Threat of new entrants

Competitive rivalry

Power of suppliers

Power of customers

Threat of substitutes

Conclusion

Don’t look at the mountains as mountains, but discover the flowers and birds in the mountains

PARA1 The date is March 20X3. Mayhews Ltd (Mayhews) is a family-owned business which runs three garages from freehold sites in prime locations in central England. Each garage operates a filling station, which sells fuel (petrol and diesel), and has a facility offering maintenance and repairs for motor vehicles.

PARA2 Fuel retailing in the UK (Introduction to each retailer) Fuel retailing in the UK is a high volume, low margin business, characterized by strong competition. In the industry there are three types of filling station: A Branded filling stations are either owned and managed by one of the major fuel wholesalers or operated on their behalf by licensees. B Independent retailers, like Mayhews, are free to obtain fuel supplies from any wholesaler. Over 50% of all filling stations in the UK are independently owned. C The big supermarket chains operate filling stations alongside their major stores. In recent years, whilst the number of branded filling stations and independent retailers has declined, the number of supermarket-owned sites has increased. This has coincided with the expansion of large out- of-town supermarkets with more people driving to do their shopping and buying fuel at the same time. As a result of their supply chain efficiencies and the large volumes of fuel that they sell, the supermarkets incur lower overheads per liter of fuel sold and are able to charge lower prices. In addition, many offer discounts on fuel based on the amount customers spend on goods in the main store. The average retail price charged by supermarkets in 20X2 was 130.9 pence per liter compared to an overall UK average of 133.8 pence per liter.

PARA3 Supply of fuel and pricing in the UK industry (fuel supply and pricing) The wholesale supply of fuel to retailers is dominated by a few large companies which produce and refine crude oil into a range of products including fuel. These wholesalers supply fuel to their own branded filling stations and to the supermarkets and independent retailers. 60% of the UK retail fuel price per liter consists of fuel tax and sales tax. On average 35% is paid to the wholesaler and the retailer earns 5% towards overheads and profit. Wholesale fuel prices in the last three years have been very volatile as the price of crude oil has varied significantly. Price volatility is a major problem for independent retailers. When market prices fall, independent retailers are often left with fuel supplies previously bought from the wholesaler at a high price. If they reduce the retail price then they may make a loss. If they keep retail prices high this is likely to have a negative effect on sales volumes. Conversely, when wholesale prices rise, the independent retailer may struggle to afford the increased cost of replenishing fuel supplies.

PARA4 Demand for fuel in the UK market Despite increased numbers of cars on the road, sales volumes of fuel are under pressure because of the improved efficiency of vehicle engines, increased fuel prices and the difficult economic climate. Government figures suggest congestion on motorways and major roads has been falling, indicating that people are undertaking fewer journeys by car. Fuel station monthly, a respected online industry journal recently highlighted that fierce competition between fuel retailers has led to a significant decline in the number of filling stations. There are now fewer than half the 18,000 filling stations that existed 20 years ago (Exhibit 1). A fuel station's viability depends on two key factors: the gross margin per liter and the volume of fuel sold. Independent filling stations and those in less well-populated rural areas are at the greatest risk of losses due to declining sales volumes and below average margins . They also struggle to justify the additional capital expenditure required to comply with increasingly strict environmental and safety regulations. Many have tried to reduce their reliance on fuel revenue by creating alternative revenue streams such as on-site shops selling snacks, groceries and vehicle accessories. Mayhews does not currently operate a shop at any of its garages. 420 filling stations closed in the UK in 20X2, of which two-thirds were independent. Some of these filling stations have been bought by property developers, although because of environmental regulations, sites have to be closed and the fuel tanks filled with concrete before being capable of alternative use.