By Jason Parent, Vice President Consulting, Kent Group Ltd.
According to the Kent Group’s recently released annual Retail Site Census, the number of retail fuel sites in Canada reached 11,916 in 2015; an increase of over 100 from the previous year. This reversed a 25-year trend that saw the number of retail fuel sites in Canada drop from over 20,000 in 1989 down to 11,811 in 2014. The reversal of this trend actually started a few years ago, with a pronounced deceleration in the rate of decline.
What is driving this shift? Have site closures slowed, or are retailers building more new sites? According to Kent’s detailed site data, sourced from over 300 Canadian markets, new-to-industry (NTI) and rebuilt sites have remained fairly stable over the last 10 years, while site closures have decreased by nearly 70% over that time. The result was a change from a net annual decline in the number of sites to a net annual increase over the last few years (Figure 1).
This trend reversal coincided with a near doubling of the average retail margin in Canada between 2006 and 2015 – rising from 5 cents per litre to 9 cents per litre over that time (Figure 2). That increase is likely both cause and effect of a reduction in site closures. High margins may have kept some marginal businesses solvent when they may otherwise have closed, and plateauing site counts can translate to flat or declining site throughputs, ultimately putting upward pressure on margins.
In addition, there simply may be fewer underperforming sites left in the market after 25 years of consistently high closure rates. Despite the rise in retail margins, the average annualized throughput (volume of fuel sold) at closed sites showed considerable uniformity over the last decade, presenting a consistent profile for sites that are at risk for closure (Figure 3). Further examination of Kent’s data from 2006 and 2015 shows that the percentage of sites with volumes below the average annualized throughput of closed sites fell from 15.2 percent in 2006 to just 8.9 percent in 2015, so the reduction in closure rates may simply be a product of a smaller pool of underperforming sites remaining in the market each year.
Certainly there are factors other than margin and throughput influencing site closures, but these two factors remain fundamentally important to site viability. Current market conditions have led to a period of relative stasis in the number of retail sites in Canada; however, this stability is not likely to continue in the long-term. It is unlikely that margins will continue to rise at the same rate they have over the last few years; they are much more likely to follow inflationary trends. Additionally, the demand outlook for retail fuels in Canada is flat, and the throughput from the average NTI site can replace three or four average closed sites. Lastly, despite the abovementioned decline in the number of poorly performing sites, the total number of these sites remaining is still over a thousand. Therefore, the expectation is a continued net decline in the number of sites over the longer-term, albeit at a much slower rate than over the past 25 years.