The case for investing in SA's fuel retail sector

James Noble

Service stations are an integral part of modern society. More specifically, they enable mobility; affording people many fundamental rights, such as going to work, attending school and transporting life-blood goods and services around the country. In South Africa, with many communities based in rural areas, the importance of enabling mobility and the impact this can have on people’s livelihoods and futures is immense.

Industry contributes +6% to GDP

With the outlook for the South African fuel industry looking strong, exploring business opportunities around service stations could be a step in the right direction. According to a report by the South African Petroleum Industry Association (SAPIA) the sector (as a whole) contributes in excess of 6% to the country’s gross domestic product (GDP) and supports employment of over 100,000 people directly or indirectly.

There are approximately 4,600 service stations (owned or controlled by oil companies and operated by fuel retailers) that pump on average 300,000 litres of fuel per month. Importantly, the industry recognises they have a positive role to play in society, spending upwards of R64.2 million on corporate social investment initiatives.

While service stations offer the budding and experienced entrepreneur a viable business opportunity, there are many factors to consider before taking the plunge, particularly as it remains a capital-intensive and cash-flow dependent industry. Investing in a service station entails one of three business opportunities: investing in the physical building, land and associated assets (prop-co), purchase of the business operation only (op-co) or purchase of both (prop-co / op-co).

High cost/time factor

To date, the asking price of a service station business can vary from R1 million to R35 million. In addition, the average working capital requirement of a service station can fluctuate between R1.2 million and R1.5 million.

If, however, one wants to develop a service station from the ground up, one’s physical set-up costs could range anywhere from R10 million to R100 million – with highway sites commanding the greatest capital spend. The cost of these investments is based on the usual appraisal criteria of a commercial property such as the profitability of the operation and the evaluation of the physical real estate, including its assets and location.

As an entrepreneur you understand that time is money. Therefore another point to bear in mind when planning a new service station development is the length of time it will take to tick all the red-tape boxes - with some developments taking up to 10 years to finalise. This includes establishing land use rights for the purpose of a service station through the local authorities, conducting environmental impact assessments and applying for site and retail licenses through the Department of Energy.

While the investment from a time and financial perspective is immense, service stations are still regarded as a profitable business opportunity. Operators can maximise revenues, through the addition of alternate profit centres to the forecourts, such as quick-service restaurants, convenience stores and car washes. Although fuel margins are lower, fuel sales remain the primary income of a business, accounting for approximately 80% of an operation’s turnover and usually delivering greater profit than the other goods and services.

©Natalia Klenova via 123RF

Franchise versus independent

If you are looking to invest in a service station, another important factor to consider is whether you would like to operate as a franchise, under a major oil company brand, or as an independent. Pros and cons exist with both options, but with any franchise versus independent decision, it comes down to personal choice.

In general, franchising has become an important player in the South African economy. With over 600 franchise systems and approximately 39,000 franchise outlets in operation around the country – covering a broad range of industry sectors from fast food chains, retail, childcare and education to name a few – franchising contributes 12.5% to South Africa’s GDP and provides employment for 325 000 people.

Buying into one of the major South African oil franchise operations provides the back-up and security of working with an established brand, with no need to build up brand reputation or design new operating processes and procedures. The parent company provides tried-and-tested concepts, along with marketing and buying support and a degree of business guidance and mentorship.

All one will need to do is staff the business and maintain one’s service station, based on the oil company’s criteria. Other benefits of operating as a franchise include insurance against any environmental risks that may occur, with the oil company generally taking responsibility for these costs. The retailer is responsible for normal business interruption and short insurance risks.

It is also worth bearing in mind, in most cases, the franchisee will be required to sign an agreement to purchase fuel related products from the associated oil company. In addition, if you decide to sell your franchise, the oil company will need approve your buyer.

Independent route

On the other hand, if you are interested in exploring the independent route, you will be afforded the freedom and flexibility to run your own operation as you wish – from the services you offer, to the hours that your station is open. Moreover, when you are ready to sell your business, you can sell it to whomever you like without input or oversight from the parent company. On the flipside, you are entirely responsible for the business from the branding and marketing to meeting very stringent environmental standards, which can be daunting and expensive, particularly when things go wrong.

Semi-independent option

If one is leaning towards functioning as an independent, however, apprehensive about the time it will take to build one’s brand, there is another interesting trend to consider. Making strides, particularly in the rural areas of Mpumalanga, Gauteng, Limpopo and KwaZulu-Natal, is the forging of partnerships between independent service stations and big fuel wholesaler brands.

While non-refinery wholesalers, such as Puma Energy, cannot legally hold a retail license in South Africa, this ‘flexible’ agreement enables the independent owner to enjoy the benefits of being associated with a big national brand – with the provision of branding and signage – while at the same time, giving the owner the freedom to operate their businesses on their own terms. This less restrictive relationship with independents is not only confined to non-refinery wholesalers, but we are seeing this business model being rolled out by smaller up and coming petroleum retail brands like Viva Oil, MBT Petroleum, Quest Petroleum and Elegant Fuel.

Watertight business plan

Once one has decided on the type of service station business one would like to invest in, the next step is ensuring that one has a watertight business plan to present to one’s financier or bank and that all of the pre-work has been completed and approved. Whether one seeks finance assistance from a bank, private funders or a collaboration of investors, it is critical that one works with a finance team that has a deep understanding of the fuel retail sector.

Finally, whether one is uninspired by the shackles of corporate life or specifically looking for a new venture in the fuel retail sector, owning and/or operating a service station offers the entrepreneur an attractive business opportunity. However, before handing over a deposit, it is critical that one asks one last question. “How ready is one to commit to the demands of the ‘always on’ fuel retail industry 24 hours a day, 365 days a year? If the answer is yes, the personal and professional gains will be worth it.