Monday, 17 July 2006

Petrol Station in the UK is the best road to bankruptcy

According to Don Kinnersley at Price Waterhouse Coopers, auditors to the oil industry, owning a Petrol Station in the UK is the best road to bankruptcy. With the government taking around three-quarters in tax, only a profit margin of between 2 and 5 percent can be expected form selling fuel. With supermarkets now the biggest seller of fuel in the UK offering fuel as a loss leader to attract customers to the store the option to increase prices is not a real one. Price cutting proved suicidal for the "Save" chain of service stations in the UK and whilst Esso's "Pricewatch" cost matching scheme succeeded in gaining more turnover, it has cost the company Billions.

With overheads exceeding profits from fuel, the only way to generate a positive cash flow is to concentrate heavily on the non-oil sector of forecourt business, that is car valet and the convenience store. Even then, the convenience store will need to offer a well-presented and targeted product to attract the consumer. The only shining star in a grey retail environment here is the lowly sandwich. Staple diet for the British at lunchtime, the sandwich offers a substantial profit.

Despite a concerted effort, no oil major has managed to truly master the softer art of selling food and explains why many have sought partners such as Tesco, Waitrose and Sainsburies. Worst of all from a loss making point of view are low turnover rural sites, which are being rapidly lost from the market sector, much to the annoyance of the country dweller. The optimum petrol station site is one selling at least a million gallons per year (2,200 kl / annum 183kl / month). Such a large turnover site will however cost you £1 million.

Not surprisingly many petrol station forecourts have closed and been reclaimed and redeveloped for more profitable purposes. Petrol stations both loose money and provide nothing but a focus for ill will from a distrustful consumer who sees oil companies as both environmentally harmful and greedy. The option to pull out of Retail and focus on upstream activities is seen as a real one for many. Shareholders would certainly understand the logic. Perhaps the only reason many stay is to not jeopardise their winning of upstream exploration licenses from governments keen on keeping their voting consumers adequately supplied.

As a model in developed and deregulated markets, the UK is quite normal. However beware those in developing markets who currently enjoy high fuel profit margins!

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