Money Growing: Gasoline Retail

In the opinion of experts, such terra incognita for retail is Russian gas stations, through which millions of people pass on a regular basis. All motorists are potential clients and buyers of many non-profile goods of gas stations, however they usually leave gas stations empty handed.

"A substantial, if not overwhelming part of the profit from a gas station should be generated from the sale of additional services and goods. All over the world there is a category of real estate called transit or transport real estate,” says Ilya Shershnev, director of development at Swiss Realty Group.

According to vice president and sales manager at Torgovy Kvartal Elza Rosental, a shop at a gas station automatically transforms a simple gas station into a multipurpose refueling complex. "Theoretically, buyers at a gas station need only gasoline. However by observing certain technologies of laying out goods, price formation and marketing it is possible to stimulate impulse purchases very skillfully," the expert says.

Here is not there

The first time gas stations were used as a retail point was in the West where now such practice has become quite usual business. "For gas stations in Europe the sale of food stuffs and accompanying goods has been a separate point of income for a long time, making greater profit than the sale of fuel. At the moment the ratio of income is approximately 60 per cent and 40 per cent accordingly,” Rosental says. In the western market the retail segment at gas stations is developed. According to her, such shops at some point are visited by 61 per cent of the population, and almost 30 per cent go there on a regular basis. In megacities this parameter reaches up to 40 per cent. For example, Rosental continues, in 2002 in the UK, 11,000 shops operated at gas stations and their turnover was almost 2.5 billion pounds sterling.

Market participants name 24/7 operations as an extra stimulus in attracting people to gas stations: after all nearby shops have closed, a gas station starts to work as a high-grade supermarket. "There is always a big flow of constant clients with a long operating time. The location is important especially if it is on a highway where, apart from a gas station, there are no other places to stop. It is always convenient for people to stop, have a snack, buy something and continue their journey. It is important, in connection to this, to consider prices in the given location and the target audience: truck drivers, taxi drivers, mini buses, local residents, etc.,” Roman Sokov, director of the consulting department at Becar Commercial Property Moscow, says.

According to Alexei Averyanov, general director of Vesco Consulting, the retail format of gas stations in European countries has been in demand for 10 years already and is now experiencing another boom.

"In recent time there has been a trend for retail trade operators to develop chains of gas stations and even use dumping, with the purpose of attracting buyers,” he says.

However in Russia everything is a little different. "In Russia the concept of combining the sale of fuel and retail trade of food products and other goods started to develop only several years ago. BP was a pioneer in this area. Tatneft, TNK, Yukos and Lukoil have joined the bandwagon,” Rosental says.

For example, according to data based on 2001, in Moscow of 650 gas stations only 140 of them had shops. More recent data has not been published, but experts are assured, that now this parameter has grown considerably, however it does not yet prove significant growth of the gas station retail segment.

"Retail in this case is practically always a secondary business which generates no more than 20 per cent of the income of a gas station. First of all this is connected with the developed model of consumer behavior in Russia - here it is not common to make large purchases at gas stations. Accordingly, the average bill is insignificant, and is not offset even by larger flows of consumers. However, even 15-20 per cent is quite a good increase to proceeds and makes the development of retail premises attractive for investments,” Sergei Filchenkov, an analyst at investment company Finam, notes.

According to Rosental, in Russia because of the high retail margin on fuel, the sale of other products does not make as much profit as the sale of gasoline. "The retail margin in shops at gas stations is more than 50 per cent. The profitable part of such shops is small in comparison with the expenses on realizing the project, and also with problems connected to maintaining the effective operation of the shop. Therefore only chain projects are successful in this segment, she adds.

What is on sale?

In the opinion of experts, in Russia certain standard conceptions of what is necessary to sell at gas stations has already been developed. Rosental says that shops at gas stations have a specific assortment which differs from the assortment at "walking distance" shops. "The area of such shops is usually 150-200 sq.m. There are practically no stockrooms and the assortment can be divided into several segments: goods of impulse demand, goods for cars and foodstuffs.

Sometimes there might be flowers and lottery tickets on sale, and beauty salons may also be located there. The most popular category of goods is snacks and drinks. Cosmetics and flowers are much less demanded. In addition a gas station can offer the services of a car service center, i.e. tire pumping or a car wash,” Rosental lists.

As Sokov notes, the following goods can also be bought at a gas station: brushes, windscreen cleaner, oil, retail goods, spark plugs, belts, etc.

According to Sergey Lobanov, director of the department for the management of assets at MIEL Commercial Real Estate, a shop with a few essential commodities (newspapers, drinks and so forth) attracts additional consumers that are not frightened by even a double margin on goods, it gives a basis to assume the economic expediency of the arrangement of such shops.

Some experts skeptically consider eating establishments at gas stations. "Bars or cafes are excessive. You rarely come across them, as a rule, in places where except for a gasoline station there are small service centers or carwashes. To build such premises within the structure of a usual gas station is unprofitable,” Averyanov considers.

Expanding the number of services provided at gas stations, in Sergey Lobanov's opinion, basically, is not necessary. "The mentality of Russian citizens does not assume the fulfillment of all purchases at a gas station,” he considers.

However, according to Shershnev, "what makes money - cannot be superfluous. Although in conditions of limited space only the most marketable goods should be on sale at gas stations.

A union of convenience

According to Filchenkov, proprietors of gas stations are rarely engaged in retail - shops and restaurants belong to them only in 40 per cent of cases. "Retail and public catering are complex enterprises that demand special knowledge and constant control. The majority of owners of gas stations prefer a rental model,” he explains. However such premises in most cases do not come onto the open market, and brokers do not know about them. According to Shershnev, many tenants would be interested in premises at gas stations, but for owners it is more profitable to organize retail independently, with a small modification: "They should be capable of doing it effectively.”

Because of the inability of large chains of gas station to adjust to retail work, professional trading operators try to create unions with gas station owners. As usual, practice makes perfect. "In 2002, Yukos bought a controlling stake in Kopeika to develop a supermarket chain with areas from 500 sq.m combined with a gas station,” Rosental says. However the project didn’t work.

Then, according to her, in 2006, Paterson negotiated with Tatneft over opening its shops at gas stations, but as the parties did not come to an agreement, the deal was been concluded. Now the Bakhetle chain is planning to create a retail chain on the basis of Tatneft gas stations. An agreement was signed in April 2007. According to the plan, the shops will have an area of almost 200 sq.m and will have a range of about 5,000 products, says Rosental.

"The construction of trading premises within the structure of gas stations is not widespread in the Russian market yet. Retail trade operators and owners of gas station chains are unable to realize such projects because of disagreements," Averyanov explains. As a result, the union of Russian gas stations with large retailers cannot be called successful, and shopping and restaurant premises on gas stations are either bought by smaller operators, or remain under the control of the owner of the gas station. Although, according to Filchenkov, on rented premises at gas stations Spar Express shops, the shops of some other chains and numerous independent stores are being opened.

"Far from all chains rent shopping and restaurant premises, and not all gas stations build chains," Sokov says.

Experts name the absence of uniform standards as one distinctive feature of the Russian retail segment at gas stations.

More often the standardization of service relates only to the main business of a gas station. "As far as chain operators like Lukoil, TNK-BP, etc, are concerned, they have uniform standards of service. Each chain has individual standards, but they always have a certain size gas station and a certain set of services such as tire pumping, vacuum cleaners and a carwash,” says Sokov.

Experts name BP, which created the BP Connect chain that provides additional services at gas stations, as the most successful independent player of this segment of the market. "BP gas stations, which are well represented in the Moscow and Moscow suburbs market, have a uniform style. As a rule, on their territory at all stations there is a cafe, cash machine and retail shop," says Lobanov.

“In the West, for example, quite often a strategic partner of a gas station chain is a large shopping chain,” Filchenkov compares. However, according to Shershnev, it is not so smooth abroad either. "A BP gas station in London and one 100 miles from London have nothing in common from either a construction point of view, or from the point of view of the accompanying goods and services on sale. In Paris in the city center there are gas stations where 2-3 pumps are based on the sidewalk. In Switzerland many pumps already work without the participation of employees, gasoline is paid by card, and chewing gum is sold in an automatic machine,” he says.

A market with room for growth

Although the retail market at gas stations is not yet developed, and the union of large chains with retailers is developing with difficulty, experts predict huge growth of this segment. "The prospects are rather good, the turnover growth rate of the “retail at gas stations” segment will be not less than 40 per cent a year. However we will hardly reach European parameters where non-profile segments generate 50-60 per cent of the income of a gas station. Most likely in our country these figures will not exceed 30 per cent," says Filchenkov.

"The given segment is promising and profitable enough and if a shop at a gas station are located in a residential area, the supermarket, besides car owners, will attract buyers from nearby houses," Averyanov agrees.

However expansion of the segment, according to Sokov, will happen internally rather than externally, i.е. with the development of already existing gas stations. "To construct a gas station, it is necessary to find a place and get approval for all engineering communications and the location with the environment protection authorities. The cost of construction and development is always high - on average about $3 million. And shops and cafes are an accompanying service.

In Moscow this sphere is already extremely developed, therefore it is more profitable to build and develop such gas stations with additional options somewhere outside the city’s boundaries,” Sokov says.

Market participants name as a possible way of developing the segment the conclusion of sell and leaseback deals whereby the owners of gas stations sell them to other companies, and they become long-term tenants. This allows for funds frozen in real estate to be released, and directed on developing the business, including retail. On the other hand, in such cases, the present owner of the gas station can remain a tenant of only the gas station, and the shopping premises can be rented to another company.

It is necessary to note that such sale and leaseback deals are rather popular mainly in the retail real estate market. Therefore experts compare the potential for gas stations basically to the retail segment. "Such transactions are legally possible in the segment of gas stations, although they will be hardly realized, as nevertheless, gas stations are not retail premises,” says Lobanov.

Shershnev is also doubtful. "It is impossible to say with full confidence that such transactions will be interesting to owners of gas stations as often they belong to companies that are not interested in such ways of financing,” he says. “Though there could be many potential buyers," he adds.