Petrol filling station prices
(Professional Articles- Estates Gazette 4-March-1995)
Adrian Camps gives an overview of the petrol retailing market and examines some of the problems encountered by valuers.
The entry of hypermarkets into the petroleum retailing market commenced in the 1970s. By the mid-1980s the number of hypermarket sites had increased, but the price-cutting that they offered was initially regarded by many oil companies as a "loss leader" on the part of the hypermarkets.
The design of some of the earlier hypermarkets went some way to acknowledging this opinion, as petrol forecourts were often poorly located in relation to the main roads were not visible to passing traffic, and mainly served the shoppers using the hypermarket for their food purchases.
By negotiating bulk-supply agreements at preferential prices the hypermarkets were able to sell cut-price fuel - discounts of about 10p to 12p per gallon could often be achieved compared with sites selling at oil company full price. This attracted a much wider customer base than merely retail food-shoppers and hypermarkets started to claim a significant share of the market. Consequently the design of many of the later developments was changed, giving the petrol forecourt a greater degree of prominence. Many of the forecourts are now sophisticated in design, with the large-scale introduction of credit card prepayment pumps to achieve a fast customer throughput.
At the end of 1990 there were some 434 hypermarket sites with petrol facilities in the United Kingdom, which retailed about 10% of total fuel sales. At the end of 1993 there were 649 hypermarket sites, with approximately 15% of total fuel sales. This is predicted to rise to 20% by the end of 1995.
The hypermarkets have had a resounding effect on the whole of the petrol retailing industry, with a consequent lowering of prices. In addition, the oil companies' and dealers' profit margins have been reduced as the price competition in the market has intensified with the multiplicity of hypermarket petrol forecourts.
Increased price competition has affected the market in a number of ways. The overall number of sites in the UK has reduced as the oil companies have rationalised their networks by carrying out massive disposal programmes. Some independent operators have also closed unprofitable forecourts resulting from the pricing policy of hypermarkets in the locality. There has been an about-turn in the Government's policy regarding out-of-town shopping centres, initially set out in PPG 13 of 1994, which will to some extent curb new hypermarket developments with petrol station facilities. There are many sites with planning consent, which have not yet been constructed, so it is unlikely that the rate of increase in their market shares, will be significantly reduced.
A number of hypermarket operators are now opening, or proposing to open, stand-alone filling stations, with large convenience stores attached. Although their success is a closely guarded secret, observation shows that these sites are very busy and over the next year this is likely to be an area of expansion.
At the end of 1990 there were 19,465 petrol sites in the UK and at the end of 1993 there 17,969 sites. When one looks at the increase in the number of hypermarket sites during this time, these figures have even greater significance.
There has also been a reduction in the value of sites with planning consent for petrol filling stations in areas where margins are reduced by hypermarket pricing policies. In such cases, oil companies are not prepared to invest the £600,000 to £800,000 average construction cost, together with the land cost, in developing a new site.
A secondary market has developed in some instances where individuals or companies purchase the site, having negotiated a supply agreement which includes a price support structure, with an oil company. This is often linked to the level of pricing in the area and sometimes to specific hypermarkets, guaranteeing the operator a set margin. Such operators can normally develop a site more cheaply than an oil company and can therefore compete with the local hypermarkets and rely on a set margin, owing to the favourable terms in the supply agreement.
Many sites are tied to oil companies, either by the operator entering into a supply agreement or by being tenants or licensees. In these cases the supply price of the product is dictated to them and, in the event of price competition, they suffer a reduced income unless the supplying oil company reduces its profit and grants price support.
As price support is not always granted, and the pump price is often dictated by the oil company, this has resulted in some operators obtaining a reduced margin. In some cases this has resulted in legal action by licensees, against the oil companies concerned. As with most specialist property, the value of the petrol station is directly linked to the profit which a competent operator can generate. General price-cutting within the market has resulted in oil companies and other operators taking a reduced margin on their sites and, in these cases, both capital and rental values have decreased.
The traditional approach to petrol-station valuations has always assumed that, once adjustments have been made, petrol stations pumping the same core volume in, for example, urban Bournemouth would, broadly speaking, have a similar renl and capital values to a petrol stations in rural Oxfordshire.
This is no longer the case, as oil companies are looking closely at the profitability of operating or supplying each site. There are now five hypermarkets serving the Bournemouth area and, as a result, oil companies have to accept a reduced margin on their company-operated sites and offer price support to their dealer sites. Conversely, a site in a transient rural location on a trunk road is less likely to be affected by price-cutting and much of the business will be "distress" purchases, where the customer does not have the time or opportunity to "shop around" for the lowest price per litre. In such a case the operator's margin is likely to be robust and the site profitable.
As profits on petrol sales have been squeezed, site operators have looked to the forecourt shops for an additional source of income. The range of goods on offer has increased to include frozen food, fresh food, newspapers and other convenience items. Many sites are now operated as 24-hour convenience stores.
It is now no longer appropriate to carry out the "broad brush" comparison approach that has been used by some valuers in the past, and the use of out-of-date comparables is now no longer acceptable practice, because the competition between the oil companies and hypermarkets has become more severe during the past year, thus reducing the overall margins available.
It is necessary to assess the "price profile" of the area in which the property is located and compare this with the price profile of the area in which the comparables are located, in order to ensure that the overall profitability of the sites are similar. A valuer must look closely at the volume records of a site and compare these to the pricing history, as a site may show an increasing volume but reduced profitability. It is necessary to adjust the actual volume of the site to achieve a "core volume" to take account of price-cutting and other factors. The objective is to assess the volume that the site would attain if it were selling fuel at full price, disregarding specialist promotions, extended opening hours and a higher-than-average proportion of account customers. To the "core volume" one can apply rental or capital values.
The rental and capital values of petrol-filling stations increase exponentially with volume, as the fixed costs of running a site vary little, whether it is pumping 300,000 gallons or 3m gallons. Some approximate guidelines for sites free of tie are shown below. These values must be always be applied to core volumes.
In cases where sites are tied on favourable terms, this will increase the value for the length of the tie. Where sites are tied below market terms, this decreases the value for the period of the tie, and in such cases it is normal to value the term and reversion using different rates. The above figures exclude any value attributable to the forecourt shop and other buildings, which are normally valued on a square footage basis to a rent and then capitalised at an appropriate rate.
Where forecourts have throughputs of 250,000 gallons pa or less, the profitability is usually marginal and it is usually wise to carry out a check valuation for an alternative use. This may be for car display, redevelopment or numerous other uses, assuming that planning consent would be forthcoming.
The value of car-display spaces varies, depending on the prominence of the site and the amount of passing pedestrian and vehicular traffic. Figures as high as £1,500 per space pa have been achieved for very prominent sites, but a figure of £500 to £600 per space is more usual. It is customary to reduce the value of the spaces for the second and subsequent rows of cars - a concept similar to shops zoning.
When valuing for security purposes, one must assess the future potential of the site and make careful inquiries regarding any hypermarket development proposals or highway proposals in the area, which may reduce the long-term profitability. One must also be aware that many sites will suffer from contamination to some degree and, with increasing legislation in this area, some investors and lenders are reluctant to become involved with such sites, even though minor contamination is unlikely to affect the site's performance.