Analyzing the Fuel Retail Sector During COVID-19

Q: What was Deloitte’s path of entry into Mexico’s downstream sector and its initial evaluation of the current landscape?

A: After the enactment of the Energy Reform, Mexico’s downstream sector went from one extreme of the spectrum to the other, from a completely closed market to a completely open one. Since then, the industry’s major players have developed a significant interest in this segment, either through the opening of new business lines within the commercialization subsector or through the desire to get involved in the industry’s value chain, such as distribution and storage. Some IOCs saw an opportunity to do business in this sector in Mexico. Deloitte began working with many international Oil companies and independent refiners on their strategies to expand their business and enter the country and to execute these strategies, as well as helping the national downstream companies to develop new business models and enter new markets. These shaped and developed the market up to the opening of the first non-PEMEX service stations a few years ago. We have been there for our clients since the inception with their entry strategy until the opening of their first service stations, and now supporting their expansion and business growth.

Q: What do you identify as the main areas of differentiation?        

A: We identify six general areas of differentiation. The first is customer experience. The second is loyalty programs, discounts and bonuses. The third is digital access. The fourth is the product, referred to as differentiated “molecule”, which refers to physical differences in various types of fuels and its additives. The fifth is what we call the binomial relationship between the service station and adjacent retail businesses. And finally, the sixth is the development of more disruptive lines of business. Each area plays a different role in our new normality as defined by COVID-19.

The first trend that we identify is a sharp drop in volume, defined by the current drop in mobility. Companies like Google, Apple and even Twitter have released publicly available studies on the average mobility habits of Mexico’s citizens. The conclusion from their results was that people in Mexico remained up to 20 percent more mobile than people in countries experiencing similar phases of COVID-19 shutdowns, such as Spain or Italy. Mobility numbers are not expected to reach anything close to their levels previous to COVID-19 until a vaccine or cure becomes publicly available. This will be a dominating factor in the market in the near future.

A drop in volume equals a significant impact on profit margins. We have advised our clients to develop a price management strategy as well as to have strict management of cash flows. A 30 percent difference between one service station and another on the same trade area can make a significantly greater difference in a consumer’s choice than it did before because consumers are becoming increasingly price-conscious due to the global economic crisis. There are price variations once fuel reaches its designated Storage and Distribution Terminal (TAR) that are defined by intrinsic supply costs. These costs are influenced by various factors that are specific to each region, such as source refineries and methods of distribution. These may be pipelines, rail lines or tank trucks, among others. All of these factors get added into the rack price. Service station operators have room to maneuver when it comes to price, given the spread between the rack price and the price at the pump. What this means is that operators have enough space in their profit margins, once their fixed and variable costs are covered, so that price can become a differentiating factor without allowing a price war to develop.

As a result of COVID-19, customers are looking for a “contactless” experience at the pumps. This also includes the experience between a fuel operator and its employees. If you have a no-contact experience it makes you a much more attractive service station employer to potential employees concerned about their health. In general, the sanitary measures implemented at each service station will greatly influence the customer’s experience as well as keeping the health of the operators. Digital payment methods also have expanded in the last few years, and we believe this expansion can be accelerated with the prioritization of the no contact experience. Greater digital access leads to a greater contactless customer experience, incentivized through loyalty programs, promotions and discounts. COVID-19 will accelerate all of these trends.

We have also seen a significant market develop around fuel additives. We believe this process will continue and Mexican clients will continue to become increasingly conscious of product quality influenced by the branding of recognizable IOCs expanding in Mexico. We believe this trend will not be significantly influenced by COVID-19, but potentially impacted on price strategies.

On the other hand, we do see significant opportunities between the service station and the adjacent retail businesses. To be clear, we are not only talking about convenience stores. Throughout the various strategies that we have developed for companies, we have identified over 200 different retail formats. This is why we tell our clients to elaborate an analysis of each of their service stations and identify the types of customers and traffic they receive as well as identifying their purchasing patterns and competition retail stores nearby their service stations.

So by understanding the customer the nearby market and the gas station, specific retail formats and assortment can be selected for each gas stations. In addition to the market and physical considerations, the appropriate business model needs to be selected based on the operational capabilities, risk appetite and CAPEX available for investment. These options represent alternate revenue for operators with potential higher margin or else a continuous rent for the space used by the retail format, especially if they are properly chosen and developed. We have also identified that service stations can be last mile delivery distribution centers. Some companies have taken this initiative and made service stations distribution hubs for home delivery. Other companies, such as Puma Energy, have developed retail businesses, such as coffee shops with home delivery. This trend includes what is known as “black stores,” which are last mile fulfillment centers or to serve as delivery centers for companies such as DHL, Amazon lockers or Ticketmaster sales points.

In the future, there will be a transformation of gas stations to “energy stations,” where the energy in question can be traditional fuels, or alternative fuels such as natural gas, LPG gas or electrical power. The expansion of those lines of businesses will depend on vehicles powered by alternative energy, such as electricity. Mexico currently has over 670 Electric Vehicle charging stations installed across the country. BMW, Nissan and CFE formed Charge Now an alliance to promote the installation of an increasing number of Electric Vehicle charging stations. In fact, there are complete charging routes from Puebla to San Luis Potosi, CDMX and Guadalajara, Monterrey to US border and expanding routes across the country. The market penetration of electric vehicles in Mexico has been increasingly growing, for some automakers, today, more than 15% of vehicles of the total sold are either electric or hybrid and it is projected to grow to more than 30% by 2025. With fast charging stations, charging an EV can take up to 30 minutes, enough time for customers to shop around at the station coffee shop, retail format or shopping mall. As a result, service station operators can look forward to additional profits that come from car charging stations and from retail spending.  

Q: How are these differentiating factors dependent on the infrastructural investment that companies are willing to make?

A: We first define a business model that is individually analyzed. Some companies choose to focus entirely on the branding of their service stations, leaving all supply, storage and distribution to PEMEX and other third-party companies. Some just want to focus exclusively on the commercialization of fuel, while others will be including more retail features in their service stations. In terms of investment strategies, the CAPEX and OPEX of retail businesses in service stations can be covered by potential partners, such as the known convenience store brands, or other retail formats such bakeries or liquor distributors, among others. Other larger companies, such as IOCs like BP, Shell and Total have this integrated approach in mind. On the other hand, many retailers businesses on mature markets such as Australia, UK or the USA, where supermarket brands such as Tesco, Woolworths/Caltex or Costco open and manage their own service stations, or rent out space in their parking lots for other companies to operate service stations under their own brand names. This all depends on the capacity of each client, and their existing infrastructure, molecule supply and brand marketing capabilities.

Deloitte is one of the world’s leading audit, consulting, tax, financial advisory and risk advisory brands, with about 245,000 people working at member firms in 150 countries and territories. Deloitte Consulting México is responsible for the consulting practice in Mexico.