Fuel franchises: A new partnership model driving transformation

Twelve years ago, on 2 November 2000, the petroleum and liquid fuels industry in South Africa signed its own sector transformation charter to try and give effect to the goals of the 1998 Energy White Paper.

Being the first sector to take this step of committing to a sector charter, it might be assumed that the industry is now a leader when it comes to equality in the South African context. Unfortunately, this is not the case.

The goal set by the Liquid Fuels Charter to have 25% of all facets of the liquid fuels industry owned by historically disadvantaged South Africans by 2010, was not met.

Over the years, various feedback and analysis reports – first by the Department of Minerals and Energy in 2006, then the Moloto report in 2011, and finally the 2019 analysis by Tryphosa Malatsi – showed that progress was slow, or that it even stalled.

Industry players have since made recommendations and suggested an adapted approach to make sure the industry reaches an appropriate level of representation – with one successful partnership approach that seems to be driving change in the fuel retail franchising sector.

In a recent webinar hosted by Moneyweb, editor Ryk van Niekerk put it to the panel that too few black entrepreneurs have been successful in the fuel retail space, but that the Nedbank Commercial Bank financing and partnership model seems to be bucking this trend.

Gaps

Prithivan Pillay, head of client value propositions at Nedbank Commercial Banking, responded that the bank had, for some time already, looked at different funding models to lower the barriers of entry for new fuel sector entrants to own their own forecourts.

“However, over time we established that certain gaps remained, which was making it difficult to identify the right candidates and to ensure successful ownership,” he said.

Some of the challenges these business owners experienced related to working capital – which the bank could help with – but even more, it had to do with the experience and skill around topics such as inventory management, industry knowledge, sales forecasting and so on.

“The pre- and post-ownership support, that is extremely important in the fuel sector,” said Pillay.

He highlighted the high level of involvement required from fuel station owners when a crisis occurs – it is never just a nine-to-five job.

These new owners would only know how to deal with the challenges as they arise if there was a partner who had the expertise and experience on call.

To address this Nedbank found a strategic partner that took funding candidates through a process to prepare them for ownership.

The partner, PetroCONNECT, developed a screening, training, monitoring and mentorship programme that entrenches the skills that new entrants to the fuel retailer industry will need.

New research by the University of the Western Cape shows that 70% to 80% of small businesses fail within five years.

Responsibility

Van Niekerk put the question to Pillay whether supporting post-financing was supposed to be the responsibility of the bank in the first place.

“This day and age, yes, it is our responsibility,” Pillay said.

“The one thing we do not want to do is just finance a business for a short period of time and then it closes because it is in trouble. So we have taken it upon ourselves to establish what it is in terms of post-ownership support that would be essential to the sustainability of the business.”

Pillay explained that PetroCONNECT provides support to the candidates ranging from a back-office tool system, labour and legal support as well as on-site operational interventions which includes assistance with stock control, fuel drops and other operational controls.

“Over the last three years we have assisted close to 40 individuals to own service stations,” he said.

“It has been very successful. We constantly engage with all the relevant stakeholders and have regular meetings on the supply chain side with the oil companies, together with the clients, to proactively address any distress signals and ensure that the business remains sustainable.”

What it takes

Pillay indicated that there are currently around 7 000 fuel station sites, which includes white sites or emerging fuel brands (unbranded petrol stations owned by small players outside the franchisee networks of major oil companies). Of these, less than 30% is owned by B-BBBEE entrepreneurs.

Pillay advised that a prospective owner should have 20% to 30% of the purchase price of a station, which can cost in the range of R5 million to R10 million, available upfront.

The required cash might seem like a high barrier to entry, but Pillay believes that this buffer is absolutely necessary in order to withstand the storms in a very turbulent and external shock-impacted sector.

Considering the rise in fuel prices, which probably makes fuel the biggest ‘grudge purchase’ for businesses and households at present, Pillay said prospective owners should be aware of the challenges in the sector and have the right attitude to face these challenges to achieve success.

Brought to you by Nedbank Commercial Banking.

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