Service stations are getting more like 'one-stop-shops' every day. With products from hot food to Internet access, you could be forgiven for forgetting the fuel was there. The major reason is that retailers make low margins on fuel. But in that case, why are Petroplus' fuel-only unmanned sites doing so well in the Netherlands? Datamonitor's Mike Phillips looks at the curious case of Tango...
In Europe, it's hard to make money from retailing oil products. Margins are low, and costs fluctuate widely. This has led most European service station operators to depend on other revenue sources. Retailers are adding more and more products and services, from car washes and convenience stores, to Internet terminals and laundromats.
However, Dutch oil company Petroplus defied this trend in March 2000 to open its first 'Tango'-branded gas station. The Tango station was unmanned and sold nothing but fuel. Such stations are usually found in remote locations where footfall is limited, and expanded offerings are therefore unviable. But the Tango site was in the middle of town, where the forecourt shop is normally a key profit center.
The major players in the Dutch fuel retailing market were not terribly worried by the new arrival. In a country that leads Europe in the development of non-fuel offerings, there would be no consumer interest in no-frills petrol stations - or so they thought. But less than two years on, Tango sites are enjoying throughputs three times the national average, and its management team is upbeat about the future.
As Marc Schroder, Tango's Managing Director, explains, "There is a certain consumer segment that will always value cheaper fuel more than a full-service station. It may be a niche, but it represents a serious percentage".
Given the overriding trend towards expanded service offerings, driven by six major oil companies controlling 92% of the market, it could still be argued that Tango will struggle to make any significant impact. The company still only operates 16 stations throughout the country, with another 9 under construction. But its presence is already making waves in a market where competition is subject to some unusual practices.
Allegations of "vertical price-fixing" and collusion amongst the majors have recently resurfaced: the Dutch competition authority, NMa, named Shell, BP, Esso, TotalFinaElf and Texaco in a December statement.
Vertical price-fixing involves legal agreements between the majors and their dealers, whereby any dealer faced with discount-led competition in their area can match the new prices with the promise that their retail margins will be protected. The purpose is to make discounting counter-productive, and tie prices to those of market leader Shell.
You know when you've been Tango-ed
This hasn't deterred Tango, however. The low setup and running costs of unmanned sites have enabled it to offer fuel 5-8% cheaper than anyone else. Full-service stations simply cannot match this level of discount while still turning a profit on fuel. As a result, even though rivals have cut their prices in the neighborhoods of the new sites, targeted at catchment areas with at least 25,000 inhabitants, Tango remains the price leader.
The group that has the most to fear from its expansion is the independent sector. Independent operators risk being squeezed out between giant 'one-stop-shops' on the one hand, and unmatchable prices on the other. Such a squeeze would benefit Tango, since its best expansion strategy is to acquire sites from independents.
A new EC directive will also help the company's rise, by limiting the duration of fuel retail supply contracts to a maximum of five years. This makes it risky for oil majors to invest in upgrading their dealers' sites - which they currently do in order to increase the sites' throughputs and, therefore, overall sales.
Under a 15-20 year agreement, the return on such investments is reasonably assured. But a limit of five years makes them much less attractive: rivals could reap the rewards if the dealers switch supplier. The dealers therefore become another potential target for Tango, as many of them do not have the resources to maintain competitive full-service stations without oil company help.
The majors fight back
The low-cost unmanned solution could well become the only means of survival for the smaller players. This could allow Tango to gain market share directly from the oil majors by winning over some of their dealers, as well as through gaining their price-sensitive customers.
However, the oil companies have the opportunity to put up a much more active resistance. Indeed, Shell began its own experiment with the unmanned model last year. Station operator Tinq, in which it holds a majority stake, opened its first two unmanned stations in August.
Shell's rivals, meanwhile, should remember that the Netherlands often leads Europe in fuel retailing trends. They would be well advised to monitor the Dutch situation closely, as Tango's price-conscious target segment undoubtedly exists in other European markets.