There’s no doubting the fact that Tesco has always regarded the petrol arena as a massive business opportunity. It opened its first petrol stations in 1974 and by 1991 was the UK’s biggest independent petrol retailer. Today, it runs 380 petrol stations alongside its supermarkets and hypermarkets, and in a deal with petrol retailer Esso runs 130 Express stores on Esso forecourts.
So last month’s news that it had made an offer to acquire 30 former BP/Safeway forecourts from Morrisons was fascinating, not only because it has the potential to boost the retailer’s booming convenience store business, but also because it will take Tesco’s presence in the forecourt arena to 540 outlets across the UK.
Despite its multi-channel approach to retailing, Tesco clearly doesn’t see itself as a forecourt retailer per se. But that’s what it has become. And Shore Capital analyst, Clive Black, believes that the Morrisons deal makes sense: “The deal is very consistent with the way that Tesco has developed in petrol and convenience retailing for over a decade. It is probably the number four or five petrol retailer in the UK so it’s definitely part of its broad level strategy.”
Such growth is undoubtedly a cause for concern for independent forecourt operators. Ray Holloway, director of the Petrol Retailers Association, believes that although further expansion by Tesco into the forecourt sector would be unwelcome, independent retailers will have to learn to live with the competition.
The big challenge for independents is that supermarkets such as Tesco can cover part of the cost of fuel operations through their store business, whereas independents can’t.
But while Holloway thinks independents can learn a great deal from Tesco’s store presentation and offer, they can also play to their own strengths: “Independents should not be afraid of Tesco, because there are some things they can do better, like tailor their services to the local community.”
Nevertheless, he warns: “The continued expansion of companies of Tesco’s size into the sector is unwelcome. The OFT does have to look at the implications.”
Despite such concerns, analysts stress the motive behind Tesco’s latest deal is the opportunity to increase its chain of Express stores. The retail giant itself has said the deal, which is still subject to OFT approval, was “a small deal” but would, admittedly, boost its share of the overall c-store market to 6%.
RW Baird analyst Paul Smiddy says: “The deal is driven by Tesco’s desire to roll out its Express format further. This is a back door way of getting new Express stores.”
Tesco says it is too early to comment further on the deal, but a spokeswoman adds: “Tesco Express is an important offering for us. It provides a fresh food offering to areas where there may not have been one before and offers convenience, low prices and a really popular format.”
BP is not saying whether it will continue to operate the petrol stations, as it considers all options.
Tesco’s deal with Esso was struck in 1998, when trials took place at 10 Esso forecourts to operate a Tesco Express store as the forecourt’s shop. By February 2000, the deal was extended across the UK.
Esso spokesman David Eglinton says there have been benefits to both parties: “Our alliance with Tesco has successfully brought together Esso’s expertise in petrol retailing with Tesco’s reputation for quality and value in grocery and fresh produce. Research shows that customers were delighted with the combination of Tesco-quality groceries and prices and Esso-quality fuel and value.”
Esso and Tesco remain coy about their future plans and declined to reveal whether their alliance would expand beyond the 130 sites that they currently operate.
However, analysts are confident that Tesco would jump at the chance to expand its Express format with other petrol retailers. Smiddy says: “If similar things come up I’m sure they’ll go for them.”
>>fuel, forecourts and express
n Tesco operates 380 of its own forecourts in conjunction with its supermarkets and hypermarkets. It is the UK’s biggest independent petrol retailer
n In an alliance with petrol retailer Esso, Tesco operates 130 of its convenience format Express stores on 130 Esso forecourts
n Tesco has made an offer to acquire 30 former BP/Safeway stores from Morrisons, subject to BP pre-emption rights on 12 of the sites