive car valeting centre, and shop with 24-hour Greggs and Subway, as well as full convenience store offer from Spar. ‘This is a huge commitment to the future,’ remarks Madderson.

‘It takes a lot of planning time and effort, but somebody like Euro Garages has decided the best way to get tolerable growth in the UK is through the NTI route. They are rumoured to have 50–60 planning applications already lodged for NTI sites going forward,’ he says. Last year, Sainsburys sought to acquire Asda, but the deal was knocked on the head by the Competition and Markets Authority (CMA) in spring 2019 because of a perceived degradation of offer to the consumer, which included fuel. So, the deal was abandoned. The acquisition of MRH by MFG also came to blows with the CMA, who judged they could only proceed provided they sold off 38 sites located where the CMA had judged that competition might be compromised.

Electrification:

‘Electrification is not moving very fast in the dealer sector because there’s little or no perceived return on capital in a viable time period,’ comments Madderson. ‘The number of electric and plug-in hybrid cars on the road today are an infinitesimally small part of the total market. As yet, the long-awaited cheap and long range EV [electric vehicle] has not yet arrived.’

Controversially, Madderson suggests: ‘I think the new [UK] government’s latest attempt to frogmarch the consumer into a bright, clean world is bound to failure because they have not understood all the complexities of the market and are not really providing sufficient funding to help us get there [to net zero by 2050].’

So, when does he expect the EV initiative to take-off ‘I think there are several issues for the consumer. One is price – although there are signs that new EVs from car makers like Volkswagen [ie the e-Up!] and at least 20 other models due for launch by early 2021, may change the picture. Another concern is range anxiety, which doesn’t look like going away for a long time, nor is the shortage of charging points.’

‘Primarily, the major oil companies are installing EV charging points in a bid to show shareholders and green investors they are “being good” and on the road to a carbon-free future. But most others are not – apart from some EV initiatives by hypermarkets and a few dealers,’ comments Madderson. ‘What’s more, some dealers have safety concerns about the proximity of EV chargers to offset fuel tanks or fuel dispensers with volatile hydrocarbons.’

Considering the introduction of new biofuel blends and alternative fuels, Madderson welcomes the proposed introduction of E10 in the UK, so long as it is mandated. ‘In other countries where E10 has been mandated, it has been successful. However, in countries like Germany, where the choice was optional, E10 take-up was not successful initially,’ he says.

However, Madderson is optimistic about the potential for hydrogen, given the introduction of 83 hydrogen stations in Germany and faster take-up in Asia. ‘I think hydrogen could overtake electric in the longer term as a sustainable option, with electric merely being a 10-year fil-in!’ Now there’s a thought.

Forecourt property values level off

Meanwhile, UK forecourt property values rose only slightly in 2019. Generally, there’s been a levelling off in the forecourt property market rather than a slowdown and there continues to be a lack of supply for available businesses to buy.

Barber Wadlow’s latest Forecourt Property Value Index (in association with Experian Catalist) reports a 3% value increase in 2019, the 8th consecutive year of growth. The index has now achieved a 38% increase over the last five years, ‘largely due to enhanced profitability’, explains Adam Wadlow, Director in forecourt property adviser Barber Wadlow.

Despite improved trading, he maintains: ‘There was a lack of available businesses to buy, which is also underpinning values. It’s not a slowdown but more of a levelling of following significant appreciation in values over the last five years. The spike in values in 2014/2015 was as a consequence of oil companies’ completing their divestment programmes. The only sites that were left were other independent retailer sites. Effectively, there was a massive reduction in the supply of sites that were coming to the market. That brought values to a new platform [level]. To a large extent the sector was just mis-priced up until that point. What is also driving ongoing demand and depreciation in value is a lack of supply and available businesses to buy.’

Barber Wadlow estimates 175 service stations were transacted in 2019, a 10% decline on 2018 (excluding the massive MFG/MRH transaction – which skewed the market). The year started with the completion of MFG’s divestment programme. As a consequence of the company’s acquisition of MRH, the Competition and Mergers Authority review of the deal insisted on the divestment of 38 sites. Then MFG re-entered the market with the acquisition of Simon Smith Retail, with seven sites in the Cotswolds, and Symonds Retail, with 10 operational sites in the South West, towards the back end of the year.

Ascona acquired the Cornwall Garage Group, a network of 17 sites in southern England. While Phillips 66’s acquisition of Harrogate Investments, with four sites, demonstrated the fuel suppliers’ continuing desire to build a retail platform. Certas also acquired sites in 2019.

Single sites also continue to be sold to a wide range of buyers, depending upon the business type and geography, says Wadlow. Demand is also increasing for NTI development sites, despite the supply of such opportunities being severely constrained by the lengthy UK procurement, planning and development process.

There is also increasing demand for larger sites given growing requirements for shops, car parking and the like. ‘The average petrol station in the UK is probably in the 0.4 – 0.5-acre bracket,’ Wadlow estimates. ‘Going forward, the industry is looking for 0.75-acre sites. So, you are seeing a variety of operators, including BP, Euro Garages, the Kay Group and others, building bigger sites in order to provide larger shop offers, as well as to incorporate energies of the future, be that electricity, hydrogen, etc.’

He emphasises: ‘The requirement criteria for bigger sites are in that order. Electric charging is still very much at the bottom of the list when it comes to requirements for bigger sites. The number one reason for wanting bigger sites is to be able to provide larger shops with customer car parking. Those are the key drivers at the moment’.

[source: Petroleum Review – April 2020]