Industry leaders looking back, looking ahead: Reggie Sibiya – CEO, Fuel Retailers Association
As we near the end of another ‘interesting’ year on all fronts, we chat with industry leaders about their highlights of 2021, as well as their predictions for the new year.
Here, Reggie Sibiye – CEO at the Fuel Retailers Association shares his thoughts.
What are your top highlights for 2021?
• The long-term effects of Covid-19 and its lockdowns had the biggest impact on the industry in 2021 with volumes dropping by 80% with many operators pleading for rental relief from landlords, bank holidays and with very little or no support from government.
Then came the July 2021 riots and looting and the sector lost over R300 million to looting and property damage – the combined Covid-19 and looting cost the industry billions of rands in both revenue and tax collection through fuel levy and road accident fund.
• Labour challenges have been compounded by rising levels of unemployment and retrenchments as a result of COVID-19 although the industry was taking strain even before the pandemic.
The sector retrenched 3 658 employees during the pandemic period – a trend that is going to continue until government intervenes or the economy fully recovers. As hardships of the compromised retailer margins continue, retrenchments continue to increase with no clear strategies to address this problem from government.
• Fuel is the major part of the business making up 60 – 80%, depending on location; urban sites progressively doing more convenience and other supplementary streams, more than in rural areas. Margins are fixed, pump prices are increasing and change every month.
“With no relativity between fixed margin and the movement of prices, most of the operating expenses are linked as a percentage of the pump price so when the pump price goes up, the operational expenses also go up, yet the margin is fixed annually,” says Reggie Sibiya.
“This leads to the erosion of the operational margin at the end of the day which is not a good or healthy situation to be in.”
• Margins lagging behind, rampant inflation, compliance costs and the missing elements like credit card costs which were introduced in 2010 for the FIFA Soccer World Cup and never reviewed, adds to the cauldron of challenges the sector faced.
Margins are determined by the minister of mineral and energy resources and once determined they are fixed. A 2016 KPMG study showed under-recovery of around 12c per litre on cost recoveries and those adjustments have never been factored into margins.
“If operational elements are not in the margins operators are under-recovering and will take the strain,” says Sibiya.
• The poor implementation of the RAS model talks to the split on the other element of the margins – the profit margin – the way it was calculated left a lot to be desired. The department left the negotiation of the split of that element between the retailers and the oil companies which then becomes a serious challenge because it upsets the balance of power between the two parties.
The Fuel Retailers Association has taken the matter to court on behalf of all fuel retailers against the minister of mineral resources and energy.
• Unregulated costs, like airtime, Lotto and even cigarette sales were compromised over time – it is becoming tighter and tighter to operate the service station business – both in relation to regulated and unregulated elements of the business. With increasing pump prices and fixed margins, we are way below the appropriate levels of recovery.
What top trends do you predict will shape fuel retailing in 2022?
• The FRA’s 2022 Conference to be held on the 16th & 17th March as part of the Automechanika Expo in Johannesburg will once again review the past two years of instability and then focus on future change and growth. Once again, international guest Mark Wohltmann, Director of the National Association of Convenience Stores (NACS), Europe will give a key-note address bringing us up to date as to what was happening in Europe and the USA with regards the big industry issues and the changes brought on by the pandemic.
“It will be interesting to see whether the total deregulation and the move to electric and hybrid mobility has stalled or whether it has in fact fast tracked 4IR in line with our changing economic and consumer landscapes,” says Sibiya.
• Fuel remains a very strategic resource for the foreseeable future albeit capital intensive due to the nature of its assets. In South Africa, we can’t get away from the fact that it is also very labour intensive and currently employs over 83 000 people and has 4 500 SMMEs running fuel retail operations.
“Our industry is peculiar in that our value chain has a lot of players who have different interests – to get them to work together and collaborate on issues that are beneficial to the industry is a mammoth task, says Sibiya. “But we continue to work on that and won’t give up.”
Deregulation is another issue that needs to be watched carefully as it is a concerning picture which has benefits for customers but dire consequences for businesses. At present, the Petrol Pump Price is the only thing regulated in the entire pricing value chain.
The trend of reducing retailer margins, increasing traditional and non – traditional competition via new brands and supermarkets, relaxed product importation regulations and shift to convenience retailing, points to full deregulation which will erode jobs and SMMEs as we see in other global markets.
This needs the Department of Mineral Resources & Energy to intervene urgently to sustain the jobs and SMMEs in the sector, otherwise all will be lost.
The trend globally in card interchange fees is also causing an outcry from retailers worldwide who want to see card interchange fees being reduced as they can be steep in terms of operations expenses. Fortunately, in South Africa we have the Reserve Bank project which is in phase 4 and currently dealing with the issue.
• New alternatives to fuels and imaging customer will drive the evolution of the industry with electric vehicles and hybrids being slowly introduced driven by an emissions reduction global agenda. South Africa, which exports as much as 64% of the combustion engine cars it produces to countries like the UK, who have very clear-cut legislation that phases out the use of combustion engines, will feel the impact on the economy going forward.
• The training of the labour force is another challenge as the 4th Industrial Revolution looms large with COVID-19 seemingly fast tracking this transition. How to train young people for future 4IR jobs when other jobs become redundant are the challenges facing the industry.
• The long-term sustainability of bargaining councils is always a challenge, and the FRA plays a major part in engaging with them but the extension of scope to non-parties is a serious threat, as is the absence of centralised bargaining, SMMEs will be forced to spend a lot of time dealing with trade unions which is not desirable or productive as their focus must be on running their businesses versus them spending time on bargaining issues.
“We are expecting tough wage negotiations in view of COVID-19 and the very slow economic recovery,” says Sibiya.
• Navigating the legislative & transformation maze in fuel retailing with its myriad of regulations underpinned by various legislations, contractual agreements, SABS standards, bargaining councils and POPIA will be the focus in 2022.
Petroleum Products Acts and its regulation challenges include the proliferation of service stations and the rampant illegal trading which is threatening the sustainability of existing service stations businesses; if it is not addressed seriously, we may as well forget about the survival of the fuel retailing business.
12B arbitrations – a clause enshrined in the petroleum products act – for which the Fuel Retailers Association fought long and hard for this to be incorporated and to address the issue of unfair contractual practices which is on the rise, has caused a lot of hardships both from the franchisor and franchisee side.
• The transformation sector code for the fuel sector is underway but has proved to be slow in delivery. Certain peculiarities unique to the sector, such as how fuel turnover is measured, are a major concern. Whilst other unregulated businesses are measured per turnover excluding VAT, fuel turnover is inflated by the fuel levy, the road accident fund levy and other levies.
As an association the FRA will deal with such issues to ensure that the categorisation of all these fuel retailing entities is properly allocated in terms of the threshold revenues which exclude such things as levies.
• Creativity in convenience retailing is key to the future of fuel retailing when electric vehicles become a reality. Service station owners then need to add convenience stores, fast food & beverages, car washes, car and trailer hire, with electric or hybrid vehicle charging spots, laundry services or even future potential in pharmacies on the radar to make ends meet.
“The future of the fuel retailer lies in creating a competitive edge,” concludes Sibiya.
“He needs to be prepared to change with the times, recognising the need to move from the needs of the vehicle to the needs of the driver and his passengers.”