The observant country salesperson taking a drive through South Africa’s provinces north and east of the Orange River in recent times may have noted the gradual change in the fuel service station landscape.
From Makhado to Melville, new brands are popping up, names far removed from the cartel-type service station landscape to which we are all accustomed. Of the 2,500 members of the Fuel Retailers’ Association (FRA), 133 are independent and growing year on year, with one firm growing particularly fast.
“Government regulations governing the fuel industry are dated and lean towards the oil majors with refineries,” says Rona Lynch, general manager of Puma Energy South Africa, stressing the need to change them “as the landscape changes over the next few years”.
Puma Energy started operating in the country in 2015 with the acquisition of Brent Oil and Drakensberg Oil. Although South Africa is a challenging business environment, says Lynch, it works as a regional hub to accommodate supply teams (trading, lubricants, fuels and aviation fuel) that serve other African countries.
The firm, which is majority-owned by Singaporean independent commodity-trading house Trafigura and the Angolan Sonangol Group, continues to invest in the market to grow its retail network and storage capacity, she says.
This local fuel brand is growing fast, with its branded service stations appearing in strategic locations around Cape Town and Johannesburg, but it isn’t the only new player. The roads north, east, and west of Johannesburg reveal brands often foreign to visitors from other provinces.
Reggie Sibiya, CEO of the FRA, says established brand stations such as Shell, BP, Caltex, Engen, Sasol and Total are owned by the refining wholesalers, with independents owned or supplied by non-refining or independent wholesalers.
Of the FRA’s members, Sibiya says the 133 independents are split among the provinces, with Gauteng home to 33, followed by KwaZulu-Natal at 25, Mpumalanga at 18 and Limpopo at 14.
The growth of the independent sector began with the “oil majors” moving out of rural areas to cut costs, which then gave independent wholesalers the opportunity to supply independent service stations.
Independents such as Puma Energy and Elegant Fuel and Diesel Wholesaler & Bulk Supplier, which has been selling fuel for 10 years, moved in.
The Elegant Group is 25% owned by black women and has stations from Musina to Lephalale and Boksburg. It claims to distribute “500 million litres of high-quality fuel annually”, straight from the refineries of well-known oil majors to other independent retailers.
With branded service stations from Garsfontein and Pretoria’s inner-city suburbs to Sophiatown in Johannesburg West, MTB Petroleum is also growing its footprint fast, shouting out its BEE credentials on its website alongside images of its Buzz Café service station convenience store. MBT, like Elegant Fuel, is a “non-refining wholesaler”.
Elegant Fuel will rebrand an existing service station or build a brand-new one from scratch, but MBT’s model enables private ownership of fuel stations by third parties.
Sibiya says selling franchises is one way to generate income in an industry where the margins are low. He describes it as the quicker, easier route. It is “less costly as building a new site is very costly and subject to objections and declined licences [even] after incurring costs”. He says regardless of a licence being granted or not, building a new service station is a huge capital cost requirement.
Rebranding and selling franchises is the route Puma Energy has followed. Rather than buying new stations, Puma approaches “retailer-owned, dealer-operated stations” when their supply agreements with oil majors are about to expire, offering to convert the site, maybe offering a sweeter rebate in the process.
Sibaya adds that although the oil majors lose market share to these new entrants at the retail level, they still make money across the value chain because they are 100% vertically integrated.
“The FRA has been pushing the Department of Mineral Resources and Energy [DMRE] to fight against vertical integration as per their policy legislation and regulations.” Sibiya says the DMRE has created another headache for itself by making it “too easy” to apply for a wholesale licence, as opposed to a retail licence.
By way of example, he says the DMRE has issued more than 700 such licences, but that this increased number of wholesalers has a limited network to supply. Getting a wholesale licence does not guarantee finding clients.
Retail sites are locked into supply agreements by the oil majors and they are not allowed to source their products outside the supply agreements. In a market that is experiencing significant declines in volumes because of the economic downturn and less consumer spending, most of these more than 700 licensed independent wholesalers are, according to Sibiya, now wholesaling and retailing from their wholesale sites to the public.
Fuel wholesalers selling products directly to motorist consumers, other than through a retail network, is illegal. “The DMRE obviously did not take this into consideration when issuing such a large number of wholesale licences.”
While the FRA wants to see action taken against both such illegal operations and the oil majors’ vertical integration, Puma Energy’s Lynch says the DMRE regulations will need to change over the next few years, with the refineries being shut down and converted to storage facilities.
She says this will effectively make South Africa an import market, and level the playing fields for new entrants and smaller importers. Sibiya welcomes such a vision. He says independent brands “come with less onerous and one-sided agreements with oil majors … allowing the true spirit of entrepreneurship as opposed to being dictated by numerous rules of a franchise agreement.
Which, in turn, allows for the exploration of other profit centres which are relevant to their local communities.” At the end of 2020, Puma Energy, which imports its own oil, had two terminals, 4,900m³ storage capacity and 109 service stations. Lynch says it hopes to increase to 115 sites, nationwide, by 2025.
While she says market growth in South Africa over the past two years has been slow at only 1% to 2%, with annual consumption at around 28 million litres of fuel, Lynch says Puma’s parent company sees “significant potential for further growth for our business in the country”.
Sibiya says countries such as Kenya and Zimbabwe are “way ahead of South Africa as regards the independent trend”, with independent wholesalers and retailers in some markets giving multinationals serious competition.
The electric car is many moons from reality in South Africa, but it seems that the internal combustion engine and the fuels that drive it are here to stay for a while longer. Sibiya says “monopolistic practices” will gradually disappear with time and the relaxation of import regulations.