01 May Are gasoline stations doomed?
Have you ever wondered about the impact of digital technologies on gas stations? What’s to become of the thousands and thousands of gas stations in the low carbon future?
Geneva Claesson and I were discussing this topic recently where we had a chance to speculate on the future of the oil industry. We spent some time noodling on some of the big sweeping trends that factor into the future of fuel retailing:
- The challenge of simply surviving the broad oil and gas sector down turn, the shortage of capital and the demands to replenish reserves
- The gradual greening of industry under pressures from society and government to address stress on the environment, including air, water and land
- The pace and intensity of globalization, the rise of economic nationalism and the reconfiguration of nation state relationships
- The changing role of government, increasingly stringent regulations, failed state challenges and potential interventions in key industries like energy
- The decaying infrastructure in the west (bridges, roads, airports, ports) versus the investments in infrastructure in the east (check out the Pearl River Delta region for a glimpse into the future of infrastructure) and government responses
- Demographic shifts, including new generations in western countries, absolute demand growth in Africa and Asia, and the impacts on energy trade flows
- Resource scarcity, in the form of minerals, ores and fuels, and the abundance of new resources like renewables, and the possibility of further nation conflicts over resources
- Finally, the relentless pace of technology innovation, the challenges of IP ownership, new open business models, cyber security and data privacy.
Combining just two of these trends (the gradual greening of industry, and the pace of technology innovation) suggests that the humble gasoline station may be in the cross hairs. Big changes may be on the horizon. We speculate that cars are driving the change (yes, pun intended).
Cars go digital
Your next car, if it’s a new model, will likely have a pound of silicon in it in the form of on-board computers, sensors, LIDAR, radar, gauges, actuators, displays and controls. The trajectory looks clear – over time, cars are going to continue to evolve, although not at the pace of a smart phone’s evolution. Cars are just more complex. But with dozens of car makers out there, and no limits on the movement of good ideas and technology in our connected existence, it’s not infeasible, in a world of cloud computing, big data, GPS and the internet of things, to re-imagine the car eventually turning into a robot, for occasional or shared personal transportation.
But it’s going to take a very long time for the car fleet as we know it to become fully autonomous and robotic. There are 1 billion cars on the planet today, and car makers can only churn out 65 million new cars a year with the current factories and supply chains. Of those, about half are for replacement (as we trade up), and half are for growth in the market (the US, for example, adds 15m new drivers every year). Some of the cars are to replace the ones we have wrecked in our too-frequent accidents, but a lot end up on the used market where they experience an extended life.
Even if we wanted all new cars to be fully robotic, to turn over the existing fleet of 1 billion cars would take 33 years with our current manufacturing capacity. And that assumes everyone converts, which they won’t. To set up a government program to buy out all the gasoline-fueled cars will take billions of dollars. A remote possibility with all the monetary pressures on government today.
It’s a good bet that people will have to drive their fossil fuel-based vehicles themselves for a few years yet. So the fuelling station has a long term role to play. But will it be the same role in the future?
In the meantime, our silicon cars are going to spew a progressively larger and more interesting torrent of digital exhaust in the form of data about engine performance, parts conditions, driving habits, fuel usage, music preferences, routes taken and ridership. If we’ve learned one thing over the past decade, it’s that data, no matter what it is, has value, and especially large consumer datasets.
And we also know (see Facebook) that consumers will trade access to that data in exchange for something of value.
Fuel is changing
Now that coal is in terminal decline as the most carbon intensive energy source of electricity, the next target is going to be transportation fuels. In Canada and the US, road transportation fuels are now the leading contributor to green house gases.
99.99% of us have petroleum fuelled cars, me included. This is a fact. And many of us will want to reduce our contribution to carbon emissions. Sadly, our cars have no idea whose fuel it’s been fed. Was it brand A with its emulsifiers and markers or brand B with its engine cleaning compound? At best our cars might tell us how much fuel we consumed to go a few miles or kilometers, but not what it cost us. And we really don’t know our true cost to society of our carbon emissions. We’re supposed to piece together vehicle performance in our heads.
Then again, your next car might not even be a petroleum car at all. Maybe it will be wholly electric, with replaceable batteries. It might recharge simply by parking over power plates in parking spaces, like a cell phone does. Or maybe it will plug itself into an electrical outlet in your garage or at a shopping mall, like a carpet cleaning robot. Or maybe it will run on hydrogen, or compressed natural gas, or petroleum gas.
Certainly some demand for some fuel is going to permanently disappear, as many customers, particularly younger generations, will switch to do their bit for the environment. Other fuels may take their place, and that creates a need for customers to purchase that fuel, and possibly an ongoing role for the fuel station of the future.
Petroleum retailing is a stale experience
If there’s a purchasing experience that hasn’t changed in a very long time it would have to be petroleum purchasing. We pull up to the pumps, get out of the car, program in what we want, grab the nozzle, dispense the product hopefully into the fuel tank and not on the ground, and, enter a booth to pay someone for the experience. The product smells bad and you wonder about the toxicity of the fumes. The odor of spills linger for hours, and it’s been this way for 50 years.
Sure, there’s been some changes (getting rid of attendants, the addition of a 2 way radio for when you need help, the introduction of loyalty programs), but in the main, it hasn’t changed. Consumers are simply doing more of the work.
Curiously, consumers are acutely aware of fuel pricing, but only because fuel retailers are trapped in this cycle of public posted prices. No other industry with retailing in the free world posts the price of its main product on a lit sign that changes hourly outside the shop. Milk? Butter? Bread?
Fuel retailers are behind in understanding their customers the way Google does. Visa and MasterCard send you the bill if you purchase on credit, and your debit card doesn’t have an address or any other personal data. Unless you’re on the loyalty program, you’re effectively an anonymous customer.
Step inside a gasoline station and if there was no obvious branding, they all look alike, and they all are configured the same way. The station agent is behind bars or wires or in a glass cage (how’s that for a job) and typically near the door. In Brazil, there may be a heavily armed guard at the entrance. Even the cash register has barely advanced in 20 years.
What to do?
There are about 11,000 fuel stations in Canada, selling 97 different brands of fuel, marketed by 71 companies, and I would wager that today’s fuel retailing business, where customer visibility is low, may lack the insights into forecasting with accuracy how fuel usage is going to change.
Delaying making changes might not be a good strategy. It will take years and a lot of capital to convert these fuel stations into something different. Wait too long and the free cash flow from the stations may be so low that there won’t be enough capital to carry out any upgrades. But moving too quickly isn’t sound either – there’s still way too much uncertainty in how the world will look in the future to place big bets now.
But what could the future look like? Come back next week for part 2 in this series.