The inconvenient truth of fuel retailing in Australia
June 10, 2016
If you were to truly believe some of Australia’s politicians and the State/Territory motoring organisations, the Australian retail fuel market is dominated by a handful of large oil and supermarket businesses that are allegedly charging motorists more for fuel than is really necessary – particularly in advance of public holiday long weekends.
This perspective is frequently used by governments to justify the introduction of new regulations for the retail fuel industry in Australia, effectively making our industry a ‘soft target’ for longstanding and continuous criticism by politicians and motoring clubs alike.
ACAPMA has long argued the contrary perspective, suggesting that the retail fuel industry in Australia actually comprises a large number of retail businesses of varying size that compete in an open market – one characterised by a level of price transparency that is higher than any other industry sector in the country.
But given that ACAPMA is the national peak body representing fuel distributors and fuel retailers in Australia, such a perspective is unsurprising and is often derided by our opponents as industry ‘spin’ that is simply designed to conceal alleged flaws in the real-world operation of the retail fuels market.
In an attempt to introduce some objectivity to this 40+ years debate in Australia, ACAPMA recently completed a scan of the structure and operation of the wholesale and retail fuel industry in Australia.
The findings of this industry analysis are detailed in ACAPMA’s inaugural iScan 2016 report.
Rather than undertake its’ own analysis, and risk further criticism of ‘industry spin’, ACAPMA’s inaugural iScan simply collates all of the industry data produced by the numerous research and regulatory bodies that monitor the Australian Fuel industry.
These organisations, all of which are wholly independent of the Australian fuel industry, include:
Petroleum industry monitoring data prepared by the Australian Competition and Consumer Commission (ACCC)
Australian petroleum statistics data prepared by the Australian Department of Industry’s Office of the Chief Economist
Industry research data compiled by IBIS World – one of the world’s most authoritative industry research providers.
The analysis of the data published by these organisations gives rise to some very interesting observations about the true nature of Australia’s fuel retailing sector.
An industry comprising a large number of small fuel retail businesses
First and foremost, the true face of the fuel retailing sector is one that comprised 3,790 retail fuel businesses in 2015 (albeit that a significant proportion of this number are automotive retail businesses selling lubricants).
This large number is a far cry from suggestions that the Australian retail fuel market simply comprises four or five large Australian businesses – albeit that these businesses do operate a significant number of high volume sites.
Given that around 33% of the nation’s 6400 service stations are owned and operated by one of the major fuel retailers in Australia (i.e. BP, Caltex, Coles and Woolworths), the remaining two-thirds of Australia’s service stations are operated by more than 3690 businesses – most of them small Australian businesses.
Highly varied ownership structures and business models
The business models used by fuel retail businesses are as diverse as the nature of their relationship with their fuel suppliers and the ownership structures that exist throughout the industry.
Some retailers operate using retail sites that are owned by a larger business, others are leasing sites from non-fuel related businesses and still others own and operated their own sites.
Further diversity in business models is created by the fact that the vast majority of Australian fuel retailers are ‘mixed’ businesses – with each business relying on varying levels of profitability from the sales of fuel products, sales of convenience products and/or revenues derived from automotive servicing.
Suffice to say, there is no such thing as a ‘typical’ fuel retail business in Australia.
This begs the question “Why does the Australian community believe all fuel prices should be the same simply because fuel is wholesaled into the Australian market at similar prices”.
For ease of industry analysis, the ACCC classifies Australian retail fuel businesses into five broad groups (see Figure A), namely:
Company owned and company operated (COCO’s) – businesses that are wholly owned and operated by a large fuel company
Commission agents – businesses operating under a modified franchise arrangement where the franchisee is not required to purchase the petrol but rather, is paid a fixed commission per litre of fuel sold. The fuel supplier is the one that sets the retail price.
Franchisees –these businesses operate under a pure franchise arrangement with a fuel major where the fuel major is involved in the retail price discussion.
Dealer owned and dealer operated (DODO’s) – businesses that are independently owned but operate under a brand agreement with a fuel major. The business purchases its own fuel stock and has the freedom to respond to market movements in fuel prices
Independent fuel retailers – businesses that are independently owned and operate under a brand other than a fuel or grocery major. Once again, these businesses purchase fuel from their supplier and set their own retail prices according to local market pressures.
Figure A: The business operation of Australia’s 6400 retail fuel outlets can be broadly classified five key groups according to the nature of their business operating model (ACCC 2014)
Sector profitability is lower than the Australian ‘all industry’ average
Contrary to popular belief average profit margins in the fuel industry have been historically low over the past decade, largely due to the combined forces of new industry competition from Australia’s grocery majors and continued business consolidation.
In fact, the ACCC estimates the profit earned by fuel retail businesses between 1 Jul 2005 and 30 June 2013 average just 2cpl (for petrol and convenience sales) as shown in Figure B. Given average annual fuel sales of 2.86ML per year, this translates into an annual average profit of $57,200 (or 3.6% of gross revenue).
Figure B: Retail industry averaged just 2cpl in the 8 year period ending 30 June 2015 (ACCC 2014)
Interestingly, the 3.6% gross profit earned by fuel retailers between 1 Jul 2005 and 30 June 2013 is actually below the all-industry average of 4.9% over the same period
Unfortunately, a change of focus in ACCC research in 2015 means that the data for the period since 30 June 2013 is not readily available. It would be fair to conclude, however, that profit margins for fuel retailers have returned to more healthy levels over the last 2 years – largely on the back of lower global oil prices.
Most businesses appear to be taking the opportunity to use these higher earnings to invest in upgrading fuel infrastructure, restocking capital reserves depleted by a decade of cut-throat competition, and funding ever-increasing compliance costs.
Fifth lowest national average fuel price of all OECD countries.
In its most recent assessment of Australia’s national average fuel price, the Australian Government (Office of the Chief Economist 2016) found that Australia’s petrol and diesel prices were the fifth lowest of all OECD economies in the December 2015 Quarter (see Figure C).
Figure C: The Australian average price of petrol and diesel was fourth and fifth lowest (respectively) of all OECD economies in the December 2015 Quarter.
Interestingly, there was considerable debate about petrol prices in December 2015 about the high average price of petrol in Australia – a concern that does not appear to be supported by objective analysis of Australia’s petrol prices relative to those levied in other developed economies.
It therefore follows that the Australian retail fuel sector is one of the most efficient in the world in delivering relatively low fuel prices for all Australians – and is doing its part to enhance the international competiveness of our country in the global market.
The fundamentals of industry competition remain strong
The variety of business structures that exist in the market provides varying degrees of price control (i.e. direct and indirect) by the major fuel marketers in Australia.
At its most basic level, examination of the ACCC data on retail site about business structures (see Figure A) demonstrates that 40% of Australia’s retail sites operate completely independently of Australia’s largest fuel and supermarket companies.
To suggest that the businesses that operate these sites are somehow conspiring with large oil companies and supermarket majors to set uniformly high national prices is patently absurd.
Nonetheless, the industry regularly welcomes competition interrogation by the Nation’s competition watchdog – the ACCC- who despite more than 10 years of intense market interrogation have failed to find any substantial evidence of competition failure.
A valuable contributor to the Australian economy.
Much of the attention of politicians and economists on the retail fuels sector is motivated by a desire to minimise input costs to Australian businesses and households. That is, by keeping unit fuel prices low, Australian businesses pay less to transport their goods and services to national and international markets – thereby improving the competitiveness of Australian business and industry.
Low petrol prices also mean that households spend less on moving around in their cars and have more money to spend on buying domestically produced goods and services to help grow our national economy.
What often gets lost in these discussions, however, is the actual contribution that the retail fuel industry makes to the Australian economy of itself.
In the last financial year (2014/15), Industry research (IBIS World 2016) tells us that the 3790 businesses that comprised the Australian retail fuel industry:
Employed more than 43,000 Australians
Generated more than $37B in revenue (much of it being government taxes)
Made a profit of $924.5M
Added $2.6B in value to the Australian economy.
By any measure, the Australian retail fuel sector is a big employer of Australians and makes a substantial economic contribution to the national economy.
It therefore makes you wonder why politicians are so reckless with the future of the sector by introducing an ever increasing suite of industry regulations – much of it creating higher operating costs for retail businesses for little/no tangible community benefit.
A concluding thought
After spending my first year as leader of the peak industry body that represents fuel retailers in Australia, I am constantly surprised about our unwillingness to take on unsubstantiated criticism head-on.
Sure, people will always whinge about petrol prices. That is their right.
Equally though, we should not be timid about putting the contra-view with confidence.
The Australian retail fuel sector is an industry that is providing a valuable contribution to the Australian economy in an open and competitive market that delivers some of the lowest retail fuel prices of any developed economy.
For our part, ACAPMA will continue to educate policymakers and the general public about the vital role played by our industry and will continue to fiercely oppose any regulation that cannot be justified on the grounds of net benefit to the Australian community.