Not just any petrol station: BP taps the M&S effect
Oil giant aims to copy UK food retail success abroad, says Emily Gosden
‘In a typical M&S [petrol station] site, more of the income comes from the shop’
AS one of the most senior executives at oil giant BP, Turkish-born Tufan Erginbilgic might not be expected to have a particular interest in the grocery shopping habits of the great British public.
It’s a misconception that Erginbilgic, head of BP’s “downstream” refining and marketing division, is used to hearing when he brings potential business partners to the UK – to show off the company’s expertise selling Marks & Spencer’s sandwiches and ready meals. “Some of them are saying, ‘aren’t you an oil company’?”
BP and M&S formed a partnership in 2004, opening their first M&S Simply Food petrol station store a year later by the Hammersmith Flyover.
Since then, they have steadily expanded to 248 UK forecourt shops and counting. It is a business model BP is now increasingly looking to replicate overseas.
BP’s downstream division typically gets less attention than the upstream arm, with its high-stakes exploratory drilling and blockbuster projects – not to mention spills and lawsuits.
Downstream is no less important to the company, however, and in 2015 brought in $7.1bn profits, as the oil price crash sent upstream into the red.
Results for the first nine months of 2016 showed a fall in downstream profits due to a collapse in industry refining margins, but this was partly offset by an “increased retail performance” from BP’s global empire of 17,200 petrol stations.
And that, BP says, is a key benefit of the marketing arm: it is broadly insulated from the kind of volatility that has hit refining and upstream, offering “reliable profit and cash flows”.
The company won’t split out precise forecourt earnings, but told analysts this summer that it had made about $2bn from “fuels marketing” – which also includes aviation fuel – over the previous 12 months, with retail “the most material element”.
Profits are up 35pc since 2013 thanks to higher sales in growth markets, and “strong convenience retail partnerships”.
Deals with the likes of M&S might sound like a fluffy adjunct to the serious business of petrol retailing. But Erginbilgic says selling food can actually be more lucrative than selling fuel.
“In a typical M&S site, more of the income comes from the shop,” he says.
BP operates the M&S stores itself, earning an undisclosed share of the profits on goods sold.
“The oil company, because it’s producing a lot of footfall, is probably going to take most of the margin,” says Iain Reid at Macquarie. “It’s a large part of the profitability of a forecourt – about 60pc,” he says.
While M&S is responsible for selecting its product range, it’s BP that employs the 6,200 staff who work at the shops. BP also bolsters sales by selecting other branded goods to sell, and offering hot food and drinks through its Wild Bean Café.
“Customers really like this offer,” says Erginbilgic. “If you look at customer preferences today in a hectic world, they want easy, they want speed, quality and range. Normally in a traditional [site], without an interesting shop, most customers come for fuel, they may buy some candies, this and that. But in this kind of [M&S] store we get a significant number of shoponly customers – 40-50pc.”
The idea of convenience stores at UK petrol stations is not new, but it’s only over the past decade or so that tie-ups with big grocery retailers have really taken off. ExxonMobil’s Esso now has about 200 sites with a Tesco Express, while Shell launched with Waitrose in 2011. Erginbilgic says there is significant scope for “differentiation” in picking the right partner and offering.
Though he won’t disclose the figures, he says BP’s analysis of industry rivals shows that “typically, M&S- BP sites’ income tends to be higher”.
The M&S roll-out continues apace: “By the end of next year, maybe early 2018, we will have 300 stores,” Erginbilgic says – almost all of the UK sites that BP owns and operates. The other 900 BP-brand sites are franchisees, which complicates the situation, but he says: “We are not going to stop at 300.”
The company is also busy exporting the concept overseas. In Germany, where BP operates under the Aral brand, it signed a deal in March with retail giant REWE for a “fast rollout” of their stores on up to 1,000 of its sites. “There is no other company in Germany in the petrol sector doing this. The [convenience store] concept is very new for Germany,” Erginbilgic says. “In many countries, we have been the first one doing this.
“When we want to have a deal with a partner we bring them to the UK, for them to see BP’s capability.”
There are partnerships in Spain, Portugal, South Africa and Austria, and trials under way in the Netherlands.
BP is also in talks with possible partners in three more countries, which could include the US, where the company has 7,000 branded but franchise-operated forecourts.
“It is a global strategy,” he says. “The more we roll out, the more differentiated our offer will be – and earnings will obviously grow.”