Interview: 'Applegreen's forecourts foresight'
Applegreen helped transform the service station sector. Co-founder Joe Barrett tells Fearghal O'Connor it is not slowing down its drive
For Joe Barrett it was always a logical decision for Applegreen to be a food company first and a fuel company second: "You might stop for fuel once a week, but you've to eat a few times every day," he says. The plan worked. Last month the company said it had hit €2bn in annual sales. It now has 11,000 staff - close to 5,000 of them in Ireland. Since going public in 2015, it has more than doubled in size and - if its growth path continues - industry observers expect that it will do so again.
"Growth is in our DNA. There are great opportunities and we have no lack of ambition," says Barrett, Applegreen's chief operating officer.
This growth has come at a time when the overall service station market is contracting.
"What you will see is a smaller number of bigger sites with more offers for customers," he says.
In the UK the market has fallen - from 12,500 stations to 8,500 in 20 years. When Applegreen started there were as many as 3,000 stations in Ireland. That's now down to about 1,200 - almost 200 of which are Applegreen's.
"It's a natural evolution in the industry. As electric cars come into play and as car engines become more efficient there is a requirement for less service stations. I think you will find a natural cull of smaller sites that have an alternative use over the next five to 10 years," he said.
Applegreen, of course, has been one of the main drivers and beneficiaries of the change, not least because of the foresight of Barrett and his business partner, Bob Etchingham.
"It was a tough business," says Barrett. "Our roots were in the dealer business and we knew that the margins on fuel were very low so we got into food at an early stage."
Barrett first worked with Etchingham at Blu Gas in the bottled gas market in the early 1990s. Etchingham was CEO and Barrett was its first employee. It was subsequently sold to Calor and in 1992 Etchingham bought Dublin-based service stations in Sarsfield Road in Inchicore and near Lusk.
"He asked me did I want to come on board and I said yes... if I could get a shareholding. That was nearly 27 years ago. So we're together nearly longer than most marriages."
Even at an early stage the company was looking to innovate. Barrett helped develop push-button coffee machines with Patrick Bewley, for example. These days the company has more than 500 food partnerships with many of the world's biggest food-to-go brands. But finding a brand to fit a changing world was also key.
Indeed, Applegreen was very nearly something else entirely. Designers had already started working on the name favoured by a team of brand specialists: Horizon. "Bob was a stone in the shoe. He wasn't happy. It wasn't aspirational enough. Then Bob's daughter voiced the idea at the dinner table that we should call it Apple."
Apple, of course, had already been taken but the dinner table chat sparked the end result.
"Timing is everything in life and the green revolution hadn't quite kicked off, but we were in the right place at the right time doing the right sort of things," says Barrett.
Applegreen's growth in Ireland - where it is now the second biggest player after Circle K with 18pc market share - has been phenomenal. But well over half of its now 472 sites are outside of Ireland. It moved into the UK in 2006 and over the following decade expanded to 120 stations.
"We hadn't a huge problem with over-paying for properties. It was a good position and we enjoyed our expansion into the UK," says Barrett.
The company has also just completed the €362m acquisition of Welcome Break that it announced last August, adding 36 large motorway sites to its British portfolio. Those sites include 29 hotels at motorway stops with a 30th due to open this week, with 2,000 beds in total.
There has been speculation that Applegreen could look to offload the hotels but Barrett says the company is in the middle of an assessment of that business: "there will be no quick-rush decisions."
Hotels - based on sales, margins and costs - is not as dissimilar to the core motorway services product as might seem at first glance, he says.
"It's a relatively small, tight business with an existing management team in place. It's a three-star or four-star market. It's beds with a light amount of food. They are not the big, entertaining five-star hotels. It's a different market. We're not doing weddings. I met a friend of mine recently who owns a hotel in Waterford and he was delighted to have a wedding, a funeral and a communion all on the same day. That's not us."
Five years ago last week the company moved into the US, acquiring two sites on Long Island.
"We now have 121 sites in America and I spend a week a month over there," he says.
It has 21 sites in the northeast, 50 sites in South Carolina - including 19 Burger Kings and five Subways - and 43 sites in Florida, close to Tallahassee. "We expand in little clusters. We like the east coast. In terms of flights over and back it is relatively easy to commute to those locations."
Barrett puts the size of the opportunity for Applegreen in its three different territories into context: Ireland has about 1,800 service stations in total; in UK, 8,500. But it is perhaps the US - where there are 125,000 service stations - that presents the biggest opportunity for expansion.
"On that metric alone, the amount of opportunities that are over there are huge. The size of the population, the distances they travel, the number of cars on the road… there is plenty of opportunity. But our motto is to take our time. Get to know the market before you expand so that if you make mistakes they are only small mistakes," he says.
About €50m goes on capital spending each year, with plans now for four big motorway sites in the UK and the building out of a further six sites in the northeastern US. "Over the next 12 months we will bed down the Welcome Break acquisition, getting the synergies and driving on that business. But in the next two to three years I would definitely see us with the appetite for other opportunities."
This drive for expansion and growth is fuelled by the company's access to capital from the markets. When the brand - with its distinctive service stations and large food offerings - started to pop up around Ireland's expanding motorway network, the timing was ideal. Irish consumer habits were in the middle of a huge change that meant more and more people were on the road and happy to spend money on food-to-go and coffee.
"We had expanded over the years with bank debt, funding site by site. It proved very effective."
But when recession hit and banks looked to businesses like Applegreen to refinance and change banking terms, Barrett and Etchingham decided they no longer wanted heavy bank debt.
They faced a choice: "There were three ways we could go. One was to sell the business. One was to bring in private equity or other investors and another choice was to go public. We didn't want to sell the business because we like what we do."
So in June 2015 the company went public, raising €91.7m. The pair now own just over 40pc, with senior staff owning shares and the remainder owned by large pension funds and other investors.
"The limiting factor for us in the first 10 years of our existence was trying to get sites, the second 10 years it was access to capital and funding to buy the sites. And now really the next 10 years is trying to get good people to help us grow. The opportunities are there and the money is there."
The markets have continued to support the company's growth plans: "They like the fact that we are spread across three different countries and that we have a big food presence."
The main concern that investors raise with the company, says Barrett, is the electric car.
"Electric cars are coming. There will be a tipping point. But I'm changing my car soon and I am going to get a hybrid car. I've tried an electric and it was a disaster. In Dublin it was lovely, but I drove to Belfast in a Tesla S and I had to stop twice - once on the way up and once on the way back - to recharge. So range anxiety is still an issue."
The company is building the electric car and other technologies into its future plans. Welcome Break operates 50pc of the Tesla chargers in the UK and it operates the first hydrogen pump in New York state. But, he says, increasing fuel efficiency and additives in fuel means there is still plenty of life left in hybrid and even diesel.
"The other thing to remember in terms of the carbon footprint is that the vast majority of electric is being produced by carbon emitting power stations. So it's not straightforward."
One way or another Barrett knows that drivers will always need a comfortable place to stop for food, rest, toilets, petrol or an electric charge. Other retailers away from the booming service station market are, of course, less sanguine about the future. In his other role as the new chairman of Retail Excellence Ireland, Barrett is aware of the challenges. "There's a lot of difficulties in other parts of the retail market. The cost of operating retail businesses is very high. In Ireland we have very high rent, very high rates, very high insurance.
"Wage costs are escalating on an annual basis and competition is increasing so margins are getting squeezed. You have to keep reinventing yourself and keep costs tight."
Brexit does not present a direct challenge to Applegreen because it is not dependent on imports and exports in the Irish or UK market. "However we are hugely impacted by customer confidence. Anything that hits retail. Look at the devastation that has caused on the UK High Street."
Applegreen's motorway-based UK operation has remained "strong and robust", he says, because it is in the travel sector: "Because of the fear factor people are keeping their hands in their pockets and the big buzz word in the UK now is 'staycation'. That is going to be very beneficial to our business. Every cloud has a silver lining as they say."
For anyone who has followed the rise of Barrett and Etchingham, it will not be too surprising to see even where others are contracting or retreating in fear, Applegreen is powering ahead.
Name: Joe Barrett
Position: Co-founder and chief operating officer, Applegreen PLC, Chairman, Retail Ireland Excellence
Education: BComm, UCD; MBA, UCD
Family: Married to Natalie with three children, Gavin (22), Amy (20) and Grace (16)
Pastimes: Fitness, golf, weekends away and family time
Business inspiration: Ryanair, CRH, Kerry Group and Glanbia
Favourite holiday destination: Being with friends and family, and ski holidays
What is your favourite piece of business advice?
“Every tub on its own bottom”, it’s important to mind the pennies.
What key lesson have you learned over your career?
Keep striving to improve. Respect all your customers and colleagues.
What makes you proud about the business you helped start?
In 2009 we started our own Applegreen charity fund. We give 1 cent per transaction to charity. From that we have raised a fund of over €3m over the last ten years. All of us and the staff all get involved in cake sales, sponsored runs and all sorts too. On average we are now raising over €750,000 a year. We have an internal charity committee that every two years selects partners of choice and we work closely with them to give something back to our community, for example the Irish Youth Foundation. Children are the core theme for all of our charities because most of us are parents or aunties and uncles and when I look at our customer base the common theme is children.
Sunday Indo Business