Why electric vehicles won’t kill your local servo

Chris Brockett

Australia remains a nation of car lovers. Some of us enjoy the engineering and craftsmanship, others have fond memories of lazy Sunday drives and long holiday road trips. In reality, many of us have little choice. Our low population density and poor public transport means most of us are car-dependent.

This is a fact not lost on service station and convenience retail asset investors. They have invested on the basis that service stations and convenience retail will remain an essential part of our daily lives.

For some, electric vehicles challenge this view. If you own an electric vehicle (EV) that can be recharged at home or work, what role is there for your local servo?

Let’s answer that question. The Ford Model T first popularised the use of the internal combustion engine in 1908 and has dominated our urban landscapes ever since. The move to EVs is therefore symbolically powerful, a once-in-a-lifetime change with the potential to redefine our towns, our cities, maybe even our lives. No wonder the media loves writing about it.

The problem is this; many investors now saving for their retirement are unlikely to see any of the changes now being written about in their lifetime.

There are three primary reasons why the impact of EVs is decades away.

The first is financial. The Australian Government raises about $20 billion each year in fuel excise tax. EVs will reduce this figure, perhaps to zero. That lost revenue will need to be replaced, probably from some form of road user charge. As we know from existing road tolls, this is unlikely to be politically popular.

The reticence to adopt an EV policy is therefore understandable. If the financial incentives or tax subsidies that encourage EV use lead to lower revenues from fuel excise, why rush it?

This is a major factor in the switch to EV. The role of incentives was laid bare in Denmark where a phase out of EV incentives in 2015 provoked a dramatic decline in EV sales by 60%, prompting the Government to reinstate the incentive regime in 2017.

Governments have another argument against EV subsidies. According to US and EU data, they cost 20 times the economic benefit that EVs deliver through lower carbon emissions. Investments in improving the fuel efficiency of petrol-powered vehicles may offer better value for money than EV subsidies.

Then there are the practical considerations. EV charging takes time and charging infrastructure is sparse. Australia lacks a comprehensive recharging network and the experience of other countries shows that without appropriate infrastructure, including standardised recharging plugs and a large network of superfast direct current recharging stations, motorists aren’t inclined to make the switch.

Australia’s small population and long distances aggravates the problem. Unlike a densely populated, small country like Korea or Holland, the higher cost of our network infrastructure needs to be supported by a small number of people. This makes the economics of EV infrastructure even more demanding in Australia than elsewhere.

Finally, there’s cultural proclivities. The average Australian owns a car for about 11 years, one of the longest periods in the world. Many of us won’t want to simply write off the value of a car that we could happily drive for another five years, which will likely slow the uptake of EVs.

None of this is to claim the switch to EVs won’t happen. There are already pilot programmes throughout Australia and more EVs on the road today than a few years ago, although they still accounted for less than 0.1% of the 1.2 million new passenger vehicles sold last year.

The existing infrastructure built for the petrol-powered car will eventually be repurposed to cater for EVs. But even when this change occurs it may well strengthen rather than weaken the case for convenience retail.

People are time poor and becoming more so. Retail services that offer “extreme convenience” are more in demand than ever. And nothing better fits that bill than your local servo.

Most service stations are located close to homes, businesses and major roads, offering operators the perfect opportunity to connect with retail consumers. The current operators’ strategy is to move away from fuel sales and impulsive purchases to convenience retail and services.

Along with Puma Energy and its 7th Street Café concept, Caltex is at the forefront of this change with its “convenience marketplace” concept, The Foodary. Caltex announced that initial results are encouraging. The Foodary’s introduction led to a 35% increase in sales and 5% higher fuel volumes. And importantly, almost half of all in-store transactions didn’t involve the purchase of fuel at all. That’s not surprising given that partnerships with Sumo Salad, Guzman Y Gomez and Boost Juice, plus the recent purchase of boutique sandwich outlet Nashi, encourage food-only visits.

Touch screens at the pumps mean meals can be ordered while customers refuel. And some sites feature parcel collection and laundry services, where customers can have their clothes cleaned, dried and ironed for same-day pick-up. The Foodary concept will soon be rolled out to up to 60 more stores.

BP is following a similar strategy in its pursuit of the Woolworths fuel business. Drawing on BP’s successful UK alliance with Marks & Spencer, the aim is to attract retail consumers with a local, convenient “one-stop-shop” offer of food and household items.

It may be decades away but eventually most passenger vehicles on our roads will be electrically powered. Service station operators are already preparing for it, successfully shifting their businesses away from fuel sales and towards convenience retail and services.

This makes sense. Whether cars are petrol or electrically powered has little bearing on our need for convenience. In 20 or 30 years’ time we’ll still be grabbing a coffee on the school run, picking up milk on our way home, and refuelling our bodies as well as our cars.

Roadside convenience will become an increasingly significant part of the retail landscape as a result. In the UK, petrol sites account for well over half of all convenience sales. Here, the comparable figure is 20%.

The road may be long but the route is clear, making the futurist headlines about EVs a bit of a sideshow. This switch is likely to take longer than people expect. And when it does eventually occur, convenience retail will inevitably be an even greater factor in our daily lives.

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This article has been prepared by APN Funds Management Limited (ACN 080 674 479, AFSL No. 237500) for general information purposes only and without taking your objectives, financial situation or needs into account.


Chris Brockett

Chris joined APN in March 2016 and was previously responsible for managing the Direct Property Funds business before the listing of the Convenience Retail REIT. He has over 10 years of experience in direct real estate, funds and asset management.

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ed Swiatkowski

Let me propose another alternative. Why would there be a need for only servo's to power up your vehicle, when thousands of times a day people go shopping to a mall? Park-N-Power locations at malls could do the same thing, but people will have a longer time to shop while their cars charge up.......For a fee of course.....done thru their phones. And then very soon, along will come the cordless charging system. Park over or near it and voila!

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ANTONIO GEORGIOU

The elephant in the room, apparently invisible to everybody, is that we can barely produce enough electricity to run the tiny motors in our air conditioners on a hot day, let alone the massive motors required to push 2 million automobiles with passengers up a hill. There are no plans I know of to quadruple our electricity output, so how can the EV story go forward ?

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Philip Whish-Wilson

It's good to hear someone in the investment sector finally applying some commonsense to the EV market. Yes, it will happen but it will be a long-term, very long-term, matter for Australia, especially when you take a drive outside the major cities and experience the tyranny of distance in the big country!! EVs won't get you to the next town in most parts of the country. Furthermore, who wants to wait around while your EV charges at a charging station! Hybrids are the answer for the medium term, if that's the way you want to go.

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Bruce Smith

Good article. There are a number of points to consider. EV's should not be subsidised; at least in Australia. However, how the conclusion is arrived at claiming that "they cost 20 times the economic benefit that EVs deliver through lower carbon emissions" sets a bit of a long-bow. Strip out subsidies and then look at low operating costs and you just may end up with people having more disposable income to spend in other areas. In 3 years I have spent zero on oil and petrol and only A$600 in "service costs". The power cost components is more difficult to allocate as from the PV it is now basically free; the installation now fully paid for and offering - supposedly - a 25 year life. Charging most certainly can be an issue but my EV either trickle charges at work from my PV or at night (off-peak rates) and all works well. In fact an uptake in EV may further increase the number of PV + battery storage installations (mainly domestic). As for the fuel tax component, if any political party ever gets the guts to do it it is a perfect time to totally re-think and re-organise how "road tax" - call it what you will - is collected. The opportunity to charge on a "user pays" tipping point is looming closer. As always there will be winners and losers but that system will not give a damn what you are driving or how it is powered, just how much you are using the road system. A side benefit may be that such a system may also steer people towards public transport - if we ever gets a decent system in place. The Convenience Store concept is just another modern iteration of the earlier "corner store" . There are a number of variations being tried but, in general, its just another convenience shopping option. Some just do food and take-aways whilst other (as you say BP and M&S in the UK) do a mini supermarket concept. Yes hydrocarbon powers vehicles are becoming more efficient BUT the EV has no combustion engine, gear-box, diff, drive train, exhaust system (read catalysts), sovereign risk (read Middle East/Russian fuel supplies) etc. I sometimes think that these " lower carbon emissions" centric arguments are too narrow in scope. The news is that the Middle-East wants fuel back up around US$100 a barrel. There is possibly more likelihood of "electrical power" plateauing from solar/wind sources than there is of hydrocarbons following a stable pricing policy. The article does not seem to include the potential massive world-wide savings that (if they ever become a reality) autonomous vehicles will bring to the cost of road trauma.Yes, hydrocarbon powered vehicles may also enter the autonomous arena but possibly not so cost effectively as an EV. People did not, do not, and will not willingly accept change but at some time in the future, as the EV product improves (charging time especially), an inflexion point will arrive and there will be a very rapid cross-over.

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Ian

Adoption of EVs might be slow for the next few years, but as battery costs continue to decline, it will reach a tipping point where the econonomics are inescapeable and the rate rapidly accelerates. Of course we don't see that yet, which makes it hard to predict, but why on earth would you buy a more expensive Internal Combustion Engined (ICE) car that requires much more expensive fuel and has much higher servicing costs? And since few will want a second hand ICE (and many will want to sell them), the resale price will plummet too, making the depreciation the biggest problem. In addition, EVs will prove to be a boon for our electricity grid, as there will not only be incentives to charge them whilst electricity is readily available, but also for those willing to allow the battery to be used during peak times. With a fully charged EV able to power twenty homes through an evening peak, just imagine how much that would assist in the ability to store and utilize renewable energy. All of this would be controlled via an app on your phone that would know how much charge to reserve in your EV for your actual trips, and how much would be available for sale back to the grid! Energy providers are already getting on board with this, offering subsidies to EV buyers in NZ because it reduces their generation costs. On the other hand, the costs of EV ownership may well be largely immaterial, because automated driverless EVs will probably arrive by 2023 anyway. At that stage it will become so cheap to call an AEV to take you where you wish to go (around 10% of the current taxi fare), that it simply won't make sense for most people to own a car (and definitely not two). Why would you outlay $40K on a vehicle if it costs you $2 to get to work, with no need to worry about parking at either end of your trip? You simply tell your phone where you need to be and when, and the app schedules the car to pick you up. In such a world, the issue of recharging is totally irrelevant to you - the car takes care of it. Servos may still exist as convenience shops, but I suspect the products you have ordered via your phone will be picked automatically and delivered to your share car as you drive through! This might sound far-fetched today, but none of the technology here is earth-shattering, and all is being worked on by huge companies with immense budgets - I can assure you that they wouldn't be doing it if they thought it unachievable (or even too long-term).

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