WhipLash
08-03-2001, 08:52 AM
Here's an interesting article I found on Business And Finance. Accroding to this article, a lot of petrol stations are operating on margins of between 0-4.5%. Hmm........
Running On Empty
Irish motorists, particularly those based in cities are benefiting from one of the most competitive petrol markets in Europe, with many filling stations operating on zero margins on petrol and diesel sales. The tight market is forcing most operators to look at alternative sources of revenue, writes Tom McEnaney.
If you drive on the Cork road out of Cashel you will come across three filling stations for sale or to let. They are one of the symptoms of an increasingly hostile battle for the petrol tanks of Ireland. It is very unlikely that all three stations will attract buyers, and anyone thinking of venturing into this market should have deep pockets.
Before 1991, when the Government fixed the price of fuel, retailers generally enjoyed margins of about 11p per litre. Now the standard retail margin is about 4.5p and many stations are selling fuel at cost price to attract customers into their forecourts. Indeed local competition is forcing some operators to offer their product at a loss, in hope of making their money in the shops.
While the consumer is benefiting in a big way, tougher competition and tighter environmental controls are expected to force many smaller players to the wall.
Not all consumers are enjoying the benefits of competition. Cork and Kerry seem to be the toughest markets in the country, and consequently have the cheapest prices.
Motorists in the capital fare almost as well. But drivers who rarely venture out of the Midlands are being forced to pay considerably more for a tank of petrol.
Petrol is a local market. Unlike diesel, where long-distance truck drivers force all stations to apply similar prices, the price of petrol is set by what a market in a 10-mile radius will bear. And like on-course bookies, petrol stations tend to watch the prices being offered by their competitors and adjust accordingly.
This means that it is difficult to point at one company and say they are offering the lowest prices. Indeed, because some stations are owned by the oil companies but many are owned by independent dealers it is possible to find differences in prices between filling stations of the same brand in the same town.
Take, for example, Portlaoise. According to Conor Faughnan of the AA, which monitors petrol prices on a monthly basis, this was one of the most expensive places in the country to buy petrol until it was bypassed about three years ago. Now it is one of the cheapest.
There are 10 filing stations in the town. One is an EMO station; one is Campus; three are Esso stations, of which one is company owned; three are Statoil stations of which one is company owned; and there is a small Maxol site and small Shell site.
From speaking to executives in a number of oil companies and to the owners of garages around the country it seems that in markets which are competitive, the price is determined by the smaller, less well known operators.
Motorists travelling between Dublin and Cork have known this for some time. The presence of an Amber station in Mitchelstown has made the town one of the cheapest places in the country to buy petrol. If Amber has driven down the price in for the south of the country, in Dublin the honour probably goes to the DCC-owned Emo group, which is currently rebranding its network of Burmah stations.
In Portlaoise too, according to the owner of one local station, it is Emo which tends to set the price.
Statoil operates a price promise, which means that those Statoil stations participating in the scheme will guarantee that there prices are as cheap as any other local station. According to a Statoil spokeswoman, about three quarters of Statoil forecourts are involved in the scheme.
For the retailer it means that Statoil will share the burden of any price reduction necessitated by competition, almost always on a fifty/fifty basis.
So it is not surprising that the Statoil company-owned statioon will be the first to react to a price reduction in Portlaoise. The station across the road, which happens to be an independently owned Statoil outlet, has no option but to follow suit, and he, according to local sources, is followed by the Statoil site on the outskirts of the town. Similarly the Esso company owned stations tends to lead the way for independent under the same brand.
At the time of going to press the price of a litre of regular unleaded petrol in Portlaose was 64.9p. This is far from the lowest price available in the country. In Mitchelstown, for instance, the price is closer to 61p. According to one Portloaise operator, he is currently paying 55.5p for his unleaded petrol. Add on a not unreasonable margin of 4.5p and you get a price of 57p, which after tax becomes 68.4p. This is the standard price charged in the less competitive - places at some distance from either a city or a motorway and where there is no proliferation of garages. But take the retailer's margin out completely and you are left with a price which is still only around the average charged in the country. It is not difficult to see how many stations are finding difficulty to make money. If independent stations are finding it difficult to make money on petrol, the oil companies themselves are not faring much better. A litre of petrol typical costs an oil company 18.6p in today's market. For every levy it is then required to pay a levy of 0.38p to the National Oil Reserve Agency. Add to this 27.42p in Duty and 10.7p VAT, and allow for an overall margin of 6.8p and you get a pump price of 63.9p. In other words, while oil companies may be faring a little better than the independents, they are certainly not creaming it.
As illustrated in the following pages, those which are succeeding are making their money in the shops. Indeed many of those, particularly when sited along motorways, are making very comfortable profits, often while subsidising their own petrol prices.
At a time when margins are being squeezed, some retailers feel that the oil companies are favouring their own sites. All of the companies deny this. "Because of the size of our dealer network, and the investment we have already made in our dealer network it would not be in our interests do anything which would have a negative effect on our dealers," said John McDonagh, retailing director with Irish Shell.
According to McDonagh, however, there are towns where the company -owned Shell station offers a lower price than the dealer-owned station. The reason, he said, is that the independent dealers in those cases have not availed of the Shell price support mechanism, which is almost identical to the Statoil scheme.
Some dealers complain that the oil companies' willingness in many cases to sell petrol at below cost is anticompetitive, but senior sources in the Competition Authority disagree. "If the oil companies can subsidise petrol prices by effecting efficiencies and by making a profit elsewhere then that's good for competition," said one senior source.
As McDonagh pointed out, many oil companies have invested hundreds of thousands of pounds in individual stations owned by independent operators. This investment traditionally formed part of a "solas" agreement between the companies and the operators. In return for major investment on the part of the oil companies, the operators would generally agree to buy only their fuel for a period of ten years.
But new EU competition rules means that these contract can only be signed for a period of five years. Too short, say the oil companies, for them to be guaranteed a reasonable return on any significant investment. So oil companies are offering discounted product, which has the effect of forcing down prices, which increases the need for independent to reinvest in their ancillary activities.
Independent operators, however, are not likely to be forced out of the market. While the company-owned sites do enjoy many advantages, it is generally felt that the entrepreneurship of the more successful independents will help them to survive.
Of course, if you happen to be located along the border you are much less likely to be worried about margins. At present a litre of regular unleaded petrol will set you back about stg71p in Northern Ireland, which is a very significant incentive for Northerner to travel across the border. "There's an awful lot of smuggling going on, we reckon the UK exchequer is losing around £200m per annum in excise duty and tax because of smuggling," said Tom Noonan, chief executive of Maxol. "They will come anywhere in a line down from Belfast for petrol."
Call up to any petrol station on the south side of the border and it is not uncommon to be stuck behind a line of eight or nine cars, many of which will have Northern registrations. The boon to South Border filling stations eases competition, which means that many stations in Donegal, Cavan and Monaghan and charging almost 70p for a litre of regular unleaded.
Of course this is disastrous for many Northern petrol retailers, and, according to McDonagh, many have reacted by smuggling petrol from the Republic. A year ago, smuggled petrol was only common along the border, but now, according to McDonagh, it is common to find smuggled petrol in Belfast garages. There is even a strong suspicion, he said, that some people are smuggling petrol on container ship from Northern Ireland to Britain. Five years ago about a billion litres of petrol were sold in Northern Ireland every year. Today only about 500m litres of petrol are sold in the North on the legitimate market. According to McDonagh, the problem is enforcement, and despite endless lobbying this is simply not a priority for the British government at the moment.
Those lobbying the British government have also made a case for special tax treatment for Northern Ireland, given that it is the only part of the UK which shares a border with another country. Immediate action is not expected.
It is perhaps surprising that petrol prices in Ireland are so competitive when, according to Faughnan, the Irish consumer is generally anything but price conscious. "If you offered a typical motorist standing on a forecourt a tenner to tell you the price of a litre of petrol, he probably wouldn't get it," said Faughnan. Part of the problem is that many consumers do not buy by the litre, but fill up with, say, £10 or £20 worth of petrol. He recommends that consumers buy their petrol by the litre so that they know what they're paying. Those looking to find the best prices in their area would so well to check out www.irishfuelprices.com, which relies on people logging on to report on petrol and diesel prices in their areas. Information on the site is deleted after two weeks, which means it is always reasonably up to date. "Personally, I would never pay more than 64.9p a litre for unleaded," said Declan Holmes, the man behind the site. He said that when prices do fall, the more competitive areas benefit first. "When there was a dramatic fall in VAT and crude oil prices fell it didn't happen simultaneously. It happened very quickly in Dublin and Cork, but very slowly in places like Cavan." On the other hand garage operators point out that how quickly they can lower the price depends on how much fuel they have in their tanks. "It always seems to happen just when you got a fill" said one Donegal garage owner.
If you are travelling on along journey the advice is fill up in cities rather than the country and fill on main roads rather than smaller routes.
Running On Empty
Irish motorists, particularly those based in cities are benefiting from one of the most competitive petrol markets in Europe, with many filling stations operating on zero margins on petrol and diesel sales. The tight market is forcing most operators to look at alternative sources of revenue, writes Tom McEnaney.
If you drive on the Cork road out of Cashel you will come across three filling stations for sale or to let. They are one of the symptoms of an increasingly hostile battle for the petrol tanks of Ireland. It is very unlikely that all three stations will attract buyers, and anyone thinking of venturing into this market should have deep pockets.
Before 1991, when the Government fixed the price of fuel, retailers generally enjoyed margins of about 11p per litre. Now the standard retail margin is about 4.5p and many stations are selling fuel at cost price to attract customers into their forecourts. Indeed local competition is forcing some operators to offer their product at a loss, in hope of making their money in the shops.
While the consumer is benefiting in a big way, tougher competition and tighter environmental controls are expected to force many smaller players to the wall.
Not all consumers are enjoying the benefits of competition. Cork and Kerry seem to be the toughest markets in the country, and consequently have the cheapest prices.
Motorists in the capital fare almost as well. But drivers who rarely venture out of the Midlands are being forced to pay considerably more for a tank of petrol.
Petrol is a local market. Unlike diesel, where long-distance truck drivers force all stations to apply similar prices, the price of petrol is set by what a market in a 10-mile radius will bear. And like on-course bookies, petrol stations tend to watch the prices being offered by their competitors and adjust accordingly.
This means that it is difficult to point at one company and say they are offering the lowest prices. Indeed, because some stations are owned by the oil companies but many are owned by independent dealers it is possible to find differences in prices between filling stations of the same brand in the same town.
Take, for example, Portlaoise. According to Conor Faughnan of the AA, which monitors petrol prices on a monthly basis, this was one of the most expensive places in the country to buy petrol until it was bypassed about three years ago. Now it is one of the cheapest.
There are 10 filing stations in the town. One is an EMO station; one is Campus; three are Esso stations, of which one is company owned; three are Statoil stations of which one is company owned; and there is a small Maxol site and small Shell site.
From speaking to executives in a number of oil companies and to the owners of garages around the country it seems that in markets which are competitive, the price is determined by the smaller, less well known operators.
Motorists travelling between Dublin and Cork have known this for some time. The presence of an Amber station in Mitchelstown has made the town one of the cheapest places in the country to buy petrol. If Amber has driven down the price in for the south of the country, in Dublin the honour probably goes to the DCC-owned Emo group, which is currently rebranding its network of Burmah stations.
In Portlaoise too, according to the owner of one local station, it is Emo which tends to set the price.
Statoil operates a price promise, which means that those Statoil stations participating in the scheme will guarantee that there prices are as cheap as any other local station. According to a Statoil spokeswoman, about three quarters of Statoil forecourts are involved in the scheme.
For the retailer it means that Statoil will share the burden of any price reduction necessitated by competition, almost always on a fifty/fifty basis.
So it is not surprising that the Statoil company-owned statioon will be the first to react to a price reduction in Portlaoise. The station across the road, which happens to be an independently owned Statoil outlet, has no option but to follow suit, and he, according to local sources, is followed by the Statoil site on the outskirts of the town. Similarly the Esso company owned stations tends to lead the way for independent under the same brand.
At the time of going to press the price of a litre of regular unleaded petrol in Portlaose was 64.9p. This is far from the lowest price available in the country. In Mitchelstown, for instance, the price is closer to 61p. According to one Portloaise operator, he is currently paying 55.5p for his unleaded petrol. Add on a not unreasonable margin of 4.5p and you get a price of 57p, which after tax becomes 68.4p. This is the standard price charged in the less competitive - places at some distance from either a city or a motorway and where there is no proliferation of garages. But take the retailer's margin out completely and you are left with a price which is still only around the average charged in the country. It is not difficult to see how many stations are finding difficulty to make money. If independent stations are finding it difficult to make money on petrol, the oil companies themselves are not faring much better. A litre of petrol typical costs an oil company 18.6p in today's market. For every levy it is then required to pay a levy of 0.38p to the National Oil Reserve Agency. Add to this 27.42p in Duty and 10.7p VAT, and allow for an overall margin of 6.8p and you get a pump price of 63.9p. In other words, while oil companies may be faring a little better than the independents, they are certainly not creaming it.
As illustrated in the following pages, those which are succeeding are making their money in the shops. Indeed many of those, particularly when sited along motorways, are making very comfortable profits, often while subsidising their own petrol prices.
At a time when margins are being squeezed, some retailers feel that the oil companies are favouring their own sites. All of the companies deny this. "Because of the size of our dealer network, and the investment we have already made in our dealer network it would not be in our interests do anything which would have a negative effect on our dealers," said John McDonagh, retailing director with Irish Shell.
According to McDonagh, however, there are towns where the company -owned Shell station offers a lower price than the dealer-owned station. The reason, he said, is that the independent dealers in those cases have not availed of the Shell price support mechanism, which is almost identical to the Statoil scheme.
Some dealers complain that the oil companies' willingness in many cases to sell petrol at below cost is anticompetitive, but senior sources in the Competition Authority disagree. "If the oil companies can subsidise petrol prices by effecting efficiencies and by making a profit elsewhere then that's good for competition," said one senior source.
As McDonagh pointed out, many oil companies have invested hundreds of thousands of pounds in individual stations owned by independent operators. This investment traditionally formed part of a "solas" agreement between the companies and the operators. In return for major investment on the part of the oil companies, the operators would generally agree to buy only their fuel for a period of ten years.
But new EU competition rules means that these contract can only be signed for a period of five years. Too short, say the oil companies, for them to be guaranteed a reasonable return on any significant investment. So oil companies are offering discounted product, which has the effect of forcing down prices, which increases the need for independent to reinvest in their ancillary activities.
Independent operators, however, are not likely to be forced out of the market. While the company-owned sites do enjoy many advantages, it is generally felt that the entrepreneurship of the more successful independents will help them to survive.
Of course, if you happen to be located along the border you are much less likely to be worried about margins. At present a litre of regular unleaded petrol will set you back about stg71p in Northern Ireland, which is a very significant incentive for Northerner to travel across the border. "There's an awful lot of smuggling going on, we reckon the UK exchequer is losing around £200m per annum in excise duty and tax because of smuggling," said Tom Noonan, chief executive of Maxol. "They will come anywhere in a line down from Belfast for petrol."
Call up to any petrol station on the south side of the border and it is not uncommon to be stuck behind a line of eight or nine cars, many of which will have Northern registrations. The boon to South Border filling stations eases competition, which means that many stations in Donegal, Cavan and Monaghan and charging almost 70p for a litre of regular unleaded.
Of course this is disastrous for many Northern petrol retailers, and, according to McDonagh, many have reacted by smuggling petrol from the Republic. A year ago, smuggled petrol was only common along the border, but now, according to McDonagh, it is common to find smuggled petrol in Belfast garages. There is even a strong suspicion, he said, that some people are smuggling petrol on container ship from Northern Ireland to Britain. Five years ago about a billion litres of petrol were sold in Northern Ireland every year. Today only about 500m litres of petrol are sold in the North on the legitimate market. According to McDonagh, the problem is enforcement, and despite endless lobbying this is simply not a priority for the British government at the moment.
Those lobbying the British government have also made a case for special tax treatment for Northern Ireland, given that it is the only part of the UK which shares a border with another country. Immediate action is not expected.
It is perhaps surprising that petrol prices in Ireland are so competitive when, according to Faughnan, the Irish consumer is generally anything but price conscious. "If you offered a typical motorist standing on a forecourt a tenner to tell you the price of a litre of petrol, he probably wouldn't get it," said Faughnan. Part of the problem is that many consumers do not buy by the litre, but fill up with, say, £10 or £20 worth of petrol. He recommends that consumers buy their petrol by the litre so that they know what they're paying. Those looking to find the best prices in their area would so well to check out www.irishfuelprices.com, which relies on people logging on to report on petrol and diesel prices in their areas. Information on the site is deleted after two weeks, which means it is always reasonably up to date. "Personally, I would never pay more than 64.9p a litre for unleaded," said Declan Holmes, the man behind the site. He said that when prices do fall, the more competitive areas benefit first. "When there was a dramatic fall in VAT and crude oil prices fell it didn't happen simultaneously. It happened very quickly in Dublin and Cork, but very slowly in places like Cavan." On the other hand garage operators point out that how quickly they can lower the price depends on how much fuel they have in their tanks. "It always seems to happen just when you got a fill" said one Donegal garage owner.
If you are travelling on along journey the advice is fill up in cities rather than the country and fill on main roads rather than smaller routes.