How Fuel Stations Keep Reinventing Winning Formulas

Soaring petrol prices may be hurting our hip pockets, but they are not stopping investors targeting fuel and convenience assets. While petrol prices climbed by 41.4 cents a litre in the 12 months to December last year boutique commercial real estate agency Burgess Rawson transacted 32 freehold fuel investments totalling $156 million. Now as prices continue north and electric vehicle numbers increase, several factors are keeping the sector buoyant according to industry analysts.

Chief among them is an agility to shift with consumer tastes said Mark McKenzie, chief executive of the Australasian Convenience and Petroleum Marketers Association (ACAPMA). Meeting changes in demand has kept fuel stations viable and underpinned solid returns, a typical metropolitan service station delivering an 8% return year-on-year since 2006 according to ACAPMA figures. “That level was maintained right through the great financial crisis of 07/08 and even through the first year of covid,” Mr McKenzie said.

Long leases and top tier tenants are other major drivers of investor interest said Burgess Rawson partner Kieran Bourke. “Inquiry for these properties hasn’t dipped from last year when this sector was extremely popular,” he said. “There’s still more buyers than there were pre-covid.” Retail fuel assets also benefit from locations in commercially strong areas with high volumes of passing trade Mr Bourke said, as nowadays “people don’t simply stop for fuel, they stop for numerous reasons.”

The next evolution

As fuel subsides as a mainstay and electric vehicle sales rise, Mr McKenzie said fuel retailers are currently poised for their next evolution. “The first major transformation came when the repair business went through major consolidation in the 1970s and that business was taken away,” Mr McKenzie said. “So service stations shifted from a fuel and repair shop model to one of selling ‘chocolates, chips and drinks’, and the number of fuel retailers went from 26,000 sites down to 6400 over a period of 20 years.”

The second transformation occurred in 2004 when, in a “major watershed moment” of the industry, the large supermarkets joined forces with fuel stations to move products through small format convenience stores. Prior the move fuel retailer’s main product line had been automotive accessories and basic parts. This too disappeared was lost as a revenue stream when new corporate players entered the auto accessories business, leading to fuel outlets ramping up food and beverage offerings.

“Around 2014 the ‘good for me’ consumer trend arrived,” Mr McKenzie said. “People were looking for water, fresh food on the go and coffee became a major opportunity. We started seeing a major investment into barista style coffee bars and installation of bakeries and then supermarkets added salad and sandwich ranges as well.”

“Currently non-fuel offerings are 25% to 30% of total revenue depending on location, and the rest is fuel,” Mr McKenzie said. “The return on non-fuel sales is generally double or more of that received during the ‘70s and ‘80s.”

Surviving the future

Australia’s 7080 fuel retailers are continuing to lift their game to attract consumers. Services, interior style and overall sophistication are growing in importance. Mr Bourke said he recently came across an outer western Sydney fuel retailer that had incorporated a post office, and many others were undergoing refurbishments to resemble high-end cafes.

While Australia’s uptake of electric vehicles is well below levels elsewhere in the world, service stations will inevitably become providers of multiple fast charging stations, Mr McKenzie said. They could also turn into hubs for car sharing and car parks.

“The next 10 years will see millennials who own one EV or want to car share and their primary mission in visiting a fuel station will be for some other purpose,” Mr McKenzie said. “There is a very real opportunity for the servo to be used as a hub or base for sharing your EV in the future. Fuel retailers are not going to be gobbled up by EVs, rather they will see the slow cannibalisation of their fuel revenue as EVs start to penetrate into the national vehicle fleet.” Industry figures show while only 17,000 EVs were sold in Australia out of a total 1,050,000 vehicle sales last year, the volume was triple that of prior years.

By 2030 about 1.4 million of the 16 million passenger vehicles on Australian roads will be EVs according to government forecasts. “Even though that is quite a small number of EVs, because the margins on fuel are so narrow it represents quite a significant volume to our industry,” Mr McKenzie said. “This is why fuel retailers are continuing to evolve business models and ramp up offerings. Over the last 60 years, service stations have proved resilient in the face of consumer industry change and now a global pandemic and there is no doubt they are well-positioned to deal with the technological changes of the future.”

 

Extracted from Commercial Property Guide

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