Fueling your inner entrepreneur: opportunities in the fuel retail sector
03 November 2017
For some, service stations evoke fond memories of pit-stops on the way to family holidays and other special occasions, for others, they are simply a place to fill up and grab a cooldrink. However, service stations are in fact an integral part of modern society. More specifically, service stations enable mobility; affording us many fundamental rights, like going to work, attending school as well as transporting lifeblood 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.
Whether you’re considering taking a leap into entrepreneurship or thinking of adding to your growing business portfolio, investing in the fuel retail sector might offer you the financial independence and wealth creation opportunities you’ve been seeking.
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 that 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).
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, you want to develop a service station from the ground up, your 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 are 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 licences 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 centers 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.
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 within both options, but as is 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. 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 you will need to do is staff the business and maintain your service station based on the oil company’s criteria. Other perks 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’s also worth bearing in mind that, in most cases, the franchisee will be required to sign an agreement to purchase fuel related products from the associated oil company, and if you decide to sell your franchise, your buyer will need to be approved by the oil company.
On the other hand, if you’re 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. And 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.
If you are leaning towards functioning as an independent, but are apprehensive about the time it will take to build your 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 also 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 you’ve decided on the type of service station business you would like to invest in, the next step is ensuring that you have a watertight business plan to present to your financier or bank, and that all of the pre-work has been completed and approved. Whether you seek finance assistance from a bank, private funders or a collaboration of investors, it’s critical that you work with a finance team that has a deep understanding of the fuel retail sector.
Finally, whether you’re uninspired by the shackles of corporate life or specifically looking for a new venture in the fuel retail sector, owning and/or operating your own service station offers the entrepreneur an attractive business opportunity. However, before you hand over your deposit, it’s critical that you ask yourself one last question: Are you ready 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.
To find out more about franchising and financing solutions for fuel and automotive franchisees and franchisors:
• Visit the franchising site
• Call Absa on +27 (0) 11 350 8000
• Email: email@example.com
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.