Groceries Are a Bright Spot for Major Oil Companies

Profit from c-store groceries, foodservice and drinks offsets weaker fuel demand.

January 19, 2021

LONDON—Coffee and groceries are becoming a bigger part BP’s and Royal Dutch Shell’s bottom lines, reports the Wall Street Journal.  

During the pandemic, gas stations have shown themselves to be one of the most profitable parts of the major oil companies’ sprawling operations, with higher spending on food and drink offsetting the weaker demand for fuel. That has encouraged both companies to expand their retail businesses.

Shell plans to add 10,000 branded retail sites to its 45,000-strong network worldwide in the next five years, making it a larger retailer than Starbucks or McDonald’s. BP, which now has 19,000 outlets, plans to add 6,700 sites in growth markets by 2030.

“We believe we can more than offset the impact of fuel volume declines in established markets to 2030 through growth in convenience,” said Emma Delaney, head of customers and products, BP.

Profit margins for selling coffee, food and household items at gas stations are typically higher than the oil business and returns aren’t linked to volatile energy prices, making it an attractive business. Exxon Mobil and Chevron haven’t enjoyed these benefits as much as their European counterparts because they sold off most of their sites several years ago.

Both Shell and BP say they have an ROI of more than 20% in their marketing divisions, which includes gas stations, lubricants and premium fuels. That exceeds the typical 15% return on oil projects and 10% return on renewable-energy projects.

Shell’s marketing business reported record adjusted earnings of $1.6 billion in the third quarter, an increase from $1.5 billion in the previous year’s period. Marketing generated more than half the company’s overall earnings in the quarter, in comparison with around 20%-30% in recent years.

Huibert Vigeveno, downstream director at Shell, said that during the pandemic, the company’s gas stations capitalized on consumers’ changing shopping habits by offering more groceries and bakery goods to compensate for the weaker demand for fuel.

“Even with less customers, you’re selling a higher basket size,” said Vigeveno. Compared with the same prior-year period, customers purchased 15% more when visiting Shell stores in the first nine months of 2020.

Vigeveno said Shell sells 450 million snacks, 350 million cold beverages and 250 million cups of coffee each year. Additionally, Shell has accelerated the rollout of new services, including parcel collection and home delivery. In the U.K., Shell sites offer drinks and snacks via Uber Eats and Deliveroo.

Meanwhile, BP’s marketing business has seen opportunities in the pandemic as well. The third quarter was its best in nearly two years, with strong retail sales offsetting a 15% drop in fuel sales. Additionally, BP turned to partnering with delivery app Glovo in Spain and Deliveroo in the U.K. to dispatch items from gas stations to provide home delivery in order to boost sales. The owner of Amoco and ampm stores in the U.S., BP says it plans to invest in proprietary food brands and seek further retail partnerships to increase gas station profitability.

Both companies say they plan to offer additional services at existing sites in established markets like the U.S. and Germany. They will also add new outlets in developing markets, such as China, India and Indonesia.

Today, profit is in the shop. There is a gross profit margin of around 54% for hot food, 50% for candy and more than 40% for groceries sold at U.S. gas stations, according to 2019 data from NACS. However, the gross margin on a gallon of gasoline was 9% based on the average 2019 price, according to data provider IHS Markit Ltd.  

Still, other issues for gas stations and c-stores are emerging. Electric vehicles present a new problem for gas stations because charging isn’t as lucrative as liquid fuel. Plus, it can be done at home or work. Still, both Shell and BP plan to add thousands of charging points at existing gas stations and other sites.

BP is also experimenting with gas stations that sell no gas. The company has opened several of what it is calling mobility hubs in Europe, featuring services found at filling stations, electric vehicles and bikes for hire, charging points and a café.

Some observers think these are indications that the pandemic has helped oil companies prepare for the future. “We already knew there were likely some headwinds coming at fuel demand in future,” said Frank Beard, retail consultant. “COVID-19 was effectively a dress rehearsal.”