When Woolworths announced in late December it would sell its petrol and convenience stores to BP not Caltex, it heralded a new era for the $20 billion-plus sector.

It was a sign that convenience sites were about to become the new battleground.

To put it into perspective, the latest figures from Nielsen show value growth in the Australian convenience channel is up 4.7 per cent last year, which was more than double the growth in supermarkets.

When this is coupled with the sector’s relative underdevelopment compared with countries including Japan and Britain – only $1 in every $5 of convenience spending takes place at a petrol and convenience outlet – the interest is understandable.

For Caltex, convenience is seen as a key plank in a strategy to transform its business as it grapples with the longer term trend of declining income from fuel, and the hole it has to fill in the wake of the Woolworths decision to end a long-term strategic alliance and sell its 527 Woolworths-owned fuel and convenience store sites to BP.

Caltex boss Julian Segal told The Australian Financial Review: “Currently, the majority of our income comes from supplying our customers with transportation fuels, supplemented by a smaller, traditional convenience offering. However, we know that in the long term fuels volumes will be impacted by the continual increase in internal combustion engines efficiency, hybrid cars, electric vehicles and car sharing.”

To this end Caltex is targeting the convenience sector. It wants to leverage the 3 million customer visits to Caltex stations each week to grow its non-fuel income from $1.1 billion to potentially billions of dollars.

The plan is to roll out up to 15 new sites, known as the Foodery, this year and upgrade another 20 sites. The rollout is expected to reach critical mass in the next three to five years.

“We are reinventing the concept of the convenience shop from selling some bread, milk, fizzy drinks and tobacco, to focus on the real meaning of convenience – how do we use our conveniently located sites to deliver maximum convenience to our customers?” Segal says, pointing to Caltex products and services such as barista coffee, fresh grab-and-go food offerings, its Made Today Gone Today range, parcel pick-up and laundry services.

It has also been increasing the retail bench strength on its executive team, recently appointing a new chief information officer, Viv Da Ros, who previously worked at health and beauty retailer AS Watson Group and before that Tesco and Dairy Farm International.

Crucial to the strategy working is its franchise model, which has caused it immense grief in the past few months after a Fairfax Media investigation revealed rampant wage fraud across its franchise network.

The Fair Work Ombudsman made a series of random raids as part of an investigation into underpayment of workers.

Since the scandal broke Caltex has hired Ernst &Young to audit all stores to ensure they are complying with the law.

Under the Caltex franchise agreement, if a franchisee is terminated due to a breach of the franchise agreement (which can occur for wage underpayment as well as other reasons) the value of the business is returned to Caltex with the franchisee receiving only the value of any stock or other owned assets.

The audits have created tensions between head office and the franchisees, with dozens taking to the streets last week carrying banners as part of a protest outside head office. The franchisees allege the model is unprofitable and are worried the audits will be used to terminate them. Caltex argues otherwise, saying there is no correlation between profitability and worker exploitation.

Until the tensions are resolved, this will remain an issue for Caltex.

Meanwhile, rival BP isn’t sitting idle. If its deal with Woolworths is approved by the ACCC – and there is no guarantee it will – it will play a big role in the convenience store revolution.

The plan is to buy the 527 Woolworths-owned fuel convenience sites for $1.8 billion and develop a new Metro at BP store format based on Woolworths’ small-store Metro format.

It expects to roll out 200 stores, funded by BP. Woolworths and BP will jointly fund the 4 cents-a litre-fuel discount offer at the 527 Woolworths petrol stations, as well as some additional BP outlets.

For Woolworths the deal gives it the opportunity to strengthen its balance sheet, cease the indiscriminate rollout of supermarkets and strengthen its rewards system. In the long term it could mean so much more if it can tap into BP’s other sites.

Coles, for its part, is beefing up its fuel and convenience business Coles Express. It has introduced an improved and expanded food-to-go range as well as ramped up its Every Day value offer.

The aim is to make prices at Coles Express sites more aligned to Coles supermarkets, instead of the well-known “insult pricing” the convenience sector traditionally charges. For instance, Coles Express sites are selling bread and milk for $2 an item and Expresso Coffee has a deeply-discounted 80-cent price tag.

Jeff Rogut, the executive director of the Australasian Association of Convenience Stores (AACS), says that, if overseas is any guide, the sector has a lot of opportunities ahead of it, particularly if they can sell alcohol. Then it will be game on.

Extracted from The Australian Financial Review.