There are currently about 8,000 service stations in Australia, down slightly from the 8,370 stations in 20001, and down by about 50% from 25 years ago. The industry employs around 38,100 people and was worth $21.7bn in 2004-05.2 Over the past decade, total industry revenue has grown slowly (averaging around 2% per year in real terms), but the numbers of sites, enterprises and employees have fallen considerably. Industry profitability has improved somewhat as a result, but the typical service station remains a low margin, high turnover business.
Service stations' main activity is retail sales of automotive fuel, but none rely on fuel sales alone. For the industry as a whole, automotive fuel sales account for around 75% of turnover, but provide a very low margin. All stations have ancillary services including convenience shops, cafes, car washes, auto accessories, equipment hire and auto repairs. Retail sales of non-auto related items now account for about 16% of service station turnover. For many operators, convenience shops (and especially 24 hour shops) have grown to such an extent that petrol sales are the generators of customer traffic but the convenience shops contribute most of the profit, as well as attracting business in their own right. Convergence between service stations and supermarkets has accelerated this trend. Few service stations still operate on the old model of fuel sales and auto repairs only, and scarce few still provide driveway fuel services.
The ownership structure of the industry is currently based on a system of franchise, lease and branding agreements between single and multi-site owners, fuel suppliers, supermarkets and convenience store chains. The largest operators are the major petroleum suppliers — Shell, Mobil, BP and Caltex. These four control or exclusively supply nearly 75% of sites (owned, leased or otherwise affiliated) and 85% of fuel sales. National legislation currently limits the number of sites the oil majors can directly operate, but this regulatory regime is about to change.
Apart from the rationalisation of sites, the biggest change for this industry in recent years has been the rapid growth of service stations that are owned or affiliated with Australia’s two supermarket majors, Woolworths and Coles, under co-branding arrangements with Caltex and Shell respectively. As noted above, fuel retailing is a low margin, high cost business. The advantages to the supermarkets in entering this tough market are its high customer volumes and opportunities to expand into high profit ancillary convenience food and grocery retailing.
Coles owns the franchises for nearly 600 co-branded Coles Express/Shell sites nationally (purchased in 2003) and is currently Australia’s single largest fuel retailer, with 25% of all sites. Sales by Coles Express stores (including service station and other sites) grew 14.9% in 2005-06, despite a decrease in petrol sales volumes. Woolworths sites account for another 15% of the market. Woolworths has 491 sites (131 branded as Woolworths Caltex) and reported annual petrol sales growth of 32.7% in 2005-06 (on top of 50.7% growth in 2004-05) The Australian Institute of Petroleum (AIP) estimates that supermarket affiliated sites now sell about 50% of all retail automotive fuel in metropolitan areas.
Smaller fuel retail chains include 7 Eleven, Gull, Oasis, Matilda, United and G Fuels. A small and declining number of sites are owned and operated independently of any major branding. These are located mainly in rural areas, where many sites are still independently owned and supplied by a local distributor, with or without a branding agreement.
Barriers to entry for individual owner-operators are high, with purchase costs for an existing site starting at around $5mn and rising dramatically for high volume sites. Construction costs for new service station sites are considerably more, with fuel storage and facilities alone costing around $1mn.
Another significant investment for all operators is the inventory cost of the fuel itself, which must be purchased and stored on site in large quantities.
An additional barrier for the major fuel suppliers is the current regulatory regime that limits the number of retail fuel sites they can own and operate. These rules are in the process of being replaced by the more flexible ‘Oilcode’.
