FACTORS AFFECTING THE PROFITABILITY OF RETAIL FUEL OUTLETS IN URBAN AREAS: A CASE STUDY OF ACCRA

ABSTRACT
Many fuel stations in Ghana have explored alternative sources of income in order to remain profitable and it is a concern that there are too many fuel stations, resulting in an overtraded market. The retail fuel outlet businesses in the country incorporated the usage of various market mix elements to improve their profitability, price positioning, and competitive advantage to survive and grow (Johne & Davies, 2002). Achieving efficient and effective product marketing strategy by an organization is difficult. This is as a result of the ambiguity and instability of economic factors. Although some research efforts have been undertaken to explain issues pertaining to the impact of business structure and strategies on the performance of fuel prospecting industries in developing economies (Chukwu, 2002). Many of these research efforts do not provide answers to the variables that influences profitability in retail fuel outlets within urban settings. The study is a single case study of Shell Oil Company in Accra. The purpose of the study is to investigate whether shell site and location variables influence profitability or the average sales volume of fuel. The quantitative research approach adopted enabled the researcher to compute profitability ratios from secondary data sources for the study. The findings show that average sales volume of fuel has a positive relationship with shell site and location. This means that when traffic flow and buying area of a fuel station are high, sales volume increase; and when accessibility and visibility to the fuel station have a high score, average sales volume of fuel is also high.


CHAPTER ONE
INTRODUCTION
Background to the study
Recently, new economic opportunities have been created in emerging oil and gas industry, worlwide. Though in its infant stage in Ghana, many downstream distribution channels have been and continue to develop. The development of the energy sector has improved living standards of citizens by increasing output of most countries.

An important component of energy is oil and gas. Weirauch (2000) confirms the important contribution of oil and gas in economic development. In developed countries where the petroleum market is fully deregulated, the reliance of fuel stations on additional sources of income is commonplace. In the USA, fuel is considered the volume driver, whilst convenience store sales drive the bulk of the profits (Reid, 2004).

A survey performed by National Petroleum News in 2005, indicated that 66.5% of sales relate to motor fuel, but these sales only contributed 31.7% to the gross profit in the industry. The United Kingdom is no different, and Shell has admitted that they make no profit from UK fuel sales (Harwood, 2006). Profits from European fuel sales are also being eroded, causing companies to search for new revenue streams (Weirauch, 2000).

Literature provides extensive studies on the emerging decline in profitability of retail fuel outlets but most of these originate from developed economies and had therefore not considered the specific environment in different regions in emerging markets. In recent years, a number of studies have aimed at examining the variables that determine the profitability of retail fuel outlets. A study conducted by Sartorius et al (2007) in South Africa, found out that urban petrol stations selling more than 370,000 liters of fuel per month are the ones likely to be profitable. And that greater number of fuel stations, will have to rely on non-forecourt activities to survive. The study also reveals that location significantly influences urban retail sales volumes whilst fuel station size and the fuel price play a lesser role (Sartorius et al., 2007).

Oil and gas contribute a larger share of GDP in most developing countries in sub-Saharan Africa, such as Nigeria. And also adds significantly to national economic development (Chukwu, 2002). According to Chukwu (2002), exports of oil and gas in Nigeria and profits recorded about 98% of GDP and 83% of federal government revenues. One of the main offshoots of the industry is the emergence of fuel (petrol and/or diesel) stations across the country. Since the partial deregulation of the petroleum downstream in the early 2000s, the fuel retail market has seen extensive expansion by local participants, resulting in intense competition with its attendant impact on the profitability of outlets.

Over the past decades, there has been an unpredictable profits in retail fuel businesses, as a result of changes in fuel prices and other changes in market variables. Instability in the variables influencing fuel sales volume, which leads to volatility in profits, makes investment planning risky. Samli and Kaynak (1994) lament that the key problem with the determinants of firm‟s profitability in developing economies is that it minimizes the impact of marketing environment on the achievement of performance measures. Sound and robust marketing commitment on the part of retail fuel sales-people are important to the survival and growth of the industry, considering the subtle, unstable and seemingly hostile business environments in which contemporary business organizations operate (Osuagwu, 1999).

Fuel retail outlets in Ghana are confronted with a wide range of variables that constrain profit and a significant number of outlets are declining in profit. In the event of further deregulation, it is conceivable that many retail fuel outlets will go out of business. In the past, the petroleum downstream market activities of supplying fuel through retail fuel outlets, have been mainly dominated by the oil marketing majors such as Shell, Total and Goil. Over the years, and in particular, since the start of the deregulation of the downstream oil sub-sector, the petroleum sector has attracted indigenous entrepreneurs and other individual entrants, with increasing interest in storage, distribution and sales. There appears to be good prospects for investors; fuel distribution has become an attraction for many people. New stations are also being established in the city centers. Though this development is exciting, because of the associated increase in economic activities through job creation and increase in business activities in wider areas of the country, some industry players have cautioned the rush into this area of investment.

In their view, the springing up of these petroleum stations has been too phenomenal and doesn‟t augur well for the industry given that margins are so little. In an industry where profitability at outlet level is significantly determined by its throughput volume, one questions whether the growth in the size of the petroleum retail outlets is sustainable. The proliferation of petroleum retail outlets and fuel service stations across the country however comes with pressure on the profitability at the outlet level.

Statement of the problem
Many fuel stations have explored alternative sources of income in order to remain profitable and it is a concern that there are too many fuel stations, resulting in an overtraded market. The retail fuel outlet businesses in Ghana incorporated the usage of various market mix elements to improve their profitability, price positioning, and competitive advantage to survive and grow (Johne & Davies, 2002).

However, achieving efficient and effective product marketing strategy by an organization is difficult, as a result of the ambiguity and instability of economic factors. Moreover, although some research efforts have been undertaken to explain issues pertaining to the impact of business structure and strategies on the performance of fuel prospecting industries in developing economies (Chukwu, 2002). Many of these research efforts do not provide answers to the variables that influences profitability in retail fuel outlets within urban settings.

Previous studies modelled locations and pricing decisions in the gasoil market (Chan, Padmanabhan & Seetharaman, 2005); crude oil development (Chukwu, 2002); demand for automobile fuel (Graham & Glaister, 2002) and an examination of the variables influencing the fuel retail industry (Sartorius et al., 2007). However, these studies did not consider the factors affecting profitability of retail fuel outlets. Moreover, most of these studies did not focus on urban areas and studies that have been done in this area were conducted in different economies. This study therefore seeks to examine the factors affecting the retail fuel market in urban areas of Ghana.

The fuel retail sector operates in a highly competitive environment that is characterized by low profit margins and high cost of sales. It is both capital and labour intensive; site and location of fuel station determine its profits. It can be seen that even though the industry overall is growing, the share of the three main players (TOTAL, Vivo Energy and GOIL) has been declining steadily. Ghana fuel retail outlets are confronted by a wide range of variables that constrain profit and a significant number of outlets are not profitable. In the event of further constrained external factors, it is conceivable that many fuel stations will go out of business. For that matter, it is imperative that retailers understand the variables affecting the profitability of outlets in order to remain in the industry.

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Item Type: Ghanaian Postgraduate Material  |  Attribute: 61 pages  |  Chapters: 1-5
Format: MS Word  |  Price: GH50  |  Delivery: Within 30Mins.
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