The proposed $1.8 billion acquisition of Woolworths’ fuel and convenience store business is entering a critical phase, with the Australian Competition and Consumer Commission starting to take market soundings on a deal that is dependent on an ACCC clearance.
At a superficial level, the acquisition faces formidable competition policy hurdles at both a wholesale and retail level. It would lift the BP brand into market leadership of both the wholesale and retail segments of the market.
With ACCC making it clear earlier this month that it has “issues” with the far smaller $95 million proposed acquisition of the family-owned but Caltex-branded Milemaker retail network in Victoria, it would be easy to draw the conclusion, as some have, that the BP deal with Woolworths is doomed.
Nothing in the petrol business is that straightforward and BP and Woolworths will inevitably argue, with some validity, that their deal is not only quite different to the Caltex/Milemaker deal but has a number of pro-competitive strands to it.
The crux of the issue the ACCC will wrestle with lies in the nature of BP’s relationships with the canopies that bear its brand.
BP today has its brand on about 1,400 sites and would add another 527 sites if the acquisition is effected.
It owns and operates, however, only 350 of those sites. The rest are owned by independent dealers, some of them with large numbers of sites. Unlike the BP-owned sites, the independents set their own fuel prices and have the ability, if they choose, to shift their fuel purchases and banner elsewhere.
It is inevitable that the ACCC, if it were to clear the acquisition, would insist that BP divest some of the 870-odd sites it would then own. The ACCC tends to work on micro-markets when it comes to petrol retailing and there would be BP and Woolworths sites close to each other in local market areas.
Thus, there will almost certainly be a relatively large number of those sites that are available to the independents, or BP’s competitors, as the price of a clearance.
BP’s network of independent dealers is already reporting approaches from its competitors trying to convince them to defect. Competition for those independents, particularly from Caltex, will only intensify if BP acquires the Woolworths business.
It is worth noting that, if it does succeed, BP will still only control about 12 per cent of all the retail fuel outlets in Australia, hardly approaching anything resembling a dominant position.
The key issue the ACCC has with the Caltex/Milemaker deal is that Milemaker currently prices its fuels independently of Caltex, even though its sites carry Caltex’s brand and sell Caltex fuels. There are some Milemaker sites in proximity to Caltex sites, so Caltex ownership could, the ACCC has suggested, reduce competitive pressures with those local markets.
The divestment of overlapping sites and the reality that BP would control the pricing on probably less than 800 of the 1,900 sites carrying its brand would significantly reduce the impact on competition.
With BP continuing the Woolworths’ “shopper docket” discount program, there’d be no impact on that aspect of the competition between the duo and the rival Coles/Shell program.
At a wholesale level, in effect all that would happen is that Caltex, the market leader, and BP would swap positions.
There are some doubts that BP will be able to self-supply its entire enlarged network and therefore may have to rely on supplementing its fuel requirements by acquiring fuel from third parties. It is possible, therefore, that the market leadership position at the wholesale level is smaller in future than it is today.
In any event, at the wholesale level there is no meaningful increase in concentration but rather a shift in share between competitors.
The most interesting impact on competition and consumer benefit if the deal goes ahead is not in petrol retailing or wholesaling but in the convenience store market.
BP and Woolworths have agreed a joint venture relationship that goes beyond the Woolworths’ shopper docket and Qantas-affiliated loyalty programs. In about 200 of the company-owned and operated stores they plan to rollout, a new “Metro at BP” convenience offer.
BP has, since about 2004, had a similar joint venture relationship with Marks & Spencer in the UK which it is now emulating in other markets.
While others (like Shell and another UK food retailer, Waitrose) have tried to mirror the strategy, the BP/M&S offer is regarded as easily the most successful and profitable of its kind.
To make it work in the UK, BP and M&S had to construct a completely new supply chain for a small store network and BP and Woolworths would have to do the same thing here. That’s a tantalising prospect for Woolworths, where Brad Banducci has made no secret of his ambition to develop a far larger convenience store network of his own.
The cash from the sale to BP would fund that expansion, as well as Woolworths’ ongoing effort to wrest back momentum in the supermarket sector from Coles, and the IP from BP’s understanding of the offer and the logistics of convenience store networks could be invaluable to getting the foundations of that network in place.
With Caltex planning its own major expansion of its convenience store network and offer and Coles inevitably having to make a competitive response, the BP relationship with Woolworths could generate a new front for competition in the retail sector with an overlap in the retail fuel segment.
The deal is important, bordering on crucial, for both BP and Woolworths.
Woolworths needs the cash to restore its balance sheet, fund the refurbishment of its supermarket network, maintain the price war with Coles and enable its planned convenience store strategy. BP needs it to allow it to deploy the convenience store strategy that it is now pursuing internationally as much as to gain volumes and scale in its traditional operations.
Thus there is a lot riding on the outcome of the ACCC’s processes for the companies, their competitors and, if they can execute their overlapping convenience store strategies well, potentially consumers.
Extracted from The Australian.