Freehold forecourt deals fuelled growth in top end pricing but the largest number of deals happened in the leasehold dominated convenience sector. All eyes are on convenience in 2018 to drive increased profitability and a new world of innovation.
Petrol filling stations
The forecourt market continues to evolve and bloom, delivering consistent growth over the past three years. For some owners, the value of their forecourt is the highest they’ve seen. Some took advantage of increased demand from a wide pool of buyers and this meant prices achieved last year were consistently strong, and this is likely to continue this year.
This is largely the result of strong trading fundamentals supported by year on year growth shown in trading records. Good quality on-site property, healthy fuel margins and burgeoning convenience operations all combine to make forecourts an attractive proposition, especially in the current low interest rate environment.
Of the 8,459 UK petrol stations 68% are now in the hands of independent dealers and the top five groups own 28% between them. The largest operators by volume remain the supermarkets, which sell on average around 11 million litres of fuel per site.
We expect both companies to dispose of their remaining assets that do not fit core strategy, but only where there is a strategic reason such as a lucrative supply deal or a mutually agreeable swap. Private equity houses have invested in three of the five biggest groups in recent years and they have grown further by acquiring other independents which has fuelled group deal activity. High volume single site deals were also a significant feature of 2017 as those owners that tested the water were pleasantly surprised by the prices achieved, usually after competitive bidding. It remains to be seen whether 2018 will follow suit but there appears to be no let-up in appetite for such sites.
The announcement in July that the Government is committed to banning the sale of all new diesel and petrol cars by 2040 is unlikely to have any short-term impact, although it may cause those 24% of landlords who have a long-term lease in place to look more closely at the future of their investment. If they decide to diversify their risk, we could see a significant number of PFS investment deals come to market.
With comparatively low margins on fuel, many operators are focussed on expanding their retail business to attract more customers into the shop. Last year the total value of forecourt convenience sales was around £4bn.
Around 3,500 petrol stations now have a symbol branded or national chain convenience store and many now also have branded food to go operations such as Subway, Greggs and various well-known coffee brands. This is very much seen as the long term solution to the inevitable decline in fuel sales that will come on the back of alternative fuelled vehicles.
On the technology side, we expect to see a growing number of apps, such as those recently introduced by Shell and BP that allow customers to pay for fuel in advance, as well as a rollout of Wi-Fi and more electric charging points. Getting the forecourt mix right and offering a better experience will bring more customers who are likely to dwell longer and spend more.
The convenience retail sector saw massive changes in 2017. The major grocers sought alternative routes to income to combat the continued rise of new Aldi and Lidl openings, along with the growth of online shopping.In January 2017, Tesco announced its proposed merger with Booker Group. This consolidation of the largest grocery retailer and largest retail wholesaler received approval from the Competition and Markets Authority in mid November 2017.
It is too early to say what direct impact this will have on the retailers supplied by Booker, but many hope the added buying power of the newly created wholesale behemoth will somehow help them mitigate rising operating costs with better buying terms.
Some have tried to tackle falling market share by boosting their convenience credentials, some looked to expand their presence in forecourts through franchising, while others sought out a new direct channel to market through independent retailers.
Retailers will continue to have to innovate what they sell to combat the higher overheads that are coming as a result of the National Living Wage and inflation – particularly in the food market. Food-to-go is now growing 16 times faster than grocery, and expected to account for £21.7bn in sales in the UK by 2021. M&S Simply Food and Little Waitrose have both been at the forefront of harnessing this trend. The success of retailers such as Eat 17, an award-winning independently owned group that effectively fuses dining and food shopping, is likely to encourage others to evolve the convenience model. Indeed, exactly this type of concept would be welcomed in our rapidly changing town centres, where retail is being replaced by residential properties.