Life beyond petrol

In the latest of a series of collaborations between food retailers and oil companies, Marks & Spencer is teaming up with BP to introduce its Simply Food outlets at petrol stations throughout the UK. But what’s really in this venture for the parties involved? asks Jonathan Harwood

Marks & Spencer looks set to roll out its Simply Food offering at about 300 BP petrol stations across the UK, turning the spotlight on garage forecourt trading and its importance to oil companies and high-street retailers. The reports of an extension to a deal that initially encompassed just eight M&S stores on forecourts, around London and in Scotland, have been denied by both parties. But such alliances between oil and retail companies can be mutually beneficial.

Convenience stores have become an important part of any petrol station’s offer. In a climate where companies such as Shell have admitted they make no profit from UK fuel sales, oil companies must look to maximise revenue from other channels with better margins, and they have at their disposal a vast estate of retail sites.

A high-quality convenience store can also provide a point of difference for a petrol brand, particularly in a market where consumers are motivated almost entirely by price. Partnerships with respected traders can give that edge and help boost profits. From a retailer’s perspective, forecourts are highly visible places and already exist, so new stores can be opened without troubling the planning authorities.

Other forecourt alliances

The idea of alliances is not new; oil companies have been trying to establish themselves as retailers for years. M&S and BP teamed up in November, following the end of the oil company’s ten-year relationship with Safeway, after its acquisition by Morrisons. BP also offers Threshers products at many of its garages.

Tesco’s agreement with Esso heralded the roll-out of its Tesco Express brand. Last year, the retailer signalled its return to the forecourt market with the acquisition of 21 sites from Morrisons, which were part of the BP/Safeway joint venture.

Supermarkets claim more than 31 per cent of the fuel market, and they are eating away at the dedicated petrol retailers’ market share. Last year, Somerfield acquired 140 Texaco sites for &£90m. It reportedly hopes that the estate will be worth more than &£200m after redevelopment of 120 sites as Somerfield stores.

Besides the myriad of franchise agreements that put brands such as Spar on the forecourts of independent garages, there are the oil companies’ own retailing efforts. BP’s Wild Bean Café concept has been widely acclaimed as the best forecourt marketing initiative by an oil company. BP has also rolled out Connect and Express.

Rivals have tried similar ventures with varying degrees of success. Shell has decided to reduce its offer by replacing its Select outlets with a simple Shell Shop format, even after it opened several standalone Select stores that did not sell petrol.

Targeting the convenience market

Despite BP’s reluctance to comment on the tie-up extension, some of its larger stores are being readied for the arrival of the M&S brand. BP UK retail director Graham Sims says the alliance shows the oil company “is moving from a fuel retailer to [become] a true convenience retailer”.

Yet this is no new ambition. In 2000, when BP launched its Connect concept, the company said much the same thing. Despite some 173 Connect stores popping up around the country, the combined market share of brand and the more basic BP Express was just 3.3 per cent in 2004.

Patrick Smith, chief executive of FutureBrand, says the M&S deal is financially advantageous to both parties, but he is unsure of the branding benefits. “The whole thing smacks of a commercial decision rather than one based on brand strategy,” he says. “BP wants to establish food values and M&S wants to extend its channels.”

Smith believes BP wants to develop its retailing arm, where margins are up to 20 times those on fuel. On average during 2005 gross margins at the pump were 5.3p per litre on unleaded and diesel fuel, according to the UK Petroleum Industry Association. This must cover costs such as transporting fuel, marketing and promotion, and operating a filling station.

It also makes sense for M&S to piggyback a retailer with 50,000 outlets worldwide. “M&S is starting to turn the corner, so I can understand it from a channel point of view,” he says. “But you have to ask if there is there a risk from a brand perspective.” He warns that oil companies do not always make good bedfellows for “cuddly” brands, recalling Starbucks’ ill-fated alliance with American Airlines, which created negative associations for the coffee brand with an airline that was waning and unpopular.

“BP is always inches away from a PR disaster. There is not a huge amount of trust in the oil market,” adds Smith. “The things that BP says about itself are quite hard-nosed. Its reports talk about performance, while M&S is more about quality, freshness and indulgence. From a brand perspective, I can’t see a lot of mutuality.”

M&S accepts that BP may not be a well-loved brand, but claims the fit is a good one. Forecourts slot into the spectrum of other places where Simply Food stores have been popping up – railway stations, airports and motorway services. Meanwhile, M&S is confident that any extension of the relationship would not put undue pressure on the Wild Bean Café brand/ “From our point of view, they have got petrol and the café, but wanted a high-quality, fresh food offer, which we can provide.” The benefits are mutual, M&S believes, as people will choose to fill up at BP because they can combine buying petrol and “quality food”.

But Smith remains concerned: “Forecourts are already cluttered places, with car washes, oil and petrol pumps,” he says. “I don’t see why the Wild Bean Café can’t also provide food.”

Other industry observers believe different brands can co-exist on the forecourt, but are intrigued by BP’s choice of partner. One analyst points out that the M&S, and to a lesser extent Threshers, agreement could mean a move towards quality rather than price. By forming alliances with companies that do not market on price, BP could be extracting itself from the low-cost war and moving its retail image upmarket.

Looking for further revenue

As oil reserves dry up, companies need to investigate new revenue streams. BP is adopting a less aggressive image, investing in sustainable energy and running marketing campaigns highlighting its green credentials.

Some observers think the M&S deal is part of a wider attempt at brand repositioning, which sees BP aligning itself with more readily accepted brands and ideals. Another argument is that oil companies go into alliances simply because they are not in the retail business. Their real concern is fuel in the form of oil, rather than food. As one analyst says: “Retail is just a dot on their map.”

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