Where innovation and growth meet in the retail sector
by Mathew Weiss. Energy companies are investing in retail not only because it meets a consumer need, but as a pre-emptive strategy to address the decline of petrol car sales over the next several decades.Tuesday, 25 Feb 2020
by Mathew Weiss. On returning to South Africa from abroad, I was struck by the overriding negativity on the front page of Business Day.
Every article leered over the debacle unfolding within our SOEs, grim highlights against a backdrop of debt, mismanagement and rising joblessness. With all the doom and gloom around, it is worth remembering that despite the tough trading conditions, local retailers managed to grow sales in 2019 by 1.2% over a year ago.
And it is notable that the better-performing ones, like Takelot, were particularly good at meeting consumers’ ever-growing need for convenience. So, it would seem one way to grow in the current economy is to identify and exploit a convenience ‘hotspot’ for all its worth.
One such hotspot is forecourt retail. Historically a drab place to grab low quality coffee, forecourt retailers have raised their game over time and have enjoyed solid growth despite the economic malaise. A number of factors suggest growth is likely to continue.
South African car ownership is creeping up annually with half of all households now owning a car, which means more people visiting forecourts to top up the tank. At the same time, consumers are more time-starved. A forecourts’ proximity to where people live, longer opening hours and shorter queues make them an increasingly attractive option for busy people.
‘Click and collect’
The rise of ‘click and collect’ is one way forecourt retailers are meeting this convenience need. Engen is set to treble the number of 24-hour automated parcel lockers across its network as it ramps up the service from 69 ByBoxes to 160. And given that Engen has over 980 sites, there’s plenty more room for growth here.
These trends help explain why Shell plans to open a further 10,000 service stations globally, adding to its 45,000 sites by 2025. They intend to have 80%-90% of the population, in the countries in which it operates, only 10-15 minutes away from a Shell garage.
Energy companies are investing in retail not only because it meets a consumer need, but as a pre-emptive strategy to address the decline of petrol car sales over the next several decades. All Volvo cars now have a hybrid engine option, and in February 2020, the UK government announced its plans to ban all petrol and diesel car sales by 2035. Given this, it’s a legitimate question to ask whether forecourts will even sell petrol in the future?
While South Africa has a way to go before we see the death of the combustion engine, further investment in the retail proposition will help unlock profitability. By way of example, Shell’s retail division ROS (return on sale) on capital employed in 2017 was 24%, and it has experienced year-on-year growth of 7%.
It would seem that if you do a good job with the brand, retail experience and product offering, you can still grow profitability, despite what happens to the price of oil, because more and more people aren’t coming to forecourts for the fuel. When oil prices dropped from $110 to $28, fuel volumes only increased by 1%, according to István Kapitány, Shell’s EVP of global retail. BP reinforced this point in 2017 when it admitted that half its forecourt customers in Britain don’t even buy petrol, but shop at the M&S store instead.
So, it is interesting that three of the four largest petrol players in the SA market have outsourced their C-stores to established retailers. Engen has Woolworths, BP has Pick n Pay, and Caltex has Fresh Stop, each bringing merchandising, supply chain and retail expertise to elevate the offer. While the shopping experience is certainly better for customers, the downside for the energy companies is that they’re going to miss out on much of the profit growth that this sector will enjoy, while their own source of revenue comes under greater pressure.
Although the dominant offering from C-store retail remains fairly predictable – fresh produce, bakery, snacking and meal deals, we are starting to see retailers exploit the opportunities created by technology and changing consumer tastes, albeit rather slowly (this may be due to legacy IT systems, supply chain limitations and employee skillsets).
Putting the speed of innovation aside, there are now many new ways to build brand preference. One consideration is to further premiumise the food offering. For instance, in restaurants, there’s a big move towards preparing the food in front of the customer. In the larger locations ‘made to order’ is a powerful proposition.
Coffee is another opportunity. Joe Barrett, COO at Applegreen (a large UK C-store chain) calls coffee his ‘black gold’, and has invested heavily in hiring and training Baristas to prepare and serve high-quality coffee at its service stations – an interesting training opportunity for SA forecourt staff. Locally Fresh Stop’s deal with Seattle coffee is the strongest offering within its multi-branded retail concept.
The connected car
The biggest longer-term opportunity is the connected car. An ever-growing number of new cars sold now offer full smartphone integration giving them internet connectivity and voice recognition functionality. This combination means drivers could safely pre-order any number of products and services and request delivery to their car when they arrive at the forecourt.
Consumer insights in this space appear to be universal; what goes on in one forecourt overseas is equally applicable back home. For instance, in the UK, on any given day, by 4pm, 70% of people still haven’t decided what they’re going to have for dinner. That’s a lot of people who want something quick and convenient to eat as they head home from work.
Combine this insight with the connected car, and you could have a ‘click and collect my dinner’ offer that would go beyond merely offering ready-made meals in-store. A connected car could also make paying for your meal much simpler, potentially eliminating the need for old fashioned chip and pin payment terminals.
Globally forecourts are experimenting with using their C-store as an e-commerce distribution centre where people can order from their local store and have it delivered to their home any time of the night. With their vast networks across the country, this is a huge opportunity for the big players in South Africa.
A lesson we can draw from forecourt retail is that when you put a convenience hotspot at the heart of your strategy, you’re more likely to enjoy growth despite the predictions of impending doom we see in the papers.
Mathew Weiss is the managing director for Superunion Africa. He has accumulated broad experience in both design and advertising in the US, Central America and EMEA where he built brands across a range of industries including FMCG, Financial Services, Hospitality and Tourism. He has a degree in English literature and a diploma in strategic marketing from Cambridge. As a keen sportsman, he spends much of his spare time in pursuit of a lower handicap and fewer double faults.
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