Retail margins comprise the costs of operating filling stations and the profit retailers earn from selling fuel. On the basis of the estimated wholesale margin, the implied average retail margin in the Island is around 3.6 ppl and has broadly remained the same over time as shown in Table 10 below. By comparison, the average retail margin in the UK has broadly averaged 3 pence during the period.29
Table 10 – Estimated retail margins, in ppl
Petrol Diesel Weighted average
2005 3.70 2.56 3.22
2006 3.96 3.00 3.55
2007 4.36 3.26 3.86
2008 4.30 3.01 3.70
Source: Total IoM, Shell
The retail margins established in the previous report for the period 2002–05 were approximately 2.8 ppl for unleaded petrol and 3.3 ppl for diesel and are less than the estimated margins presented above. The 2008 Highlands and Islands of Scotland study
28 Defined as Oil company marketing margin – See Highlands and Islands Enterprise, HITRANS, The
Highland Council, Road Fuel Supply in the Highlands and Islands – Current Situation, November 2008 Study.
estimated retail margins at 5.7 – 6.5 ppl for unleaded and petrol respectively.30 These margins need to cover the operator‘s costs.
Table 11 gives an illustrative example of the financials of a typical retailer. The average Isle of Man filling station with a throughput of 2.4 million litres a year and a margin of 3.7 ppl has annual revenues of £88,800. These revenues have to cover wages, lease or mortgage payments for site rental, utilities, business rates and other expenses.
Table 11 – Estimated financials of an average service station
2008 (£) 2008 (ppl)
Gross margin 88,800 3.7
Salaries and wages 29,000 1.2
Leases or interest payments/depreciation for site 14,600 0.6
Utilities and rates 7,250 0.3
Sales and marketing 6,800 0.3
Total overheads 57,650 2.4
Profit 31,150 1.3
Source: Pöyry Energy Consulting
These expenses are often substantial – a typical fuel station opening for 16 hours per day (requiring an approximate minimum staffing of 1.5 full time equivalent employees) had an average wage bill of £29,000.31 The annual cost of a site either acquired (depreciation, interest payments) or leased (rental payments) was conservatively estimated at £14,600.32 Combined with other expenses, the average station is making an estimated profit of £30,000 or 1.23 ppl, leaving very little room for any exceptional overheads or for a meaningful return for the site proprietor.33
The relatively low margins resulting from increased supermarket penetration in the UK were responsible for rapid consolidation in filling station numbers with approximately 9,000 stations going out of business between 1992 and 2008. The majority of remaining filling stations have responded to this competitive pressure by diversifying
30 Highlands and Islands Enterprise, HITRANS, The Highland Council, Road Fuel Supply in the
Highlands and Islands – Current Situation, November 2008 Study.
31 Comparisons with the wage bill of several stations in the Island provides a wide variance in costs due
to differences in allocating the costs to non-fuel businesses such as car washes and convenience store on site. The stated cost estimate is conservative given that the average Isle of Man weekly gross wage of £ 568.76 implies an annual wage bill of approximately £45,000 for 1.5 FTE - see Isle of Man Treasury, Prices & Earnings 2008.
32 The cost of renting or owning the site also varies; we have selected a conservative estimate based on
selected depreciation expenses of several filling stations. However, for comparisons on the upper limit, we have reviewed a local station with an average throughput which estimates its value at £900,000 as of 31 December 2007; AMC Petrol Consultants estimates that the cost of developing a new station, as of 2003 was approximately £600,000 - £900,000. Even assuming a 5% interest rate as interest payments/ straight line depreciation on £600,000 gives an estimate of £30,000. We therefore believe the figure provided is conservative.
sources of revenue through convenience store sales and other activities such as car washes.34 It is estimated that the average gross margin on shop sales is approximately 20% compared to 4-5% on fuel sales.35
3.5
Comparative price assessment
Road fuels in the Isle of Man have historically been sold at a premium to prices in the UK. For consumers, comparisons of prices in the Isle of Man and in the UK are the most accessible means of judging whether prices are reasonable. Table 12 below highlights the average annual price differential for road fuels with the UK average36:
the average annual differential with the UK national average has broadly declined across all fuel products since 2005;
with the exception of unleaded in 2005, the annual average differential has remained within the 5 ppl differential suggested as a trigger for further Section 19 investigation in the 2006 OFT fuel price study;
the differentials are lower for premium unleaded and highest for unleaded; and
there is significant volatility in the differentials (see Figure 20);
Table 12 – Average UK and Isle of Man road fuel price differentials, ppl
Petrol Premium Diesel
2005 5.28 2.52 4.31
2006 4.80 1.22 3.43
2007 4.42 1.74 4.12
2008 3.77 1.86 3.96
Source: Total IoM, Shell, Catalyst
The average annual differential with the UK national average for the last five years was approximately 4.33 ppl for unleaded petrol and a 3.80 ppl diesel. .37 With the exception of 2005, the differentials have remained broadly below 5 ppl.
As Figure 20 illustrates, the monthly price differentials have exhibited much volatility and a pronounced worsening in the second half of 2008. This volatility may have arisen for several reasons:
34 All company owned forecourts in the UK have a convenience store - as of 2008, over 80% of all
dealer owned sites had an attached shop. Similarly, 60% of all company owned and supermarket sites in the UK have a car wash on site, as do half of all dealer sites. In part this reflects the low profitability of the fuel sector, and the comparative higher margins available for fuel retailers in the sale of non-food items and services.
35 Forecourt Trader Magazine
36 The UK average is defined as the average for all sites in the UK and is sourced from data collected by
Catalyst. The UK Department for Energy and Climate Change (DECC) produces Quarterly Energy Prices and Energy Trends which provide annual UK average prices, however we have chosen Catalyst for this analysis because it provides similar data by region and dealer type. For monitoring price differentials, the DECC average is equally suitable.
37 Calculated from OFT 2006 report (2001-2004); and data submissions from Total IoM, Shell (2005-
differences in the frequency of data collection – monthly figures are often collected on a specified day in the month. If these are not aligned then prices may not be comparable because of changes in the underlying cost of product between times. Differentials may thus arise precisely because markets are competitive and prices are cost reflective.
differences in frequency of fuel deliveries – the Isle of Man receives deliveries on a regular basis, but no more than once a fortnight on average. Thus at any point in time, there are stocks of product purchased at prices between two weeks and a month old. This inventory cost is not as pronounced in the UK, where there is a more integrated distribution network.
competitive pressure is less – the large number of stations and the greater frequency of deliveries means that UK forecourt prices reflect changes more quickly in wholesale product cost. Since retailers respond when one competitor changes price, the speed of cost changes is quicker.
Figure 20 – UK – Isle of Man road fuels price differentials, ppl
-2 -1 0 1 2 3 4 5 6 7 8 Jan-05Mar -05 May -05 Jul-05Sep-05Nov-05Jan-06Mar -06 May -06 Jul-06Sep-06Nov-06Jan-07Mar -07 May -07 Jul-07Sep-07Nov-07Jan-08Mar -08 May -08 Jul-08Sep-08Nov-08 Penc e per lit re
Unleaded Premium Diesel
Source: Total IoM, Shell, Catalyst
3.5.1 What benchmark price is appropriate?
The use of a UK average masks significant diversity within the industry along two lines:
geography; and
3.5.1.1 Geographical diversity of UK retail prices
Regional fuel prices are influenced by locational drivers such as distribution network and proximity to refineries, local demand and competitive dynamics and the cost of labour. As Table 13 highlights, regional prices can diverge significantly both above and below the average UK prices. Depending on the region chosen, the Isle of Man prices could have looked between 0.8 ppl worse or 0.6 ppl better than the average.
Table 13 – Comparing UK average retail prices for road fuels with regional prices, annual prices in ppl
UK average North West Northern
Ireland Scotland Wales
Petrol 2005 87.92 87.37 88.50 87.55 88.33 2006 91.96 91.38 92.29 91.76 92.49 2007 94.98 94.42 95.47 94.56 95.47 2008 107.53 106.71 108.12 107.08 107.75 Diesel 2005 91.86 91.41 92.73 92.06 92.49 2006 95.65 95.06 96.41 95.91 96.16 2007 97.44 96.72 97.94 97.59 97.98 2008 118.12 117.33 118.78 118.43 118.61 Source: Catalyst
Note: prices highlighted in red are above the UK average, whereas prices in blue are below the average
3.5.1.2 Dealer-type diversity of UK retail prices
One of the most important trends in the UK market has been the emergence of
supermarkets as the dominant channel for retailing fuel; as of 2008, they comprise 13% of outlets and 36% of volume sold. The diversity of forecourt types (supermarket owned stations, dealer-owned independent stations and company-owned and operated stations) reflected the differences in business models and strategies.
Table 14 – Comparing UK average retail prices for road fuels with dealer- type prices, annual prices in ppl
UK average UK
supermarket UK dealer UK company
Petrol 2006 91.96 90.57 93.61 91.65 2007 94.98 93.40 96.64 95.24 2008 107.53 105.95 107.91 106.48 Diesel 2006 95.65 94.22 96.78 95.61 2007 97.44 95.59 98.81 98.05 2008 118.12 116.08 118.18 117.27 Source: Catalyst
Note: prices highlighted in red are above the UK average, whereas prices in blue are below the average.38
UK dealer prices were around 0.38-1.66 ppl below the average illustrating the strength of the impact of supermarket competition. Supermarket sites, working on a different business model, tended to have prices around 1.5 – 2 ppl lower than the national average, recovering cost through higher volume throughput and linked revenues from increased retail sales in the associated shops.
The comparisons above highlight the fact that the reported differential for the Isle of Man will vary with:
the region chosen; and
the type of market comparator used.
3.5.1.3 Retail price differentials between the Isle of Man and other islands
As an island, the Isle of Man shares similar characteristics and market structure with other island jurisdictions such as Jersey and Guernsey and even the Republic of Ireland. Table 15 below highlights the price differential between the Isle of Man and the selected islands net of taxes.
Table 15 – Road fuel price differentials of Isle of Man net of tax prices with Jersey, Guernsey, and the Republic of Ireland, ppl
Jersey Guernsey Republic of Ireland
Petrol 2005 -15.3 -21.4 3.0 2006 -11.8 -16.6 2.5 2007 -12.5 -20.8 2.6 2008 -14.2 -14.0 -0.5 Diesel 2005 -17.3 -14.1 1.2 2006 -15.4 -13.2 0.7 2007 -15.5 -8.0 1.4 2008 -16.2 -14.4 -1.5
Source: Isle of Man (Total IoM, Shell); Guernsey Policy and Research Unit, Jersey Statistics Unit, EU Oil Bulletin
38 The UK average cited in Table 13 and Table 14 and the accompanying regional and dealer-type
pricing data are sourced from Catalyst. The UK average in both tables and the regional UK prices are based on mid-monthly average prices, whereas the dealer-type prices are calculated from end month prices across all suppliers. Both tables also highlight the difficulty of finding appropriate comparators and the importance of looking beyond short term deviations in the differentials. Comparing the Catalyst prices with the UK averages issued in the EU Oil Bulletin and those produced by DECC in the Quarterly Energy Prices and Energy Trends, reinforces this message – as all three rarely provide a similar UK average on a monthly basis. Short-term comparisons may give a slightly skewed view of the actual relativities as they are often spot observations on a particular day in a month and the differences may reflect some transient differentials linked to the speed of cost pass-through into price changes.
Retail prices in the Isle of Man were consistently and significantly lower – on average 12-15 ppl lower for petrol compared to Jersey, and 14-21 ppl lower compared to Guernsey. The Isle of Man price was 15-17 ppl lower than on Jersey in the diesel market, and 8-14 ppl lower than Guernsey. While the differentials were larger than would be expected, they provide evidence that the market in the Island is pricing more competitively compared to similar markets. Price differentials with the Republic of Ireland suggest a difference of 2.5-3.0 ppl on average for unleaded and 0.7-1.4 ppl for diesel in favour of Ireland (with 2008 differentials as a possible outlier).
Despite sharing similarities with Jersey and Guernsey, the prices in the Isle of Man were significantly lower than in either Jersey or Guernsey, net of taxes, in the study period. It is likely that the absence of duties allows Channel Island suppliers to obtain a significant mark up. This may be because their consumers‘ reference point is the difference
between their domestic retail prices and those in the UK or Europe and not the pre-tax differential, and especially because the final prices are still cheaper than UK prices.
3.5.2 Which comparators are useful or relevant?
In order to assess whether the differentials observed are reasonable, it is important to identify an appropriate comparator, whether the UK average, a specified region or type of fuel station. It is also important to identify an appropriate timeframe, for comparison and an appropriate or reasonable price difference between the two jurisdictions:-
an appropriate comparator; the most relevant of the comparators assessed in this section are UK independent dealer-owned filling stations. Most filling stations in the Island share the same business model (dealer owned-dealer operated) and have a comparable throughput. Dealer owned and operated average prices in the UK as reported by Catalyst are the most appropriate
comparator. The UK average while a more straightforward comparator is heavily influenced by the share of supermarkets which comprise 36% of the total volume of road fuel sold
an appropriate time frame; monthly and annual averages have been used for ease of comparison, however a rolling eight week period would be appropriate for monitoring differentials as it provides a reasonable period to remove the impact of transient changes in differentials due to inventory holding or fuel contracting strategies.