No matter how far round the world you go, it seems the problems of petrol retailers are the same. In Australia the talk is all about low fuel margins, struggling independents, discounting supermarkets and the need to develop a good convenience store. It’s a familiar tale, albeit with a different background.
For unlike in the UK, the serious problems for independent petrol retailers there have really only started to come to fruition in the past two years or so, since the arrival of supermarkets into the petrol retailing mix. But in the past year the knife has truly begun to twist.
Service station operators are said to be facing one of the most environmentally challenging business environments seen in the past 30 years. And it’s all being caused by big businesses flexing their muscles and using their financial resources to take a more controlling stake in the petrol retailing industry. At one time it was just the oil companies, but now the supermarkets have joined in as well.
Last year saw two announcements that would forever change the structure of the petroleum market when two of the biggest supermarket operators – Coles Myer and Woolworths – who between them control around 85% of the grocery market, got together with two of the four major oil companies (Shell, Caltex, BP and Mobil) that operate in Australia.
In June 2003 Coles Myer agreed what is thought to be a 10-year alliance with Shell, whereby the supermarket has gradually taken over the franchise agreements and operations of all the sites previously operated by multi-site Shell franchisees. Shell is said to have prepared the groundwork for this over many years by consolidating its network into six multi-site franchise groups, which made the commercial negotiations straightforward. However it still retains ownership of the real estate and the installations while Coles has bought the right to run the businesses on around 600 sites and is responsible for setting petrol prices.
Then a joint venture arrangement between Caltex (Australia’s leading oil refining and marketing company, part-owned by Chevron Texaco Global Energy, with two main brands, Caltex and Ampol) and Woolworths was announced. This is a 50/50 joint venture in terms of equity, with Caltex’s existing service station operations division, Calstores, managing all its stores. The sites are branded Caltex for petrol and Woolworths for the shop or convenience store.
Now the two alliances have engaged in heavy discounting as they fight each other for market share. They are offering a discount of 4 cents a litre for shoppers spending certain amounts in the supermarket. The battle threatens to tear the heart out of the service station network, which, according to the Australian Association of Convenience Stores, numbers 4,453. But those are just the sites with c-stores in its membership. There are many more small, independent, pump-only sites throughout the country who are now extremely vulnerable.
Ron Bowden, chief executive officer of the Service Station Association, which has been fighting the cause of small forecourt operators, says the rollout of the Coles/Shell arrangement has been accompanied by concern wherever it goes: “So far businesses and communities have a right to be concerned. The petrol volume gains that the supermarket petrol sales have achieved have ranged from significant to spectacular. That can only mean traditional petrol outlets have lost volume. Australian motorists will be the losers in the long run, as petrol prices will inevitably rise long term.”
The Coles Myer deal apparently pushed Shell’s fuel sales up 30% by the end of last year increasing its market share from 17% to 22%. It is predicted to quickly rise to 30%, meaning nearly half the market will be in the control of just the two big alliance groups. Shell would seem to have the sunny side of its particular deal, as it returns to being a refiner and industrial and commercial marketer of refined petroleum products. After all, Coles Myer is running the fuel business, and is said to be giving Shell a guaranteed payment for the leases on all the sites. It has paid out large sums to Shell’s franchise owners for the right to operate their petrol stations and c-stores; it has to pay rent and operational costs – plus it is selling fuel at a discount, probably at a loss.
However the joint ventures make a mockery of legislation which restricted oil companies’ participation in the retail arena. Mobil Oil Australia has signalled its intentions to rationalise, with many of its sites sold or closed this year. ExxonMobil Australia chairman Robert Oleson complains that: “The market continues to suffer from outdated and unnecessary regulation, including the federal petroleum Retail Marketing Sites Act 1980, that prevents Mobil competing with other retail market participants on an equal basis.” Under the Act Mobil can only operate 87 company stores – its network is about 800.
Meanwhile a survey of petrol retailers painted a bleak picture with around one quarter of them expecting to be forced out of the industry by 2005 through the tough competition.