For Big Oil, the new black gold could be coffee and chocolate.
Major European oil companies are ploughing billions into renewable energy under pressure from investors and governments alike to cut emissions, but are struggling to craft business plans that promise the returns shareholders have come to expect.
However, Europe’s big oil companies have another card to play which is their vast global filling station networks.
BP, Royal Dutch Shell and Total all say they bet on higher profits from grocery and snack sales on their retail networks, which in the electric era will still be an essential port of call for motorists.
It may only take a few minutes to pay at the pump to fill up with petrol, but even with the fastest electric vehicle (EV) chargers, customers would have to kill at least 10 to 15 minutes which is plenty of time to grab a coffee and do some shopping.
While big oil companies’ so-called marketing operations including retail sales of fuel, lubricants, groceries and dinners typically contribute a smaller slice of profits than the production of oil and gas, they typically have higher margins.
Oil companies are expanding into renewable energy and power businesses, but tend to have lower returns on investment, making it necessary for companies such as BP and Shell to find ways to maximize their total returns in low-carbon economies.
That is why, by 2025, Shell plans to increase its retail network by more than 20 percent to 55,000 locations worldwide. By 2030, BP plans to increase its filling station network by almost 50 percent to 29,000 and raise its EV charging network to 70,000 points.
Total, meanwhile, aims to expand its EV charging network in Europe from 18,000 now to 150,000 points by 2025.
Subway and McDonald’s, the two food chains based in Europe, also have fewer outlets than Shell. The world’s largest retailer by sales, US giant Walmart has 11,510 stores worldwide.
BP and Shell are also betting that regular interaction with tens of millions of customers will provide them with masses of information that they can use to tailor shoppers’ sales in small cities, towns, or even individual petrol stations around the world.
Lessons from the pandemic
Although there are relatively few electric cars on the road now during coronavirus lockdowns this year, oil companies have already had a glimpse of the potential of their retail networks.
As travel restrictions kicked in, fuel sales slumped, but people still nipped into nearby gas stations with convenience stores to stock up on everyday necessities.
In fact, in the three months to September 30, Shell’s retail division, known as “marketing,” which has the world’s largest filling station network, had its best quarter on record, taking in $1.6 billion in adjusted earnings.
So far in 2020, Shell’s marketing division has contributed 60 percent of its overall earnings, which are traditionally dominated by its upstream oil and integrated gas businesses.
Huibert Vigeveno, Shell’s head of refining, chemicals and marketing, said the company holds a daily call to check on customer preferences for anything from engine oil to croissants so it can constantly adapt.
“Having 45,000 retail sites over more than 80 countries allowed us to learn very fast,” he said. “It started in January, when we saw what was happening in China and how consumers were behaving. And we shared that immediately with all the 80 countries in which we operate.”
Decent sales of premium fuels, which have higher margins and lubricants, also aided Shell’s marketing profits.
During the pandemic months, BP and Total both benefited from a raise in their retail divisions, helping to resolve revenue shortfalls from lower fuel sales and enhancing their plans to quickly grow into convenience stores and EV charging.
“We saw during the pandemic people shopping online and topping up in local stores like ours, but it’s a long-term trend, too,” said Emma Delaney, BP head of customers and products.
Total’s Chief Financial Officer Jean-Pierre Sbraire told investors in October that retail sales in Europe were back at pre-pandemic levels in the third quarter, even though fuel sales remained very weak.
Since 2015, BP’s profit margins from convenience stores have grown 8 percent a year, producing a gross margin of more than $1 billion in 2019, a figure the company expects to more than double by 2030.
BP’s return on investment or the return on average capital employed at its convenience and mobility business, which includes sales of fuel and lubricants as well as its stores, was more than 20 percent in 2019.
In its marketing segment, which includes retail, business-to-business fuel sales and lubricants, Shell has had a return on investment of over 20 percent and expects the company to expand by 6 percent to 7 percent a year until 2025 and beyond.
Return on investment
Return on investment has been in the spotlight after oil companies such as BP revealed this year that they are preparing to slash their output of fossil energy and invest more heavily in low-carbon energy sources such as wind and solar power.
Shell is now looking to accelerate its move to low-carbon energy and is expected to announce its long-term transition plan in February next year.
Although large oil companies usually seek a return on oil investments of about 15 percent, it is predicted that returns on low-carbon electricity will be much lower and investors wonder how they will adjust to the new normal.
When it comes to retail, fuel sales already produce lower profit margins than convenience stores sales, which are often in partnership with well-known grocery brands, and that’s one of the reasons for the push into areas dominated by supermarkets.
“Redefining convenience is about much more than fuel. Sure, convenient fuel payment via our app works, but customers on the go want much more than fuel. And so we bake pastries, brew coffee, package deliveries for customers,” Ms. Delaney said.
BP works closely in Britain with Marks & Spencer, while Shell has a collaboration to offer a variety of deli food with British celebrity chef Jamie Oliver. In the United States, BP has partnered up with food and drink outlet ampm.
During the months of the pandemic, convenience sales at hundreds of sites were also helped by deliveries to homes using online apps such as Deliveroo and Uber Eats, Mr. Vigeveno said.
BP estimates that more than half the customers who visit Marks & Spencer at its filling stations come for convenience shopping only. Shell’s Mr. Vigeveno, meanwhile, said half of their sales in northwest Europe were non-fuel.
Even with a retail push, fierce competition among power companies, supermarket giants such as Tesco in Britain or Carrefour in France and new entrants in the EV charging sector could also narrow profit margins in the future.
Possibilities of data
And with oil consumption possibly already near its peak, energy companies will need to radically rethink their retail businesses to keep making money.
BP aims to double the daily number of “customer touchpoints” in its retail business over the next decade to 20 million while Shell is aiming for 40 million by 2025 from 30 million now.
“Retail is the only thing in the oil and gas value chain that gets you closer to the customer. If you want to have insight into the future trends of mobility, energy transition and so on, that’s the only thing that can get you data,” Rubeis said. “Customer data is the new oil.”