Resilience in Ghana’s downstream sectorAugust 12, 2021
Philip Tieku, CEO of Star Oil Company, talks to The Energy Year about challenges in Ghana’s hydrocarbons retail sector and strategies the company has formed to raise efficiencies and foster growth. Star Oil Company distributes and sells oil and gas products through filling stations throughout the country.
What are the defining aspects of Star Oil’s business model?
Our model is to have our own outlets that use our own staff. We don’t allow third parties to operate our stations. We are a small company. Our capital expenditure budget would normally be around USD 3 million per year. In 2020, we did zero capital expenditure.
For us, theft and operational incidents are a loss for the company, not the retailer. By comparison, Shell and TotalEnergies normally run a model that shifts the risk onto the retailer. However, we enjoy higher margins. We don’t have to pay commissions, and overhead costs are generally lower. The most important aspect is to have the right controls in place, otherwise you can incur losses.
How did the Covid-19 pandemic impact oil marketing companies (OMCs) in Ghana?
Demand has gone back to pre-pandemic levels. Most of our volumes are driven by Accra and Kumasi, our biggest cities. However, between March and June 2020 we lost 30% of our volume month on month. This has made it hard to cover fixed costs. OMCs are looking at potentially laying off workers.
The banks put a moratorium on interest and payments for around six months. Additionally, the government extended the payment cycle for taxes from 25 days to 45 days to allow us some flexibility and liquidity.
However, our real challenge is with the workforce. In Star Oil we run around 100 stations, each with around five to six people. The forecourt manpower is around 600, with about 200 in the back office. We employ nearly 800 people. As we are a family business, we have high overhead and fixed costs in terms of employees. Unfortunately, we had to lay off some employees who were near retirement age and cut salaries by about 40%.
We cut our provident funds, where the company had contributed 10% in addition to retirement benefits. We were also able to negotiate some credit terms to continue operating. We are almost back to where we should be in terms of our monthly target, which is 10 million litres a month at 100 stations.
What impact do illegal outlets have on the sale of fuel?
The downstream market in Ghana is heavily saturated. If your volume is anything less than 100,000 litres a month, it’s not profitable within legal margins unless you are willing to accept a very long payback period for your investments. Illegal outlets spring up and become avenues for illegal fuel sales. People put up stations in locations where they will be doing a low volume, like 30,000 litres a month.
Almost 40% of our selling price is the tax component. If you could dodge the tax completely, you could make GHS 2 [USD 0.33] per litre, compared to a legal margin that fluctuates between GHS 0.4 [USD 0.06] and GHS 0.6 [USD 0.1] per litre.
Shell, TotalEnergies and other market leaders are currently selling at GHS 6.23 [USD 1.04] per litre. At the same time, there are some stations that are selling at GHS 5.7 [USD 0.95], which is nearly GHS 0.55 [USD 0.09] below the market leader. For some, this is even below cost price if you consider their supplier’s price and taxes. All of this is due to illegal trade. In terms of legal margins, the market is saturated, and filling stations work at a bare minimum.
Does Star Oil do business-to-business (B2B) fuel sales?
We provide marine fuel to some extent. We do not do B2B on a large scale because you need capital. B2B sales sometimes take 90 days and the tax component must be paid in 25 days. For example, if I sell 100,000 litres to a B2B customer, he will pay me within 90 days. This means I must invest 300,000 litres worth of credit and prefinance nearly GHS 2.4 [USD 0.4] per litre (GHS 480,000, or USD 80,000), which means paying the government twice before collecting the final payment. One needs a strong financial backbone to prefinance these transfers. B2B functions on very thin margins; they get quotes from many suppliers.
One needs the right kind of financing, or it can present liquidity challenges at no profit at all. This is a shame because fuel is a key cost component for most industries (who require credit) but the tax structure makes it an area to shy away from.
What is Star Oil doing to lower costs and survive the strained economy?
We are exiting poor locations and converting these investments into more profitable locations in cities where volumes per location are healthier. For every 10 stations we have built in the past, just one should be able to cover the volumes of all previous 10 stations. We could come down to 50 stations instead of 100 stations and still be doing the same volume of sales with lower fixed costs and overheads.
We have sold 16 of our 20 stations in the north of the country, where there is a brutal price war due to illegal fuel. There are still people ready and willing to buy these locations, as smaller OMCs and sole proprietors feel they can manage these locations profitably.
How is Star Oil leveraging digital technologies in its operations?
Our retail points are all remotely controlled with online reporting systems. We all work from home. We have real-time reporting. Every day there is an online report that I can see on my phone or computer. I know how much stock we have across the network at each station and the status of each bank account. All meter readings are in the software so you can see what was sold.
Is the company considering mergers and acquisitions in the future?
We want to make sure that as a family business we can achieve at least twice the return that we would earn from financial instruments. The goal for our shareholders is not just to make money for themselves, but to make sure our footprint in terms of employment is high compared to that of multinational companies. Some of the decisions around employment are not strictly based on having a full workload for everybody. Our objective is to reach a certain threshold in order to not compromise the organisation during any crisis period.
Our plan is to start looking into mergers and acquisitions in the future. We could be looking at international companies. Most African businesses are family run, but once the next generation comes in, they want more for shareholders and expect a market-based return on investments. The possibility of mergers and acquisitions with local or international companies is likely if their business model and objectives around employment creation are similar to ours.
What are Star Oil’s competitive advantages?
Our company is run much better than many international companies in Ghana. We have the most robust systems in the downstream sector in terms of operational and financial control. We have more insight into the market than any other company in terms of location and business drivers. We are resilient in terms of our ability to adjust to systems and staffing requirements according to expectations. Most employees feel like family members. If illegal fuel were to be stopped to some extent or even wiped out completely, customers would look at other factors as price would no longer be a determining factor.
If investors are looking for a local partner, Star Oil is one of the oldest local entities in Ghana. Customer awareness of our brand is very high. We have a very strong portfolio of stations and are working on further improvements. Prospects for partnership are strong because we have a solid base of retail stations, and our volumes tend to be stable. We are always trying to make sure our next station is even better in terms of throughput.