PETROL FORECOURTS - NEW PRESSURES ON PROFITABILITY - FROM WHERE AND WHEN ARE THE NEW PRESSURES LIKELY TO COME.

A TALK BY ADRIAN CAMPS FRICS, IRRV, M.Inst.Pet. Given on the 11th July 1997

PRICEWATCH, THE ONGOING EFFECTS OF PRICE COMPETITION.

Pricewatch is the single most significant factor to affect forecourt profitability within the last ten years.
The objective of Pricewatch seems to have been to stem the growth in the hypermarkets' market share and to accelerate the closure of low volume or unprofitable sites.
This rationalisation of the network has been continuing for many years. There has been a reduction in the number of sites from 19,465 at the end of 1990 to 14,748 at the end of 1996. This is against an increase in hypermarket petrol station numbers from 434 sites to 794 at the end of 1996.

GRAPH 1 TOTAL NUMBER OF U.K. PETROL SITES

GRAPH 2 NUMBER OF U.K. HYPERMARKET PETROL SITES

The margins available to retailers in some areas can be as little as 1 p per litre, and it is not viable to continue selling petrol at this level. Most oil companies require a margin of 4 ppl to break even.

Some oil companies have decided to guarantee a reasonable margin to the retailers, whilst others have not been able to afford to do so, and in many cases the sites have closed.

The margins that are available vary considerably around the country and are still to some extent led by the hypermarkets. In some areas unleaded fuel is selling for about 63 pence per litre, whilst in Greater London it can be purchased for as little as 54.5 pence per litre (pre budget pricing add 4 ppl for current pricing).

Operators, including hypermarkets are pricing to the maximum level that the market will allow.

There have been many arguments about whether Pricewatch has been successful, Esso have claimed "a million new customers per week". It does appear that initially they regained some of the market share lost to hypermarkets, but this now appears to be drifting back.

It is possibly due to Esso's decision to abandon a loyalty scheme, when all of its competitors are increasing the extent and sophistication of their schemes.

We will all await with interest, the Office of Fair Trading inquiry into the alleged predatory pricing by Esso with its Pricewatch scheme.

The OFT have examined this issue on previous occasions, but has not found the low pricing against the public interest.

ENVIRONMENTAL LEGISLATION

The United Kingdom is some way behind other European countries, notably Germany, and the state of California in the USA, but recent environmental legislation shows that we are heading in the same direction.

The legislation that most directly affects petrol filling stations, in the day to day operation, is that concerning vapour recovery.

The enabling legislation is the Environmental Protection (Prescribed Processes and Substances etc.) (Amendment) (Petrol Vapour Recovery) Regulations 1996.

Part 1 of The Environmental Protection Act 1990 enacts proposals for enhanced industrial pollution controls and prescribes the processes that are to be controlled. This legislation implements part of EEC Directive 86/360 (Air Framework Directive) and the EC Stage 1 Petrol Vapour Recovery Directive.

These regulations, effective from 1 December 1996, require certain sites to be provided with authorised vapour balancing systems. There are transitional arrangements for conformity with the requirements of the regulations as follows:

In layman's terms, Stage 1 Vapour Recovery prevents Vapours being discharged into the atmosphere, when an underground tank is filled from a road tanker.

The new legislation requires that the vapours from the underground tank are returned to the road tanker. This requires alterations to the tank vents and the installation of a vapour recovery point, for use by the road tanker.

It is difficult to assess the average cost of conversion, because often upgrading of the tank monitoring equipment is necessitated at the same time. Usually this is in the region of 4,000 to 15,000 per site.

STAGE II VAPOUR RECOVERY.

I have seen a recent magazine article declaring that the EEC has scrapped Stage II Vapour Recovery.

Whilst the facts behind the headline are more or less correct, the remainder of the article was misleading.

It is true that the EEC have indicated that they are unlikely to issue a further directive on Stage II vapour recovery, but this is because six or seven of the member states have already introduced this.

The previous Government administration carried out research, monitoring the airborne Benzene levels at a number of petrol sites and these were found to be above the recommended levels.

Consultation with a number of bodies ruled out the fitting of large carbon canisters in cars, to deal with the discharge of Benzene and it was decided that some form of Stage II recovery was the only solution.

A decision from the present Administration is expected within the next month or so, but I would be very surprised if we did not see future legislation setting a timetable for Stage II recovery.

The objective of Stage II vapour recovery is to prevent petroleum vapour in the vehicle's fuel tank from being released into the atmosphere by an active recovery method.

The conversion of sites to stage 2 is an expensive exercise as often alterations to the forecourt pipework are required, necessitating site closure.

Again costs are difficult to average, but 20,000 to 30,000 is a rough guide, but this can vary considerably from site to site.

At the end of 1996, only 26% of sites in the country operated Stage I vapour recovery. Only 2.2% of sites were fitted with Stage II recovery and of these sites only just over half operated the recovery equipment.

Stage II is clearly on its way and any future legislation will have the effect of driving more sites out of the industry, where operators can not justify the cost of conversion.

THE ENVIRONMENT ACT 1995

The Environment Agency came into being on 1 April 1996 and its 9,000 or so employees are fully responsible for:

Assessing the Environment Creating National air and waste strategies Preventing and controlling pollution. Managing water, flood defence, water resources, recreation and navigation.

Contaminated or polluted land?

Contaminated land is that which appears to the council to be in such a condition that:-

(a) Significant harm is occurring or is likely to occur to people, animals, plants or property or

(b) Pollution of controlled waters is being or is likely to be caused.

If the land does not fall in one of the above categories, then it should be termed "Polluted".

It does seem likely that the guidance will only allow land to be labelled as contaminated if it is not suitable for its current use unless, despite being suitable for that current use, it is also causing or likely to cause harm to human health.

THE POLLUTER PAYS?

According to Section 78F of the Environmental Protection Act 1990 (as amended) the "Appropriate Person" is any person who has "caused or knowingly permitted" the substances which cause the contamination to be in, on or under the land. However, if, after reasonable enquiry, no such person can be "found" the appropriate person will be the owner or occupier for the time being.

There are certain technical exceptions to the above rule.

CLEANING UP A SITE

A leaking petrol storage tank or spillage on filling can cause contamination of the sub-soil. If the site is located above an aquifer, or the contamination migrates off the site into a watercourse, then the clean up bill may be very significant and may result in the site being closed for a substantial period of time.

I recently sold two sites affected by contamination. The first site was affected by limited contamination and to remove the tanks and contaminated soil, backfill and reinstate the surfacing cost about 16,500 plus VAT.

The other site was more heavily contaminated. The clean up resulted in the removal of 1,300 metric tonnes of contaminated soil, some of the tanks and the canopy. This work, together with reinstatement cost about 90,000 plus VAT, including land fill tax. Conditions vary from site to site, so it is dangerous to make assumptions and a full site survey is always recommended..

SUPPLY COSTS IN A SHRINKING NETWORK.

Some independent petrol retailers seem to feel that the Pricewatch scheme has been developed to destroy the dealer network and allow the larger retailers to control pricing.

The oil companies rely on the dealer network to a great extent, to help dilute their enormous fixed refining, transportation and storage costs.

The converse of this argument is that by a network rationalisation, the supply costs can be controlled.

A wholly financial assessment of the network would not be acceptable, as this would leave some remote communities without a fuel supply.

Oil companies are rationalising their distribution networks and the number of petrol sites is reducing, so eventually a balance will be reached.

INDEPENDENT HYPERMARKET PETROL STATION NETWORKS.

The growth of hypermarket petrol sites through the late 1980's and into the 1990's was rapid and impressive, but now the network is approaching saturation.

Government planning guidelines on out of town development will make it increasingly difficult to gain planning consent for future greenfield developments.

The development of free standing petrol stations such as the Tesco Express concept, could be the answer to the planning problems created by PPG 13.

Most other retailers have preferred to enter this market through trading alliances or partnerships with oil companies.

The most dramatic of these schemes has been the BP/Safeway joint venture, where sites have been specifically rebuilt to provide a large forecourt building of up to 360 m2.

Other schemes between oil companies and retailers have generally been less significant.

IS THERE ANY FUTURE FOR PETROL STATIONS ?

The State of California has been considering zero emission legislation, although this has not yet been put into place. Commercially produced electric cars are available to purchase in California and the local electric company is setting up recharging stations.

Nearer home, the town of La Rochelle in France offers electric vehicles to rent.

Mercedes are developing a fuel cell running on methanol.

The likelihood is that even if most oil companies are not selling petrol in 15 years time, the distribution of their networks will allow them to service the vehicles of the future.

Surveyors negotiating upwards only rent review clauses on long leases, should look carefully at the user clause and consider the future use of the site, before agreeing a rent.

Non petrol break clauses may also be worthwhile considering, when negotiating new leases.

SQUEEZING INCREASED PROFITABILITY FROM ANCILLARY OPERTAIONS.

WHICH ADDITIONAL SERVICES CAN BE PROVIDED?

The range of services which can be provided on a forecourt to increase revenue are considerable and include the following:

Convenience stores. Off licences. Dry cleaning. Fast food outlets and bakeries. Car and Jet Washes. Cash points. Business and fax facilities. National Lottery and Electric company concessions. Nozzle advertising. The Forecourt Channel. Bulk oil dispensers.

Nozzle advertising has been slow to take off and the majority has been for the Oil Company's own shop or oil products.

The Forecourt Channel is a new concept targeted specifically at petrol station forecourts. It comprises a 40" television monitor suspended from the canopy, with PIR controlled loud speakers, above each pump.

The Forecourt Channel pay a volume related rent plus a percentage of advertising revenue.

Environmental legislation in Germany requires retailers to take back oil cans and associated packaging. In response to this an automatic bulk oil dispenser has been produced, dispensing oil into reusable containers.

Not only does this solve the problem of disposing of empty oil cans, but it frees up shop shelf space for other products.

FORECOURT SHOPS, IS BIGGER BETTER?

Large convenience stores are not the solution to the lack of fuel margin in all cases. Where there is a large residential area surrounding the site and a lack of good quality existing facilities, the convenience store may work well.

Large, well-placed convenience stores can have can have turnovers considerably in excess of conventional forecourt shops, but there are drawbacks.

In certain areas, these units are subject to considerable loss from shoplifting and the staffing levels sometimes are not adequate to prevent loss in this manner. Generally the larger the shop, the greater the problem.

Most of the products sold in forecourt shops are high profit margin goods, with the exception of tobacco, which has a margin of about 8%.

The overall margin of an average forecourt shop may be about 20% or about 25%, excluding tobacco goods.

As the shop becomes bigger, more low profit items are stocked and the pricing becomes keener, thus reducing the overall margin.

FORECOURT SUPERMARKETS - WHAT ARE THE PROBLEMS?

A forecourt supermarket or convenience store requires a massive amount of additional land, to accommodate the building, delivery bays and customer and staff parking spaces.

The minimum site size for a large convenience store and petrol station development and car wash, is about 0.3 Ha or 0.75 acres.

I have seen proposals, where a six or seven pump site will be reduced to 3 or 4 pumps, upon redevelopment, in order to accommodate a convenience store.

In such circumstances, I can foresee queuing at the pumps and therefore a drop in fuel throughput.

BAKERIES AND TAKEAWAY FOOD - IS THIS THE FUTURE?

We are now seeing takeaway food facilities in many sites across the country, these range from Burger King to take away and delivery pizza.

These facilities are not always totally successful, due to staffing costs, wastage and the relatively high initial investment.

Clearly some of these sites are very successful, but success depends upon selecting the right location and taking on board the right expertise.

NATIONAL LOTTERY & ELECTRIC COMPANY CONCESSIONS.

Whilst the margin that the operator retains is usually very small, being about 5% of takings, this can adds to the overall shop turnover.

The theory that the shop turnover increases due to the large number of people using the site is not proven, according to many oil company sources. Often additional staff are needed at peak lottery sales times, to cope with the customers, making the profitability of such schemes questionable.

CARWASHES - STILL THE AUTOMATIC PROFIT CENTRE?

The answer to the question depends upon the location and the right location is not always obvious.

I have seen car washes with takings of 60,000 per annum, in transient locations and car wash centres taking 120,000 per annum, in rural settings. These are very much the exception to the rule and generally to be successful car washes need to be in a built up area, with not too much competition from surrounding sites.

The same applies to jet washes, these can take a lot of money in some locations, but wrongly located, they do not even cover their own cost in three years.

The market is reaching saturation in some areas, with every site having a rollover or jet wash and the wash prices and revenue are reduced as a result.

CONCLUSION

The pressures on profitability will clearly remain for some time, and it is doubtful, whether margins will ever return to previous levels. The additional sources of income will therefore be essential to the continuing profitability of the network.

ADRIAN CAMPS

Adrian Camps is a Fellow of the Royal Institution of Chartered Surveyors, a Member of the Institute of Revenues and Valuation and a Member of the Institute of Petroleum.

For some years he was the Associate Partner in charge of commercial and roadside property with a provincial firm.

He moved to Adlers in 1994 where he is an Associate Partner in the Roadside Department, specialising in petrol stations, motor trade properties and roadside restaurants.

Adrian advises national oil companies, dealer groups and private clients on all aspects of roadside property. He regularly speaks on this specialist subject and has had editorial published in a number of national property journals and trade publications.