FRA calls on government to address entry barriers to black fuel retailers
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DURBAN - THE FUEL Retailers Association of Southern Africa (FRA) has called on the Department of Mineral Resources and Energy (DMRE) to intervene and alleviate the plight of struggling black fuel retailers, warning that if the government failed to act, there would be no fuel retail sector left to transform.
The FRA also accused some major oil companies of continually allocating low-volume sites to black retailers.
Reggie Sibiya, the FRA’s chief executive, said in an interview with Business Report that the representation of black African retailers was set to fall below 20 percent, and the picture was worse for female representation. The situation would become even worse because of the financial fall-out from Covid-19.
The FRA said most black retailers acquired franchise agreements via large bank loans. In the first year of an agreement, which was typically between three and five years, they forfeited a substantial amount to loan repayments from the low, fixed cents per litre retail margin set by the DMRE.
Sibiya said that with a fixed cents per litre margin, service stations thrived only on volume pumped. This made it difficult for a low-volume service station to be profitable if the retailer had to service a loan and cover the increasing costs and claw-backs from the oil majors.
Sibiya said the profit margin, called the entrepreneurial compensation, was enough only to service the loan, so the indebted retailer had little left over to service other costs.
The FRA said the only hope for most new entrants was that when they got a second franchise agreement through a renewal they would have paid off most of the debt and started seeing a profit.
However, many black retailers didn’t make it that far. These retailers were either terminated before end of the term of the agreement or issued with non-renewal letters towards the end of the term, because the oil majors deemed them to be incompetent.
Sibiya said it was almost impossible for retailers to make a low-volume site profitable if they still had a bank loan to service.
“Worse is that oil majors were not investing in these sites as part of their investment strategies, whilst enjoying the return for investment and maintenance from every drop of fuel allocated in their margins.”
He said the 2011 audit on the implementation of the Liquid Fuels Charter found that the majority of black retailers were allocated “dog sites”, which, without further support structures, were a recipe for disaster.
The Petroleum and Liquid Fuels Charter Final Audit Report of 2011 compiled by Moloto Solutions on behalf of the DMRE found there was still a challenge of ensuring the equitable allocation of sites to historically disadvantaged South Africans.
Sibiya said the solution was to offer credit terms on product purchases and payments at low-volume sites, allowing black retailers to manage their cash flows effectively in the first tenure of the franchise agreements.
He also accused some companies of having introduced consignment stock in order to extract more from the retailer’s margin.
“By introducing consignment stock, they then claim back from the retailer margin the allocations for stock-handling costs, as they are now owners of that stock under the tanks instead of the retailer owning it by paying upfront for it,” he said.
Sibiya said that retailers who were served with breach letters or non-renewals were also expected to provide business plans of how they would increase their volumes. This was despite the reality that the sector had lost up to 80 percent of volume during the start of the lockdowns, with no support from either the government in the form of a special margin or some oil majors.
FRA said it predicted that by the time the sector was fully transformed, there would be no profit margin left for the transformed network if the DMRE did not address this.
“Of importance is that one cannot address transformation without taking into account all the required support structures as envisaged by the Liquid Fuels Charter, including proper margin allocation and protection to sustain the future of meaningful retailing businesses, SMMEs and job retention and creation,” said Sibiya.