The recent sale of Imperial Oil’s (IOL) remaining retail assets likely marks a tipping point in the Canadian downstream petroleum industry. When this series of transactions closes, IOL will become the first major refiner in Canada to become completely disconnected from their branded retail network, something that is common for refiners in the United States. This trend is likely to continue through further de-integration of Canadian refiners, resulting in greater market share for independent (non-refiner) fuel marketers, and in our view, opportunities for consolidation among those marketers.
Comparing Canadian and U.S. markets
Canada’s wave of de-integration has been slowly building over the past few decades, starting with Imperial’s gradual sell-off of their branded retail network to numerous regional marketers. This has gained momentum in the last five years with Shell’s sale of their eastern retail assets to Sobeys, and Valero’s spinoff of their Ultramar branded sites through CST.
The United States is much further along this path of de-integration. There are roughly the same number of refiner-operated sites in the U.S. and Canada, which is remarkable considering the U.S. retail fuels market is more than ten times larger. Many U.S. refiners are completely separated from their branded retail networks, while several others have retained a small fraction of their branded networks in tactical areas, altogether representing less than 4 percent of the sites in the country. This has led to a proliferation of regional fuel marketers, considerable diversity in the ownership and operation of retail site networks, and increasing fragmentation in the supply and distribution of refined petroleum products in the United States.
Canada is moving ever closer to the U.S. model. After the latest Imperial transactions close, three of the four largest fuel marketers in Canada will be non-refiners (Parkland, Couche-Tard, and CST), and according to our most recent ‘Retail Petroleum Site Census’, over 70% of the retail sites in the country would have a primary relationship with someone other than a fuel producer. However, there remain a few Canadian refiners who continue to operate sizeable retail networks.
What is driving de-integration?
The motives behind de-integration are varied. While fuel retailing is a relatively low margin business compared to refining or upstream operations, retail networks were valued as an assured landing spot for refinery production. However, through branded distributor relationships, refiners can maintain an assured buyer for their refined product while freeing up capital and other resources to pursue higher returns further upstream.
Conversely, regional fuel marketers acquire what are typically prime retail locations. They may also be better positioned to generate returns from these sites because of their leaner, more focused operations, and often their greater aptitude in areas such as convenience retailing – an increasingly important part of competing in the retail fuel sector. Through these branded site agreements, independent marketers can also benefit from the brand’s perceived value, the brand owner’s marketing support and loyalty programs, and assured branded fuel supply.
Where is it headed?
As with any maturing industry, the growth of Canadian non-refiner marketers is likely to increase the opportunity or need to consolidate. Major players have begun to emerge, and have moved to increase their market presence through acquisition. Their approach has not only built market share within their traditional markets, but through expansion into new markets, with some non-refiner marketers now approaching a national presence. Additionally, this expansion has included a push into other areas of the supply chain, including primary supply and bulk terminals, as well as rail and other distribution assets.
Based solely on the reported valuations in the recent IOL transactions, it is clear that retail assets that fit the strategic plans of growth-oriented non-refiner marketers can hold significant value. It seems certain that this trend is not lost on smaller regional marketers that may find themselves a target for mergers and acquisitions in the future.
The Canadian retail fuels landscape certainly looks different than it did just a decade ago, and all indications point to it looking dramatically different a decade from now.
Kent Group Ltd is Canada’s leading provider of retail petroleum data, analytics, and consulting, including regular volumetric (market share) reporting, and petroleum price data. More information about our products, market coverage, methodologies, and pricing is available at www.kentgroupltd.com
About the Author: Jason Parent is the Vice President, Consulting of Kent Group Ltd. His career in the downstream petroleum industry has spanned nearly 15 years, and he has worked with wide range industry and government clients from across North America. Mr. Parent’s functional expertise includes petroleum marketing economics, downstream operations, as well as petroleum markets and pricing.
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