Service stations and convenience stores battle the giants

Fuel_august13The Australian Competition and Consumer Commission (ACCC) is nearing the end of its year-long investigation into fuel discounts offered by the two supermarket giants, warning that the discount schemes could adversely affect the fuel retailing industry. Retailers Woolworths and Coles operate in the industry through alliances with Caltex and Shell, respectively. The ACCC has called on the supermarket chains to cease their fuel offers and instead discount grocery items. With up to 45 cents off per litre offered last month, the competition watchdog is concerned that fuel discounting will push out independent retailers and create a duopoly in the industry, leading to higher petrol prices in the long term.

The ACCC has no power to ban shopper dockets, but may seek legal action against the supermarket giants to limit their market power in the industry. Woolworths and Coles maintain that global oil prices and movements in the Australian dollar determine petrol prices, but the companies can subsidise large fuel discounts with higher prices on grocery items in their supermarket operations. The profit margins earned by fuel retailers are characteristically low, with operators generally relying on the sale of convenience store goods to turn a profit.

Small independent service stations have found it increasingly difficult to match the subsidised petrol prices offered by the supermarket chains, which has ultimately led to many retailers shutting down operations. Over the five years through 2013-14, the number of enterprises in the fuel retailing industry is estimated to contract by an annualised 2.5%, while establishments will grow by an annualised 1.5%. This indicates that while Woolworths and Coles are expanding operations, smaller participants are exiting the industry due to declining sales and profit margins.

Independent service stations are not the only ones affected by aggressive fuel discounting. Convenience stores have struggled over the past five years because of Coles’ and Woolworths’ strong focuses on the sale of grocery and general merchandise items at their service stations. The ability of these supermarket chains to offer discounts on fuel entices consumers to top up on groceries while filling up their petrol tanks. Convenience goods sold by service stations are included in fuel retailing revenue, not in the convenience store industry. Hence, strategies to encourage spending at service stations take revenue out of the convenience stores industry and into the pockets of large service station operators. IBISWorld estimates that revenue generated by convenience stores in Australia will drop by an annualised 3.6% over the five years through 2013-14.

Due to their size and buying power, supermarket-owned fuel retailers are able to negotiate competitive contracts with suppliers and thus offer lower prices to consumers. This has resulted in a huge disparity between the prices charged by suppliers to small convenience store operators and the discounted prices received by the supermarkets. In an attempt to match the lower prices offered by large service stations, independent convenience stores have lowered prices on some grocery items. However, this has significantly eroded profit margins. Not many operators can maintain this level of price competition and many retailers have ceased operations. The number of establishments in the convenience stores industry is estimated to fall by an annualised 3.1% over the five years through 2013-14.

The outlook is bleak for independent fuel retailers and small convenience stores. Even if the ACCC can obtain a court injunction to stop the use of fuel discount dockets, the significant market share held by the supermarket giants may threaten to push out smaller operators altogether.

Relevant industries include: Fuel Retailing, Convenience Stores

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