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May 25, 2022

Death of Transformation in Fuel Retail Industry

Transformation was set as a priority of the DMRE, enacting the purpose of the Mineral and Petroleum Resources Development Act of 2002. But twenty years later the ambitious and necessary process of transforming the Fuel Retail industry has stalled. Read on to find out why this has happened, and who really loses out when retailers are forced to compete with one another.

The South African Fuel Retail industry has lagged on transformation over the past 20 years. The Department of Mineral Resources and Energy (DMRE) commissioned a study in 2016 which showed that Retailers were under-recovering by at least 12 cents per litre of fuel. Furthermore, the study (conducted by KPMG) also showed a lack of transformation in the industry.

Barriers to transformation

In order to address the slow pace of transformation in the sector, oil companies together with DMRE embarked on a serious transformation drive. PetroCONNECT has assisted in over 80 of these transformational transactions in the past 18 months. At the peak of this drive, new entrants to the sector (historically disadvantaged individuals) face enormous challenges. The difficulties they face are largely caused by the government, the primary custodian of sustainable transformation in this sector.

Some of the challenges faced by new entrants to the Fuel Retail industry include:

  • And most recently, a proposal to cut the Fuel Retail Margins

Previously disadvantaged new entrants often do not have adequate capital for the transformational transactions, which average between 7 and 10 million Rand. These new entrants to the fuel industry would be considered a risk to lend to by banks, at a rate of 80% to 100% Net Debt to Equity. This kind of funding structure, unfortunately, leaves no margin of error as any dip in income will result in defaulting on a loan payment. Financial institutions approve these transactions on the strength of a guaranteed profit margin per litre.

The Fuel Retail industry has proven to be one of the most resilient even during crunch economic times due to protected margins in the form of the RAS matrix.

Margin cuts widen the transformation gap

There are some unintentional repercussions for allowing discounts or margin cuts in the Fuel Retail industry. New Fuel Retailers cannot compete with established retailers on price. Their margin for error on repaying their debt doesn’t allow for any reduction in profit. Allowing discounts or margin cuts creates a cut-throat industry at the expense of transformation.

Fuel retail profit margins are already limited due to the sharp increase in operational expenses such as electricity, credit card fees, insurance and bank charges.

Any threat to the Fuel Retailer’s margin has the potential to undo all the positive transformation work that has been achieved thus far. It would mean that previously disadvantaged entrants to the market are unable to repay the financial institutions that funded their transactions.

The price to be paid by Fuel Retailers

The outlook is bleak for transformation in the face of reducing profit margins in this sector. New retailers from disadvantaged backgrounds plan their business venture based on the performance record of the established Fuel Retail businesses. The newcomers assume that the profit margin experienced by the established businesses will be guaranteed for their venture. Likewise, institutions which fund these transactions are approving the loans based on future income at a fixed margin. This fixed margin has historically been experienced by this sector and is the reference point for risk assessment in debt repayment.

The declaration by the Minister of Mineral Resources and Energy to cap the price of 93 octane petrol may prove detrimental to transformation in Fuel Retail. The ability of established Fuel Retailers to sell below-regulated prices will likely create a cut-throat industry, muscling-out new entrants who have large debts to pay off.

The transformation solution

As a thought leader in the Fuel Retail industry, PetroCONNECT offers a balanced perspective on Transformation. We have exceptional consultants on our team who have experience in working on transformation solutions in the energy sector, and who can guide dealers in developing their future business strategies.

Our solutions include

  • Connecting dealers with the right equity investors or strategies.
  • Buyers include vetted and trained candidates from PetroCONNECT Academy.
  • Evaluation of your existing business and current compliance status.
  • Offering a clear, realistic and implementable strategy for a win-win business solution.
  • A balanced perspective focused on sustainability.