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 Topic | Size: 61 pages | Chapters: 1-5
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