Moneyweb
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4 minute read
15 Nov 2018
7:52 am

‘Capping fuel price could sink industry transformation’

Moneyweb

No room for discounts in fuel retail – PetroConnect.

Picture: Moneyweb

Capping the price of 93 octane unleaded petrol (ULP93) will kill new entrants in the fuel retail sector and has little potential to benefit consumers.

If government really wants to make a difference, it should rather target the margin of oil companies or the fat chunk of taxes and levies government itself has piled onto fuel prices.

This is the warning issued by Sbonelo Mbatha and Mark Harper, co-founders of PetroConnect, a company that assists new entrants to purchase and run filling stations through among other things their PetroConnect Academy.

Read: From petrol attendant to co-owner

Mbatha and Harper were responding to a Department of Energy proposal that the price of 93 octane be deregulated and capped to allow for price competition, as is already the case with diesel.

That would mean that of the three main products sold at filling stations only the price of 95 octane would still be completely regulated.

The proposal is aimed at alleviating the plight of consumers who have been struggling to keep up with rising fuel prices. Government used funds in the Slate Levy Trust Fund to absorb some of the increase in August, but that was unsustainable and was recovered from consumers in October, gobbling up the price decrease that was expected.

The Fuel Retailers Association, representing more than 2 500 fuel retailers, also expressed its concern about the impact of the proposed deregulation and capping of ULP93 on its members.

Mbatha explains that in the current ULP93 price structure, 61% goes to the oil companies, 32% to government in the form of levies and taxes, and only 7% is allocated to the retailer.

Mbatha questions why government’s proposal is only targeting the 7% retail margin and ignoring any possibility of adjustments to the rest of the fuel price.

He points out that the 7% retail margin is, in fact, the retailer’s gross revenue. After covering operational expenses, the real margin upon which discounts could be considered is only about 0.8% or, at current pricing levels, 14c.

“It would be ludicrous to think that consumers will feel any difference in their pockets whatsoever if what retailers have to play with is 0.8% of the total price per litre,” he says.

From the retailer’s point of view there is no room to manoeuvre to give discounts, he says. “We agree that the government should consider means to offer relief to consumers. However, to put that onus on small business owners who are critical to economic sustainability in our country is counter-intuitive to stimulating small business growth.”

Mbatha adds that fuel retailers have traditionally been well established businesses with owners who have been in the industry for years.

New entrants vulnerable

With a new transformation charter being imminent this is changing, and inexperienced and highly geared new entrants will be extremely vulnerable if the department’s proposal is implemented.

Mbatha points out that the deregulated diesel price has led to big truck stops completely undercutting small entrepreneurs. The entrepreneurs cannot compete with the large players on price and merely sell diesel as a service to their customers.

The same will happen with ULP93 if that price is also deregulated and retailers will be unable to make any profit on 50% of their volumes (diesel and ULP93).

Mbatha says new entrants must be given assurance that there will be a return on their investment. Most of them are not sophisticated with regard to costing and financial management. He fears that many might, with the gross margin in mind, decide to grant discounts on ULP93 in an effort to grow sales volumes.

This will backfire and the highly geared new entrants, in particular, would be unlikely to survive.

This will favour those retailers without debt and undermine the transformation of the industry, Mbatha says.

“If capping comes into effect, the first thing most fuel retailers would probably need to do to ready themselves for a price war is cut jobs. There are no other areas when looking at reducing operational expenditure, where retailers can cut their prices to accommodate the competition that government is hoping will ensue,” Mbatha says.

“If every one of the approximately 5 000 service stations in South Africa had to cut an average of four jobs, then the industry is looking at a potential loss of 20 000 critical employment opportunities,” he adds.”Existing small business owners, which constitute the majority of fuel retailers in South Africa, will start considering closing shop. It will become unsustainable for them to continue operating a profitable service station in what is already a highly challenging sector.”

Read: How the fuel price has been politicised

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