The role of private equity in the forecourt market
The forecourt industry is an exciting place to be right now. Whilst some external observers might see long term flatlining fuel volumes and the dramatic fall in site numbers over recent years as indicators of an industry in decline, it has certainly caught the eye of private equity for a number of good reasons:
Despite small steps towards electric vehicle ownership, petrol and diesel remain the dominant fuel source and are likely to do so for some time to come. Less than 3% of UK new vehicle registrations last year were for Alternative Fuel Vehicles and research shows that only 1% of prospective new owners will consider an AFV for their next purchase. So it seems things aren’t likely to change any time soon.
Most of the UK population does not see car ownership as a luxury but rather a basic requirement for modern living. Therefore, the purchase of fuel is seen as a necessity rather than a discretionary spend.
Forecourts are conveniently located so they are well placed to take advantage of growth in convenience retail sales which continues at 5% year on year.
Convenience retailing has become such a vital part of the forecourt industry…. Or is it the other way around? The forecourt industry has become an important part of the convenience sector.
17% of all convenience stores are forecourts and they account for around 11% or 4.1billion pounds of all convenience sales.
Lenders and investors are looking for new places to put their money. Forecourts are seen as a relatively untapped alternative investment with attractive returns. At Christie & Co we have seen private equity enter a number of our specialist sectors which could be termed ‘alternative markets’.
Private equity views the predominance of freehold ownership as attractive because asset backed investments tend to provide an ‘emergency exit’ underpinned by real estate values if all else fails.
The oil companies’ orderly retreat from retailing is recognition that they are good at finding, refining and supplying fuel; and retailers are good at operating sites. Whilst the majority of company sites have been divested there remains an opportunity to acquire further sites from Shell and BP.
Forecourts lend themselves well to diverse income streams with sales from fuel, shop, valeting and food to go. However this line of business still remains relatively untapped and we should expect to see further retail innovation and brand partnering across the UK portfolio.
There is an exit strategy for private equity via the City. Alternatively, once income streams are stable and the lot size is at a significant enough level, securitisation becomes a possibility to raise further funds for onward acquisitions.