Australian Convenience Store News: Forecourt - Focus: Rural & Regional retailing

s the recent expansion of supermarket chains into fuel retailing hastening the demise of the traditional country servo?

As expected, change is happening quickly. The Coles Myer/Shell alliance is up and running in Victoria, Caltex and Woolworths have announced a new joint venture and IGA is trialling its petrol discount offer in Queensland.

When FuelWatch website members and visitors were asked whether they intended to take advantage of the Coles, Woolworths or IGA discount fuel offers, over 85% said yes.

Whether they will be able to or not still rests to some extent with the ACCC. Although initially a strong supporter of the Coles/Shell alliance, the ACCC has left its options open. Recent press statements point to a less sanguine view of the supermarket fuel discounts and increasing concern over the long-term impact on independents in petrol and grocery retailing.

In the last issue of Australian Convenience Store News, we noted that rural and regional retailers could be the most affected by the expansion by supermarkets into petrol retailing. Feedback to APADA indicates the Coles/Shell alliance has reduced volumes up to 30% in some areas such as parts of Gippsland. The impact has been significant for some distributors that have lost both retail volume through their own sites and wholesale volume through the other sites they supply. Country retailing is the focus of this issue.

The public perception that country retailers charge too much for fuel has persisted for many years despite the many attempts by the industry to explain it in basic terms. This perception was not helped by Woolworths' entry into regional centres.

"It is getting harder for retailers in small country towns to retain local customers," says Garth Symington, General Manager, APADA.

"The differential between regional centres and small country towns will be bigger. Whilst logical due to scale as well as distance, it will be harder to explain. Interestingly though, in some areas there will be no reason for the supermarkets to post low pump prices and price differentials between regions may become apparent. Supermarkets will then have the explaining to do."

Most country retailers can't meet the supermarkets head on. They need to work on their product offering and find their competitive niche. According to Garth Symington, you have to "either diversify into addition product offerings such as fast food, car wash, dry cleaning and the like to become a destination location and a convenience retailer or consider leaving the industry."

Diversify or depart
Although the details of the proposed Caltex/Woolworths joint venture are still being negotiated, we do know that it will leave over 1,600 Caltex branded sites out of the petrol discount offer. We assume this will include nearly all the rural and regional service stations. Owners and operators of these sites face the same difficulties as the Shell branded dealer network. In his doorstop interview on 27 July, John Fletcher, CEO of Coles Myer, alluded to the possibility of an expansion of the Coles Express concept into the remainder of the Shell network. However, Shell dealers have either had no communication at all or have been told there are no plans for the dealers to become part of Coles Express. Australian Convenience Store News asked two Shell dealers about the initial impact of the changeover to Coles Express.

Gary Treloar operates a taxi service and Shell-branded service station in Ballarat. The new Coles Express petrol discount offer compounds an already awkward situation caused by not being part of the Fly Buys scheme.

"The same is happening with the Coles Express offer. We have a few people coming in with dockets. One gentleman became very abusive with the console operator insisting the docket should be honoured. This is probably because we are as close to the Coles supermarket as any of the Coles Express outlets in Ballarat."

Gary Treloar's sales volumes were down 6% in August when his pump price was higher than the Coles Express, Safeway Plus Petrol, APCO and United service stations, all of whom were competing with very low prices."

"We have a minimum margin that we will not go below," says Gary Treloar. "And, we are a bit protected with the taxi business. We sell a lot of LPG."

Doug Grey's taxi business is also important to his business in Castlemaine. There is no Coles Express in Castelmaine and the nearest Coles store is either Bendigo - 38 kilometres north or Kyneton - 36 kilometres to the south-east. Like Gary, Doug is maintaining his margin with a strategy that focuses on values other than price.

"Country shoppers are not stupid," says Doug Grey. "They know what it costs them to buy groceries and fuel and they can work out whether it is worthwhile travelling into the bigger regional centres or shopping locally.

"We are also confident the local townspeople know the benefit of supporting local businesses. It generates local employment and we employ local single mothers. All of the service station margin goes to their salaries."

Even in local competition, Doug Grey has found that there is a reasonable proportion of customers that are not sensitive to price but are sensitive to waiting for pumps.

"We have a big site with good access and our strategy has resulted in only a small loss of volume," says Doug Grey.

Of greater concern was the possibility that IGA and BP would form a fuel discount alliance. The IGA network penetrates deep into rural Australia and an alliance with a single brand would decimate the other brands and independents in country towns. The recent announcement by IGA to offer a fuel discount without an alliance with an oil company adds a new twist to the unfolding story.

The IGA offer
From 1 October 2003, IGA is offering shoppers at any of its 189 Queensland stores the equivalent of four cents per litre when they spend $30 at an IGA store. The fuel can be purchased at any service station. Customers just need to take their fuel receipt to IGA and purchase the required amount of groceries within 14 days of the fuel purchase. It will be interesting to see if customers are as enthusiastic about offers where they receive the discount later at the supermarket and not at the pump.

This could mean eight cents per litre discount for customers who have used either a Coles or Woolworths voucher to buy petrol at Coles Express, Woolworths Plus Petrol or Safeway Plus Petrol.

More importantly, it means all service stations in country towns where IGA is the main supermarket will benefit from the fuel offer. This might take some of the public pressure off the fuel industry.

Supply squeeze
Country retailers like Gary Treloar are experiencing a tightening in the terms of supply. Credit terms are being wound back from 21 days to seven days. This is a significant working capital impact for a small business. These and other supply implications are anticipated by APADA.

"It will be critical to lock in a supply contract," says Garth Symington. "With major oil companies supplying the supermarkets, surpluses may disappear and some independents may have difficulty obtaining fuel. If another refinery closes, the market will open up to imports again but importers may not be able to find fuel of the required quality at a competitive price."

That being said, someone has to supply regional Australia. This could mean the customer has to pay the real cost of supply. In some communities, key consumers such as primary producers are likely to pay more. Rural communities will need to address the consequences of fewer players in the business and prices that reflect the full cost of delivery. Some communities may pay the ultimate price and lose their fuel retail businesses completely.

Exit - the Clayton's option
Service stations face the same pressures that other small businesses face. The feature that distinguishes fuel retailing is the high cost of exit. Instead of a gradual change, there is more likely to be a sharper generational change. All of a sudden, there will be towns without service stations and communities will wonder why.

The reason for this is the high cost of exit. No-one will buy an old service station as a going concern and remediation costs can be prohibitive for alternative use. There is a strong incentive to stay and struggle despite the losses and, perhaps, exit the hard way. When country service stations go bankrupt and are closed and fenced off, the problem belongs to the local community.

"This is not because it is profitable: it is because the people have the spirit of ANZAC. But, this generation of owners is getting old and next generation is not there."