APADA Conference 2004:

Defining the Future Market

Australian Petroleum Agents and Distributors Association (APADA) held its annual conference at the Melbourne Convention Centre over three days from 6 to 8 September. In his opening address, Garth Symington, General Manager, APADA, identified eight key issues affecting the distributor business:

• Impact of supermarket/fuel alliances;
• Federal Government’s position on industry reform;
• ACCC’s approach to small business and the alliances;
• Senate Committee’s recommendations on the Trade Practice Act and the Government’s response;
• Key points made by APADA to ACCC and politicians;
• Changing profile of the industry;
• Product supply and changing specifications;
• EPA’s position on underground storage tank management requirements and contaminated soil disposal.

In a varied program, delegates then heard presentations covering strategic management, industrial relations, risk and insurance, and marketing. Of particular relevance to fuel retailers were the sessions presented by Gerry Hueston, President, BP Australasia, and Simon Uthmeyer, Trade Practice Partner, Phillips Fox.

Global & Local Scene

Mr Hueston reflected on the changes that have shaped BP internationally and locally, and their implications.

“ Oil companies must have a positive footprint on the world,” said Mr Hueston. “As one of the biggest companies in the world - if we can’t be the safest, we need to take a long, hard look at ourselves.”

BP has had to make geographical choices such as exiting retailing in Japan. Its operations in Australia were under serious scrutiny in 2000, and the decision was made then to stay, but with a more focused presence.

“ Refinery ownership is less relevant now, as the industry has effectively deintegrated, and investment is in cleaner fuels, not additional capacity,” said Mr Hueston.

BP led the way out of refinery exchange, so that product is costed at import parity; rationalised its distributor network for economies of scale; and reduced the number of retail sites it owns from over 900 in 1994 to closer to 300 now.

“ The future is in C-Store growth, with good locations turning over $50,000 per week,” he said. “Winners will be those that understand their customers and are professional and focused.”

The supermarket alliances and shopper docket discounts still dominate discussion of the local scene. Mr Hueston thinks that they are short-term good for the customer but questions whether they are pro-competitive in the longer-term because they rely on significant cross-subsidisation.

“ Cross-subsidisation is not a sin, but who pays in the long-term?” asked Mr Hueston. “Someone has to and it can only come out of the customer’s pocket. In the meantime, below-cost pricing is the biggest issue with its anti-competitive impact.”

Perth Average Pump Prices and BP Terminal Gate Price, Jan to Aug 2004

“ Eventually supermarkets will reach equilibrium in their fight for grocery market share through the shopper dockets, and then they will be spending between $100 and $200 million for nothing. Either the price of fuel will increase or price of groceries, or both.”

Mr Hueston concluded with a call for any debate on regulation to focus on what is good for the customer rather than discriminate between players in the market place.

Shopper dockets & retail price competition

Simon Uthmeyer, Partner in the Competition and Regulation Practice in the Melbourne office of Phillips Fox Solicitors, took a novel approach to the shopper docket issue, focusing on the underlying economic theory. If that all sounds a bit dry and beside the point, Mr Uthmeyer pointed out that the ACCC is more likely to listen to soundly-based economic arguments than ongoing discussion of ‘well-aired’ legal issues.

One economic theory supports what many retailers believe – that ultimately there will be universally higher fuel prices and increased market share for Coles Express and Woolworths-Caltex. According to Mr Uthmeyer, this is predicted from the view presented by Joshua Gans and Stephen King, both professors of economics at the Melbourne Business School, University of Melbourne, in an article in the Australian Financial Review on 20 August 2004. Stephen King is also an ACCC commissioner.

Gans and King argue that the supermarkets can increase their board prices up to the four cents per litre discount and still retain the customers with dockets. They also argue that other fuel retailers can match this board price for their customers who will typically not have dockets.

Mr Uthmeyer then considered why the ACCC has not intervened.

“ The counter economic argument holds that Coles and Woolworths will not be able to use the shopper dockets to sustain higher prices because they will be competing with each other for market share,” said Mr Uthmeyer.

“ The biggest impact is then felt by BP, Mobil and the independents competing for a smaller share of the fuel market.”

This is happening now. Perhaps we don’t really have two competing economic arguments, just different outcomes in the short-term versus the long-term.

Strategies for changing times

Between the short-term and the long-term is change, and Dr Richard Hames, futurist and corporate philosopher, offered some revolutionary strategic guidance in the first of the sessions at the conference.

Under the title “Transcending Harsh Realities – Towards Viable Enterprise”, Dr Hames presented the blunt alternatives of ‘adapt or die’. He argued that the fundamental rules of the forecourt game have changed and you can no longer compete on price. It is no good relying on governments because they serve big business. So, small business has to ‘learn to manage and lead change’.

He then presented his five keys to adaptation.

1. Think breakthrough; that means future not past or present.
2. Collaborate through the power of networks and partnerships.
3. Leverage assets and competencies such as location, loyalty, convenience, and service to offer a better deal than the supermarkets.
4. Reinvent and rethink business systems to focus on a niche with brilliant service.
5. Develop keen market insights to fulfill the desires of the community, e.g. fairness and care for the environment.

In other words, realign your efforts to defining and serving the future market.