Q&A: Is fuel retail sustainable with power cuts & less demand?

The fuel retail sector has had an unpredictable few years. With a global economic slowdown, the move to remote working, an accelerated switch to online shopping channels and soaring fuel prices, all cast doubt on whether sales can recover to pre-pandemic levels, says Karen Keylock, Nedbank National Franchise Manager.

The dramatic shifts experienced in 2020 provided a preview of the likely impact of energy transition in years to come. The long-term outlook for fuel retail envisages a 9,2% decline in global value from $87 billion in 2019 to $79 billion in 2030. This is driven by efficiency improvements, regulations to curb emissions, and the rise of electrification and shared mobility.

What is the impact of the energy transition?

As was the case during the pandemic, the decline in income from fuel retail is expected to be offset by gains in nonfuel retail, with global forecourt value increasing by 36% – from $22 billion in 2019 to $30 billion in 2030. A big contributor to this is electrical vehicle (EV) charging, which is expected to rise from approximately $35 billion in 2021 to $420 billion by 2030. Their networks, access to capital and customer knowledge, put forecourt retailers in a strong position to switch to EV-charging, but capturing this market will require significant investment in building EV-charging infrastructure. And with recharging taking much longer than refuelling, fuel retailers will need to upgrade their facilities to provide better dining options, a safe environment, expanded seating and decent toilets.

What about loadshedding losses?

A uniquely South African phenomenon that also needs to be factored into the sustainability of the fuel retail sector is loadshedding. According to the South African Petroleum Retailers’ Association (SAPRA), fuel retailers are under pressure because of generator-related costs, with running, servicing and diesel costs coming out of service station owners’ bottomline, while oil companies benefit from stable or higher fuel sales. An analysis of the impact on fuel retailers running a generator in the past 13 months shows a cost increase of 77% – from about R145,000 to R257,000.

Another challenge is that, due to the nature of their business, fuel retailers are obliged to stay open as they supply fuel to essential services such as the South African Police Service and security companies. But is becomes dangerous when service stations are forced to close due to prohibitive costs or trading in darkness. As a result, many fuel retailers are in ongoing discussions with oil companies about whether sites can remain open 24/7. If not, this could affect fuel supply security, particularly in peri-urban and rural areas where there are fewer service stations.

How sustainable is the fuel retail sector?

According to SAPRA, the fuel subsector contributes about 8% to South Africa’s gross domestic product. There are about 5,000 fuel stations, creating more than 700,000 direct and indirect job opportunities, which is about 5% of the total formal employment percentage in South Africa. Oil companies’ approach to using renewable energy at sites is allegedly another bone of contention among some fuel retailers, who are prepared to make the capital investment in solar solutions. Oil companies are reluctant to allow this, as the properties belong to them and not the retailers. Installing generators and renewable-energy systems go a long way to mitigating the problem but they cost money, which ultimately affects the bottomline.

For the longer-term challenge of declining fuel demand, EV-charging certainly offers the greatest potential for fuel retailers. It is a natural progression from their established fuel retail operations, makes use of their experience and offers the highest potential margin. It also offers considerable scope for growth with oil companies already investing in the EV-charging sector.

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