ª Print this Page ªClose this Window

Forecourt
September/October 2003

Coles & Shell - the big picture

By June 2004, the face of retailing in Australia will be changed forever. By then, at least 1000 service stations, or over 15% of the national network, will be offering discounted fuel to supermarket customers through loyalty schemes. In volume terms, the supermarket share of petrol volume could be over 40%.

The Coles Myer/Shell alliance is up and running in Victoria (see following article). Here we look at what the alliance means for retailing across Australia.

The alliance
A newly formed subsidiary of Coles Myer has secured the rights to operate the 584 Shell-owned service stations that comprised the seven Shell Multi Site Franchisees (MSFs). In effect, Coles Myer will be a master franchisee of the Shell retail real estate, albeit with greater control over the shop and the same level of Shell support on the forecourt as the MSFs.

Shell retains ownership of its key network and is leasing the sites to Coles Myer under a long-term (10x10) property lease. The sites will be co-branded Coles Express and Shell, with the former taking over the convenience stores, and Shell taking care of the fuel infrastructure. Coles Myer can remodel the shops and manage retailing, and Shell is responsible for supporting and maintaining the pumps and tanks at the sites. The purchase price is $100 million for the rights to operate the network, but the financial terms of the property lease and other components of the Alliance have not been disclosed. Service station staff will become direct employees of the new Coles Myer petrol and convenience store division. Shell will supply all fuel products at, I assume, a volume rebate off terminal gate price (TGP), and Coles Myer will set pump prices as well as offering its Coles Supermarket, Bi-Lo and Liquorland customers' fuel discounts.

"It's not just a supply deal - it's an alliance, with Shell retaining a strong interest in the success of the network," says Ian McKenzie, General Manager External Affairs, Shell Oceania.

Proposed Coles Express Fuel Outlet Numbers

State Coles supermarkets Bi-Lo supermarkets Coles Express service stations
NSW (inc ACT)	143	67	183
NT	4	3	10
QLD	92	35	119
SA	35	40	37
TAS	14	0	15
VIC	112	48	158
WA	79	0	62
TOTAL	479	193	584

This implies about 1.15 supermarkets for every fuel outlet and compares with 2.4 supermarkets per fuel outlet for Woolworths. However, under its recently revised expansion plan, Woolworths will add 160 Plus Petrol outlets nationally, taking its ratio to 1.5 supermarkets per service station.

Times will be tough
The alliance is a fundamental shift in the market, more so than the initial move into fuel by Woolworths. Even if Coles Myer do no more than match Woolworths' four-cent discount, nearly half of the petrol sales in Australia will be at near wholesale prices in an already heavily-discounted market. This can't be good for other fuel retailers, in particular the independents.

"Independents are particularly vulnerable without major oil company support and even franchisees will be affected," says Sue Scanlan, GM Policy and Operations with the MTAA.

"All small players will get caught in the fight between the supermarkets and the majors. Without access to a competitive terminal gate price, they will be squeezed between the wholesale price and retail price wars."

This is happening just as Oilcode begins its journey through the parliament. One of the key parts of Oilcode, Section 10, created a mechanism for dealing with retail price discounting below TGP. If a retail site owned by a major is selling retail below TGP it will be investigated. However, this does not apply to Woolworths because it was not a wholesaler and it will no longer apply to the Shell sites in the alliance.

"We expected Oilcode to address the issue of below-cost selling," says Sue Scanlan. "We also expected stronger measures under the Trade Practices Act, and we are disappointed with both. Even though the draft Oilcode has important provisions in terms of pre-contract disclosure, tenure and dispute resolution, it does not deal with our concerns about vertical and now horizontal integration."

The regulation that Oilcode is intended to replace is now the source of competitive disadvantage to the major oil companies who are constrained in their battle with the supermarket chains by the restrictions of the Sites Act and the Franchise Act. They should go during this session of parliament.

Tougher out of town
Difficult as it will be on the city networks, it is rural and regional retailers that will be most affected. Firstly, Shell still has a branded dealer network of over 800 service stations that are not part of the alliance. They will need to be retained in the network if Shell is to continue to meet the needs of its fuel card and commercial customers.

According to John Fletcher, CEO of Woolworths, "the discussion with owner-operators is stage two". In the meantime, they will have to deal with the confusion some country customers must experience initially in deciding where they can, and cannot, redeem their supermarket voucher. Fuel card customers will also have to get used to the idea that they can't use both their fuel card and their supermarket voucher for the same fuel purchase.

The impact on the rest of the regional dealer-owned businesses will be devastating.

"There will be collateral damage to those caught in the crossfire," says Garth Symington, General Manager, APADA, "and it will be most severe in the major regional centres where both Coles Myer and Woolworths compete."

Independent regional retailers that have relied on being able to offer a two-cents-per-litre discount, will struggle. However, many of them will be reluctant to exit the business due to the high costs of closing their sites. These and other issues will be taken up in our special feature for country retailers in next issue of Australian Convenience Store News.

Tougher for the big boys
The alliance must lead to further transformations among the major oil companies. Brand retail market shares from 2004 are shaping up as follows:

BP	15%
Caltex	25%
Coles Express	25%
Mobil	15%
Woolworths	15%
Other	5%

BP is the only major oil company to declare that it will not be forming a national alliance with a supermarket chain. After more than five years of strategic development, it is happy with its retail operations - a profitable network of large convenience stores that compete across the retail spectrum on the basis of quality.

"We have a very large convenience offer that takes on the supermarkets head-to-head as well as the corner stores," says Greg Bourne, Regional President, BP Australia & New Zealand.

BP will match the pump price but not the supermarket discount and is prepared to lose unprofitable market share. Like BP, Caltex is focusing on the development of a network of Star Marts and Star Shops at its company-operated and franchised sites. It is also targeting the less price-sensitive customer.

"Consumers don't just buy on price," former Caltex Managing Director, Jeet Bindra, said recently. "Many also consider the total customer offer, especially when it comes to convenience goods."

Unlike BP, Caltex has not rejected the possibility of joining forces with a supermarket chain. Metcash's network of IGA stores is a possibility, although an arrangement between these two large groups of franchisees would be a challenge. Caltex has rejected the possibility of exit, and it seems highly likely that a major oil company will give up selling petrol in Australia. If it's not Caltex and it's not BP, that leaves only one more.

Ian Howarth's bold announcement in the Australian Financial Review that Mobil was quitting petrol retailing provoked a short, but carefully-worded denial from Mobil. Since then, "no comment" is the most it will say. Mobil would not sell its retail network unless it was planning to exit refining. How is a mystery but no-one will be surprised when it happens. And, it has to happen soon. The trigger is the fuel standards that apply from 2006. Mobil and Caltex need to spend over $200m each to upgrade their refineries and they have to do it soon. Caltex's stated commitment to remaining in Australia as both refiner and marketer, and Mobil's silence are all we have to go on.

Fuel standards have implications as soon as this January when the restriction on MTBE content takes effect. Although few loads of imported fuel contain MTBE, Woolworths will need some certainty of supply under the new standard. This imperative lends credence to the possibility of a tie-up with Caltex. But, it's anyone's guess what will happen next. The only thing that's certain is that there will be more major dramatic changes for the oil majors.

Supermarket strategies
On a stand-alone basis, Woolworths and Coles Myer must lose money on petrol - there isn't four cents in the margin to give away. Estimates of the annual Woolworth's cross-subsidy range from $60m to $80m.This is equivalent to less than half a percent of supermarket sales (excluding petrol) but around 10% of supermarket division EBIT. It is much more difficult to assess how well Woolworths' supermarkets would have performed without this loyalty program. Now that both majors are involved, it could be argued that the benefits of first-mover advantage have been reaped. However, Coles Myer had no choice but to follow.

"It's a line extension that Woolworths introduced and Coles Myer had to follow," says Andrew Reitzer, CEO with Metcash. "Metcash will follow too. We will learn from their mistakes - a duopoly has its advantages. We will also have to follow them into pharmacy. The one-stop shop is increasingly popular overseas and inevitable here."

The alliance is as much a move into convenience store retailing for Coles Myer as it is a move into petrol.

"The alliance creates a significant new business opportunity for Coles Myer in convenience stores and we will be applying our retail expertise and economies of scale to these operations," says John Fletcher.

Is there such a thing as separate types of retailing: full -basket supermarket shopping and top-up convenience shopping? Are the lines blurring, even disappearing? Clive Humby, Chairman of Tesco in the UK thinks so.

"I think convenience retailing is going to be a very important part of a big retailer's strategy going forward, because we're all looking for that meal solution on the way home now. We (the consumers) just don't want that big weekly shop anymore," Clive Humby said.

Maybe it's not that simple.
"It's a different business with different distribution systems," says Andrew Reitzer, "For C-stores, you need a single pick system like Campbell's Cash and Carry. Supermarkets take delivery of multiple boxes."

A peek into tomorrow's world
Australia seems to be following the European model. In the UK, the growing presence of the supermarkets is partly responsible for the strong downward trend in retail margins and the high number of site closures, particularly independent sites. According to the UK Petroleum Industry Association, each year the supermarkets pump 10 billion litres (28% of total petrol volume) through 1,000 outlets (10% of site numbers). These hypermarket sites are linked to large out-of-town supermarkets that offer fuel discounts based on store purchases. The four main supermarket chains offer discounted petrol and the major oil companies are side-lined to the highways.

For the end game, we could look to France where nearly all petrol is retailed through supermarket chains. If this is where we are headed, what happened to the value of owning and operating your own business? The franchisee and owner-operator retail models were based on the better standards, cost control and customer service delivered by an entrepreneur with a personal stake in the business.

In the end, maybe people don't matter. The latest addition to the New Zealand petrol retailing scene is the unmanned forecourt introduced by Pack 'n Save, a discount supermarket chain. It consists of a set of pumps and card readers under a simple canopy.

In the meantime, take action
Despite the high level of uncertainty, you can't afford to wait and see what happens. It's true that petrol can't be a loss leader in a petrol outlet. However, look for ways to attract customers back into your store.

"Some independents will survive but not all," says Jim Lamb. "We will fight on, if not to the death. It will just make us work harder."

Woolworths Goes One Better
21 August, 2003: Woolworths announced a joint venture with oil refiner Caltex that could add 160 sites to its discount petrol business. The venture is expected to start operations before Christmas.

"This venture means we get the right number of canopies in carefully selected locations adjacent or near to our stores across Australia supplying Caltex petrol, extending our petrol offer to more Woolworths and Caltex customers and without having to take on canopies we don't need," Woolworth Chief Executive, Roger Corbett, said.

The joint venture company will lease all of Woolworths' and Safeway's petrol outlets, initially adding 120 Caltex service stations to Woolworths' national network of 290 petrol sites with possibly another 40 sites added later.

A spokesman for Coles said Woolworths deal with Caltex proved the Coles Shell alliance had changed the shape of the market.

Sydney Morning Herald: Fri, 22 August 2003

ª Print this Page ªClose this Window