Why South Africa’s petrol stations are struggling – despite record high fuel prices
Reggie Sibiya, chief executive of the Fuel Retailers Association says South Africa’s fuel retailers face many challenges – both on the fuel supply side and on the retailing side – as they try and balance onerous legislative and industry standards, with declining volumes and profits.
Speaking at the Franchise Association of South Africa (FASA) conference held at the end of August 2021, Sibiya said that while fuel remains a strategic resource, it is has become an increasingly capital intensive business.
“The bottom line, however, is that the economy and people need fuel – at least for the immediate future. It is also very labour intensive and currently employs over 83,000 people and has 4,500 SMMEs running fuel retail operations.”
Sibiya said fuel is still the major part of a retailer’s business – making up 60 – 80% of the revenue generated, depending on location. However, he said that urban sites are progressively doing more convenience and other supplementary streams compared to rural areas. He added that while margins are fixed, pump prices are increasing and continue to change monthly.
“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.
“This leads to the erosion of the operating margin at the end of the day, which is not a good or healthy situation to be in.”
Sibiya said that Covid-19 also severely impacted the industry, with customer volumes dropping by 80%.
“Then came the July 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.”
Trying to stay in business
As oil companies try to claw their way back to profitability, the picture today is one of the economic challenges coupled with declining volumes due to people spending less on travelling, margins being eroded and compromised through lack of collaboration in the industry, Sibiya said.
“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. But we continue to work on that and won’t give up.”
With margins lagging behind, rampant inflation, compliance costs and the missing elements like credit card costs introduced in 2010 for the FIFA Soccer World Cup and never reviewed, you have a cauldron of insurmountable challenges, he said.
“Remember, margins are determined by the minister of mineral and energy resources and once determined, they are fixed. If operational elements are not in the margins, operators are under-recovering and will take the strain.”
Sibiya cited a 2016 KPMG study that showed fuel retailers were under-recovering 12 cents per litre on cost recoveries and that these adjustments have never been factored into margins.
Unregulated costs, like airtime, Lotto tickets and even cigarette sales have also been compromised over time, said Sibiya. “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 that we should be recovering.”