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When the government imposed the UK’s first lockdown last year, fuel revenue shrank at the petrol station in North London managed by Shahed Murshed. Grocery sales, however, kept on flowing.
“Rather than buying a bag of crisps or peanuts, customers have been buying bread, milk, vegetables, microwave meals and frozen food,” said Murshed.
“People are trying to minimise their long journeys so they are shopping locally. It’s not just about snacks as they pay for petrol, they’re coming to buy supplies for weeknight dinners.” he added. “This is what’s different now after Covid.”
Big oil companies such as BP and Royal Dutch Shell also spotted the trend and see convenience retail as a big opportunity as the pandemic brings into focus what the future of the forecourt might look like amid the transition towards cleaner fuels.
“What happened with Covid has underpinned our confidence about our convenience business,” said Emma Delaney, one of BP’s top managers in charge of customers and products. “It was resilient even in the toughest of years in 2020”.
The oil major’s earnings were hit hard last year by a 14 per cent drop in fuel sales from its retail network. But it managed to increase the gross margin in its convenience business by 6 per cent.
Delaney said BP planned to double the share of non-fuel sales to 50 per cent by the end of the decade.
Other European oil groups, including Total and Repsol, believe grocery sales are only going to rise. Bernstein Research said this part of the sector was its “most under-appreciated growth driver”.
“Dirty fuel stations, soggy sausage rolls, misplaced massage chairs and out of order toilets is an image one might conjure up when thinking about fuel retailing . . . But not in the case of the European integrated energy companies,” said Oswald Clint at Bernstein.
“A decade back many (including ourselves) argued these should be sold and placed in the hands of ‘natural owners’ . . . like Tesco, Carrefour and peers as they built out in the sector.” While some did this, Europe’s biggest oil groups stayed put.
By Clint’s analysis these are valuable businesses with more than 20 per cent returns on capital and with gross margins in these convenience divisions at 35-50 per cent.
While petrol and diesel sales are expected to begin to decline from the next decade, they will remain relatively robust. Annual electric vehicle sales are still a fraction of the overall passenger vehicle fleet. Companies are also banking on the traffic from trucks and other commercial vehicles as well as a relatively strong stream of cars.
Energy executives argue that stronger-performing retail businesses combined with rising adoption of electric vehicles will ensure filling stations stay relevant. As customers wait for cars to charge, they can do their weekly shop.
Shell expects that by becoming indispensable to the average consumer, providing a choice of products — from petrol, hydrogen and low-carbon power to drinks, coffee and chocolate — it can secure its future.
“Unlike Big Box retail we are open 24/7,” said Istvan Kapitany, head of Shell’s retail business. And although coronavirus-related lockdowns have reduced the number of customers, they are buying more, with a “30-35 per cent . . . increase in the basket size”.
While marketing divisions, which encompass grocery and fuel sales as well as services such as car washing, are not as lucrative as drilling for oil and gas, they provide higher-margin returns.
This will be the name of the game in the years to come as companies become more selective about their fossil fuel production and as they pursue lower-margin renewables investments.
Grocery sales can help compensate for a levelling out of petrol and diesel sales in industrialised economies such as in Europe in the years to come, but there is huge growth potential in Asia and Latin America where car use, of all kinds, and retail shopping is still expanding.
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This is why Shell, already the world’s second-largest retailer by number of sites behind 7-Eleven, is expanding its network by more than 20 per cent to 55,000 globally in the next few years. BP aims to increase its number of stations by nearly 50 per cent to 29,000 by 2030.
The hope for these companies is that they boost the number of customer touch points by providing what Kapitany calls “a mosaic of choices and solutions”.
This is part of a broader goal for companies such as Shell, Total and Repsol to deliver customer services along the electricity supply chain, from electric vehicle charging to power in homes.
“This business is so critical in the energy transition,” said Kapitany. “The way to go forward is to start everything from what the customers want.”
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