Monday 26 September 2016

The verdict from the forecourts

The sale of Topaz, Ireland's largest fuel retailer, will speed the transition on forecourts from pumps to convenience retailing, writes Dan White

Published 06/12/2015 | 02:30

Brian Hannasch, President and Chief Executive Officer of Alimentation Couche-Tard and Emmet O’Neill, Chief Executive, Topaz, at last Wednesday’s announcement
Brian Hannasch, President and Chief Executive Officer of Alimentation Couche-Tard and Emmet O’Neill, Chief Executive, Topaz, at last Wednesday’s announcement

on Wednesday Canadian firm Couche-Tard announced that it was buying Topaz, Ireland's largest fuel retailer. The acquisition by Couche-Tard comes less than two months after the Competition and Consumer Protection Commission approved Topaz's purchase of Esso's Irish fuel retailing operation.

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Following the Esso acquisition, Topaz was the undisputed leader in Irish fuel retailing, with a one-third market share.

The price being paid by Couche-Tard for Topaz hasn't been disclosed but is reputed to have been in the region of €450m.

That looks like a good deal for Denis O'Brien, who gained control of Topaz two years ago when he acquired its €300m of debts from the IBRC liquidators for about 50 cent in the euro. Investment since, and Topaz's current debts, which would be included in the new valuation, make the return on that investment difficult to calculate, but it is likely to have been substantial.

For Couche-Tard, the deal gains it entry to a dynamic sector in Ireland.

This year's flotation of Applegreen, Topaz's takeover of Esso and the latest takeover all serve to highlight the evolution of forecourt retailing in recent years. These days, it's no longer just about selling petrol and diesel.

It's not difficult to see why. On Friday Brent Crude was trading at about $43.50 a barrel. Add in excise duty of 58.7 cent for a litre of petrol and 47.9 cent for a litre of diesel. Then there is VAT of 24.5 cent on a litre of petrol and 22.3 cent for diesel, based on the average AA fuel prices of 131.2 cent for a litre of petrol and 119.4 for diesel. This leaves only 23 cent a litre for petrol and 24 cent for diesel to cover refining, transport, storage and retailing.

No one is going to get fat on those sort of margins.

With margins on petrol and diesel being razor-thin, the fuel retailers are increasingly using their forecourts to sell us other stuff as well. In recent years, they have come to realise that their forecourts, many of which have prime locations, are ideally suited for convenience retailing.

Applegreen, which floated on the Dublin and London Stock Exchanges in June, illustrates just how far forecourt operators have evolved from traditional fuel retailing in recent years. It had total sales of €517m for the six months to the end of June. Fuel accounted for €423m or almost 82pc of these sales.

However, when one looks at Applegreen's gross profits, a very, very different picture emerge, with fuel accounting for €21m, or just 37pc, of the total gross profits of almost €57m. The big contributors to Applegreen's gross profits were food and store sales, with a combined contribution of almost €36m. The sales/profits distribution is understood to be similar at Topaz.

Look at it another way. Applegreen is generating 63pc of its gross profits from just 18pc of its sales. Go onto any forecourt today and the motorist will be confronted by coffee docks, burger joints, sandwich bars, newsagents, off-licences and tobacconists.

Applegreen has Burger King, Subway and Costa outlets on some of its forecourts, while Topaz has its Re.Store and Express forecourt shops.

"We try to make better use of our locations," says Applegreen chief financial officer Paul Lynch. "We try to create an environment with offers and propositions in areas such as food, where we have the opportunity to make more money."

Applegreen is increasingly expanding into convenience retailing. It now offers customers own-brand milk, eggs and sausages.

"As we grow and upgrade our facilities the proportion of non-fuel sales will grow", says Mr Lynch.

The arrival of Couche-Tard in the Irish market will accelerate this trend away from fuel sales towards convenience retailing.

It is already the largest convenience store operator in Canada and operates the largest number of convenience stores in the United States. It also has operations in Scandinavia, Poland, the Baltic States and Russia.

Couche-Tard had total sales of $17.4bn for the 24 weeks to October 11, of which $12.2bn, or 70pc, came from fuel. However, as with Applegreen, the vast bulk of Couche-Tard's gross profits, $1.73bn or almost 59pc, were generated by non-fuel sales.

The company's self-description on its website says it all. "Couche-Tard is the leader in the Canadian convenience store industry," it tells readers.

Of its more than 8,000 convenience stores in North America, less than 6,600, or about 82pc, sell motor fuel. Couche-Tarde clearly sees itself as a convenience store operator first and a fuel retailer second.

Couche-Tard has already indicated that it will be retiring Topaz's existing Re.Store and Express retail formats and replacing them with its own Circle K convenience store brand instead. Given that it already operates Statoil-branded stations in Scandinavia and Eastern Europe will the Topaz name go the same way?

Even if the Topaz brand survive, it is already clear that Couche-Tard will take the evolution of Irish forecourt retailing to the next level. For forecourt operators, fuel retailing will contribute an ever-decreasing proportion of profits as they further refine their non-fuel retail offer.

In future, the forecourt operators will come to be seen more as convenience store groups, competing with the likes of BWG's Spar, Musgrave's Centra and the fast-food chains, rather than as traditional fuel retailers.

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