Why is Shell doing it? It’s the question on the lips of certain dealers having to operate within the vicinity of a cluster of Shell co-owned sites that, for some time, have been displaying fuel prices totally out of sync with other local forecourts. In these areas, while many forecourts are struggling to keep prices below the £1 per litre mark, Shell’s poll signs have been conspicuous at 95.9ppl.

With the information available these days, any retailer can work out that at that level, using Platt’s as a measure, Shell is not making a margin. And as PRA director Ray Holloway says - the company can’t even be covering its costs. So what’s going on?

Holloway is of the opinion that Shell, as a major brand in the UK has lost its way. He doesn’t believe Shell has done anything of any significance to its network since the days of Travellers Check (late ’80s): "Prior to Travellers Check, Shell sold a lot of land, so it now has small filling stations, which don’t have huge potential for non-oil development," he says.

"Therefore, as a major presence in the market - and there’s no doubt it is one of the big three in the UK as it is in many markets - when you find premium pricing doesn’t work; and when you find that your sites are underdeveloped for the growing potential available through market closures - then what do you do? How do you use this network?

"Shell has two choices. One is to exit the market; the other is to hopefully put more volume through the network. And the way to do that is to cut price. But therein starts the problem."

Holloway believes that by pursuing - in some places - a cut-price policy from poor real estate, Shell’s future depends on only one thing - refinery margin. It doesn’t discount everywhere because of the product exchange agreements it has with other companies. Not all the product Shell sells is produced by Shell, so it has to keep the price higher at some locations in order to offset the disadvantage of the exchange agreement.

"Shell has embarked on this discounting policy - not just in the UK - because it is making shed-loads of money from its refinery business," he explains. "Shell’s delight at the moment is that the refinery margin is almost as robust as it’s ever been. The company is living off that. But it’s a very unwise senior manager that blurs the margin between his different divisions. If you end up losing money in all divisions, you’re on the road to ruin."

POOR LOCATION

Even accepting the need to operate a discount policy, Shell could be losing more money because of it than necessary. It has sites that are discounting for no gain. A Shell forecourt on the A5, going north of Milton Keynes, for example, with no other forecourt before it for 20 miles, and a premium-priced site five miles beyond it, is one of the lowest-priced sites in the network.

"Shell’s doing it because it is a poor location - but you cannot make a poor location into a good location by cutting price," stresses Holloway. "Shell is pursuing a policy that has been tried a number of times before. But unlike the supermarkets, Shell has no other added services that will bring lasting benefit. And when the day comes when its refineries are losing money, it will be out of this policy just as soon as it can.

"The interesting thing is, that the closure of filling stations has taken us back to a point where filling stations can hold volume without cutting price. The thing that’s stupid about Shell’s strategy is that it’s not optimising volume performance with price.

"Quite often Shell is dragging the price down. In an area like Portsmouth, where it has eight or nine co-owned sites, it is therefore reducing its own margin, and the insanity of that in a business model doesn’t take long in explaining to someone who understands simple arithmetic.

"So, just as Tesco and the other supermarkets stopped developing out-of-town sites long before the planning law was changed - when they discovered they were just competing with themselves - in some areas you’ve got Shell competing with Shell. It’s madness."

In the meantime Holloway is concerned for the independents in Shell’s cut-price areas: "In my opinion their business is being incorrectly and unfairly attacked by a company which really was a pioneer of this industry and will see itself as part of the long-term future. But at the moment it’ll do it without dealers, because how can anyone near a company-owned site sign up with Shell?"

The other emotional issue, which Holloway intends to bang the drum on, is the fact the UK petrol retailer has had a deficient margin since the early ’90s, when supermarkets took it away. He believes it’s unforgiveable that at a time when the major oil companies - who suffered tremendously during those days as well - are earning the highest profit margins ever in their business because of the value of oil, they’re not prepared to do anything other than destroy the downstream business.

"Shell has a very poor network, with plot sizes that are too small to maximise; it won’t hold volume at market price when it can’t afford to cut price when the refinery margin is gone. Ultimately it’ll end up selling these sites in the same way the others have," predicts Holloway.

"Most of the other oil companies have embarked on a strategy that says the future of this industry is from the independent. They have sold a lot of owned assets. Their strategy is to focus on being a supplier. Shell is trying to kick the trend. And it may believe that if it can hold this position long enough, then there is some benefit in having owned assets."

But while Holloway accepts that what Shell is doing is not illegal, it is his duty to try and do something on behalf of his members, which is why he has written to the Office of Fair Trading. The letter highlights a paragraph in the recent decision paper by the OFT regarding its enquiry into the supermarket sector, which talks about local trading area domination.

"If I can persuade the OFT that a similar situation applies in the fuel industry, then we may well bring some attention to this. It is possible to track where prices have been below cost, and you can also look at market share within trading areas.

"The problem for dealers now, is that I don’t have a solution that can be implemented tomorrow, and their businesses are being destroyed today."

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