Petrol Price Discounts: the new pull

Sex sells! Or does it? These days, petrol discounts are ?it? whether you are selling home loans or home-style cakes. The petrol discount voucher is drawing traffic to participating service stations. Can you afford not to be involved? More importantly, can you find an affordable place in the scheme of things?

You know the world has changed forever when a credit union advertises 40 cents per litre off petrol for a year if you apply for a home loan before a certain date. With a maximum 52 purchases each up to 80 litres, that’s $1,600 at best. It might be less than 1% of the value of the transaction but to the consumer it seems like a very attractive offer. So, fuel discounts now sell everything from home loans to groceries. Devised by non-fuel retailers to drive non-fuel sales, they have important implications for fuel retailers - many of whom are coming up with their own offers to stay in the game.

The major supermarkets have demonstrated that many of us, enough of us to matter, love a petrol price discount deal. We pledge our allegiance to the grocer that saves us less than $2 at the bowser, at least until a better offer comes along. That must be why they are called loyalty programs!

According to Coles Myer’s first half preliminary results, sales in the food and liquor business (that is, excluding sales through Coles Express) were 3.8% higher than for the same period last year on a comparable basis, with the fuel offer making a positive contribution to these sales. Initially, the fuel discount lifted food and liquor sales by 2%. The Coles Express growth rate was nearly 18% although this largely reflects higher petrol prices. Coles Express sales growth in the December quarter (13 weeks to 23 January 2005) was only 1% above the previous quarter. On average nationally, petrol prices were 2.5% higher according to the Australian Bureau of Statistics. This could indicate lower volumes and/or lower shop sales over the busy Christmas and New Year period as the fuel category has cycled.

We all know that it is not sales that matter in this business, but margins. Coles Express generated earnings (before interest and tax) of $20 million in the first full year of trading. Of the four cents discount, only one is accounted for in the Coles Express business. The other three cents (and at Woolworths all four cents) are accounted for in the supermarket business where they belong. These petrol deals are not really about petrol at all.

“The Coles Express fuel offer is part of a broader Coles Myer loyalty scheme which includes a revamped FlyBuys offer, the new Source MasterCard and Myer One,” says Debbie O'Brien, Corporate Affairs Manager, Coles Express.

The loyalty factor is driving the strategies of both major supermarket companies.

“The main aim of the discount petrol offer is to build and preserve supermarket share,” says Clare Buchanan, Corporate Communications Specialist, Woolworths Limited.

Comparable sales figures for Woolworths show growth of around 3% in the food and liquor business and dramatic growth in fuel sales due to the expansion of the Caltex Woolworths alliance network. Results in the second half of the financial year, when both networks are fully established, will give a better indication of how the petrol offer has contributed to grocery bottom lines.

“We also aim to make a profit out of petrol, but it is an add-on to our core business of grocery retailing,” adds Claire Buchanan.

Woolworths’ estimates its national petrol market share is 16%. Assuming the average throughput at Coles Express sites is at least that of Woolworths, a conservative estimate of their combined petrol market share is 40%. An even higher estimate is supported by anecdotal reports of a large jump in sales at participating service stations.

“At the Caltex Woolworths jointly branded Caltex sites there has been an average 80% increase in petrol sales,” says Jenny Palmer, Media Relations and Communications Executive, Caltex Australia Ltd.

“There has also been a slight decline on average at the other Caltex branded service stations.”

No wonder petrol discounts are now the benchmark in retailing, making it very difficult (though not impossible) to survive in fuel retailing without a comparable offer.

IGA rolled out its petrol discount offer nationally in 2004.

“We have found that customers now expect a petrol price discount offer,” says Andrew Reitzer, CEO, Metcash.

Peter Noble, CEO of Foodworks, agrees. “Petrol is the new supermarket category and we had to make a similar offer,” says Peter Noble. “It is more perception in the minds of customers than anything else. It is the customer feeling that they are getting a competitive offer.”

“It is losing its ability to capture market share,” adds Andrew Reitzer. “Grocery market shares are reverting to the status quo.”

Both Andrew and Peter argue that their offers are more flexible because they use a ‘reverse voucher’. Customers can take any fuel receipt to a store and their grocery bill is reduced by the equivalent of four cents per litre, and some times up to 12 cents for one-off promotions. They also favour the rest of the fuel market.

“When the offer is 12 cents, sales go through the roof,” says Peter Noble.

The reverse voucher is also more stable in a dynamic industry. Currently, Action supermarkets in regional Queensland participate in an alliance with independent service stations and offer a petrol discount voucher similar to the majors. Ongoing grocery industry consolidation will see Metcash buy Action (and Foodland) supermarkets, placing some uncertainty over the long-term future of the alliance and raising the question, “Do you have to participate in a petrol discount deal to stay in the fuel business?”

Although it looks like nearly everybody has decided the answer is ’Yes’, the offer has to make financial as well as marketing sense.

“Not all customers want the offer and retailers do not have to have a petrol offer,” says John Clark, Managing Director, Reliance Petroleum. “At the end of the day it has to be funded from margin somewhere. It can only be funded from the grocery margin because there is not enough margin in fuel.”

Doing it your way

So, it is a cost of doing business. But, whose business? Two significant regional service station networks have put together a fuel offer that ties the discount to their shop sales.

In north-eastern New South Wales, across its network of 23 service stations, the Collect stores are offering four cents per litre discount on fuel purchases when customers also buy any four items from the C-Store.

“We were not losing a lot of volume to the supermarkets, but enough to consider a comparable offer,” says Andrew Murray, Director Convenience, Northern Marketing. “Mainly, we did not want our customers to think that the supermarkets were offering better value than us, even if they did not want to take up the offer. We wanted to give them the same opportunity to earn four cents off their fuel purchases.”

There might be something in this. Customers now seem to expect the offer to be there even if they do not want to take advantage of it. In fact, it might be these offers are costing less than first expected.

“While there are widespread discount offers in the market, our information leads us to believe that the majority of fuel including petrol is still purchased by retail customers not using discount offers,” says Jenny Palmer from Caltex.

A competitive offer is only part of the solution. It should also be fairly simple for the customer and the retailer, and it should not erode total margins.

“The discount has to be paid for,” says Andrew Murray. “There is not enough margin in the fuel market to give it away so it has to come from the shop. We were surprised by the success of the offer. We thought people would just buy the four cheapest things in the store, but they have not. It is also a good opportunity for sales staff to up-sell when customers bring less than four items to the console. On average, the total purchase for those using the discount is higher than for those that are not.”

In south-east Queensland, across its network of over 50 service stations, Matilda Fuels is offering four cents per litre discount for fuel purchases when customers buy the special bread and milk combo for $4.95. The bread is an own-brand 850 gram Matilda Value Loaf and the milk is a two-litre bottle. The offer was so successful when it was launched in December 2004 that Matilda initially ran out of bread and had to arrange to increase supply.

“We think it works because it is simple to understand and easy to access,” says Garth Anderson, General Manager, Matilda Fuels.

When compared to the supermarket offers, $4.95 is a modest minimum spend and customers can take advantage of the offer immediately.

“The deal is transparent and clearly stated on our flying banners,” adds Garth Anderson. “They know what to expect when they walk in the door.”

That’s the marketing side. Once again, it has to make sense financially. Matilda Fuels have found that higher fuel volumes add to overall margin, bulk buying power keeps costs down and the offer ‘walks customers around the shop’ adding to sales of other shop items.

“We did not make a knee-jerk reaction to the changes brought by the supermarkets; we considered an offer that would work for us and our customers,” says Garth Anderson. “For some customers, $30 is a lot to spend to get the discount, and others were complaining about the queues at the supermarket fuel outlets.”

“Supermarket customers are experiencing driveway rage,” adds Peter Noble.

“We hear that shop sales are down by as much as one-third because people do not want to get out of the queue. We would not be surprised to see them trialling new store layouts with more pay-points and merchandise in easy reach of the queue lines.”

“We expected to lose fuel volume when the supermarket deals expanded, but we had not expected shop sales to increase,” says Andrew Murray. “We think the supermarket petrol stations are losing convenience store customers because the forecourts are so busy and they have to queue for fuel and payment. Our store sales increase was greater closer to the supermarket petrol outlets. I think some customers conclude that $1.50 is not worth the wait."

If this is the case it must be troubling for those Caltex franchisees participating in the alliance who retain management of the shop but have passed the ownership of fuel over to Woolworths.

You can see by just looking around you that there are some very busy Coles Express and Caltex Woolworths forecourts. However, both Coles and Woolworths claim that this is not adversely affecting the customer demographic mix or shop sales, and there are no plans to expand the networks with new fuel locations.

“In terms of increasing the network, we will continue to monitor our network on a site by site basis to ensure that it continues to meet customer demand,” says Debbie O’Brien.

“Queuing does not necessarily mean we will open additional sites as there may well be the potential to increase trading hours and expand existing sites to better cope with customer demand,” adds Clare Buchanan. “Queuing is not affecting customer numbers or demographic, and is not affecting shop sales. On the contrary, shop sales are very strong compared to last year.”

All join in

Where there are winners there are usually losers, and independent service stations on the fringe of regional centres are suffering from the loss of volume and the inability to compete on price.

“The petrol price deals are forcing some regional independents out of business,” says Garth Symington, General Manager, APADA. “Others have shifted their focus to other aspects of their business and/or are making their own offers. However, it is hard to compete. Overall, it is a zero sum game with lower margins all round and a shift in market share.”

It is not only independent fuel retailers that are feeling the impact. Small specialist retailers in towns all over Australia lost market share to the supermarkets when the petrol offer became widespread. To qualify for a voucher, customers started spending more at the major supermarkets and less in their local shops.

Will it be Servo Savers to the rescue? Servo Savers is a reward program for customers who shop with locally-owned small to medium-sized businesses, and the reward is, you guessed it, petrol discounts - at participating local independent service stations.

On 21 February, Servo Savers launched in Brisbane, Sunshine Coast and Launceston; on 28 February in Rockhampton; and on 21 March in Adelaide and Western Sydney. It will be progressively rolled out across Australia over the rest of 2005, making it an interesting year.

It works in much the same way as other petrol discount loyalty schemes. The discount voucher is the cash register docket from the local retailer. The available discounts (five cents, 10 cents or 15 cents) are advertised on the back. On the front is the amount the consumer needs to spend to earn the discount (from $10 to $50), the amount spent and the date of the transaction. Customers have a calendar month to redeem the voucher at any participating service station. The potential to earn 15 cents per litre ‘ups the ante’ in a market where four cents is the norm.

The service station then checks the docket to make sure the customer is eligible, discounts the price of fuel then redeems the docket through Servo Savers to get reimbursed. It is the local shop that pays for the discount, not the service station. There is only a small financial contribution from the service station to the program, and hopefully a restoration of sales volume and shop sales.

“Discounted petrol is the reward to the consumer for loyalty to the non-fuel business but it usually means gains in volume and shop sales for the service station,” says Marrijane Davies, Project Coordinator, Servo Savers. “It is a long-term loyalty program and retailers need to give it time.”

Participants sign up for 12 months and Servo Savers supplies the POS material including large forecourt banners to promote consumer awareness. This year there will be special promotions with double discounts funded by Servo Savers to promote the program.

“Consumer response varies across the businesses and depends on how well it is promoted by both non-fuel businesses and service stations,” adds Marrijane Davies.

“Some push it hard, reminding consumers that for a couple of more dollars they can get the discount, and letting them know where they can get the fuel. With the big banner on the forecourt, people come in and ask, ‘How do I get the discount?’ It works both ways.“

Some marketers argue that the supermarket deal works so well because it ties together activities (grocery shopping and filling the car) with similar frequencies. Let’s see if the attraction of the petrol price discount works with other shopping activities such as hardware, pharmacy and clothing. And, let’s not forget that home loan offer!