Sue Mitchell 12/5/16

After agreeing two years ago to stop subsidising petrol discounts through supermarket profits, Coles now appears to be subsidising food and grocery discounts by charging higher prices at the pump.

Industry sources believe Coles has been charging a premium for petrol for at least six months to fund investment in lower grocery prices and protect margins in its food, liquor and convenience division amid increasingly aggressive industry discounting.

In a recent report, Deutsche Bank analyst Michael Simotas said Australian Institute of Petrol data suggested retail fuel prices had fallen 7 per cent on a year-on-year basis in the March quarter, but Coles’ sales implied that its prices had fallen only 2.6 per cent.

An industry-wide shift to premium fuels and stronger sales in Coles Express convenience stores accounted for some of the gap, Mr Simotas said.

“But the gap increased in size in the third quarter, which suggests that Coles’ retail pricing fell by less than the market [ie Coles prices were higher],” he said.
Coles’ average fuel prices are estimated to have been 2¢ to 3¢ a litre higher than most competitors’ during the March quarter, and the trend had continued into the June quarter, sources said.

Coles’ prices are harder to track since the retailer stopped providing data to Informed Sources and MotorMouth, a fuel comparison service, as part of an undertaking to the Australian Competition and Consumer Commission (ACCC) earlier this year.

Coles’ premium fuel prices have contributed to weak petrol volumes and sales in Coles Express petrol stations.

In the three months ending March, Coles’ fuel volumes fell 10.1 per cent on a comparable store basis, while Woolworths’ comparable petrol volumes fell 3.2 per cent.

However, higher than average petrol prices are expected to help bolster earnings in Coles’ food, liquor and convenience division in the current half.

Deutsche Bank estimates that Coles’ premium petrol prices could boost margins in its entire food liquor and petrol business by 12 to 34 basis points or $22 million to $65 million in the June half, depending on whether the petrol price gap is maintained.

“A couple of cents per litre across over a billion litres of petrol sold per quarter is a significant sum of money,” Mr Simotas said.

“We believe this tailwind, combined with operating leverage from strong like-for-like sales growth in supermarkets, should provide Coles with the firepower it needs to continue to invest heavily in prices while maintaining or continuing to grow food and liquor and petrol margins [and keeping the pressure on Woolworths],” he said.
The strategy could be unsustainable in the longer term if Coles loses market share in petrol.

“It is also a deviation from Wesfarmers’ highly successful strategy of driving sales growth through value and letting operating leverage take care of margins,” Mr Simotas said.

Coles and Woolworths declined to comment.

In December 2013, the two groups avoided potential legal action by reaching an agreement with the ACCC to cap fuel discounts linked to supermarket purchases to 4¢ a litre and to stop subsidising fuel discounts with profits from food and liquor.
However, there is nothing to stop the retailers from subsidising grocery discounts with fuel profits.

Extracted in full from The Age.