It is a fascinating time to be working in the retail fuel industry in Australia!
A steep escalation in the capital value of retail fuel sites across Australia, coupled with the potential growth in earnings that can be harvested from time poor consumer behaviours in the convenience sector, suggests that our industry is on the cusp of a revolutionary change – one that reduces fuel retailers’ exposure to potential economic loss from the gradual lowering of petrol demand created by the progressive introduction of more fuel-efficient vehicles in the Australian light vehicle fleet.
“These trends have seen ACAPMA spending as much time providing information to the Australian investment sector as we have traditionally spent discussing fuel pricing issues in Australia”, said ACAPMA CEO Mark McKenzie.
“My personal belief is that we are on the cusp of a new age in petrol and convenience retailing that will bust the traditional paradigm of a service station being just a facility that provides fuel with ‘chips, chocs and drinks’”, said Mark
Evidence of the near-term opportunity in the fuel retail industry is provided by three major announcements that have been made in the last 3 weeks alone.
The first announcement came from Shell/Viva on 21 June 2018 with the formal launch of their Initial Public Offering (IPO) for its fuel business to be listed on the Australia Stock Exchange (see ACAPMAg Article: Viva Energy launches $5 bill ASX float).
The launch followed on from an earlier announcement of Viva’s intent to list its’ fuel business (refinery and retail business) on the Australian Stock Exchange in May 2018 – and later statements indicating that around half of the offering had been subscribed to institutional investors prior to the launch of the public IPO.
The deal will see Viva Energy become the second only fuel retail business to be listed on the Australian Stock Exchange – alongside Caltex Australia.
The most recent media on this development tells us that Viva Energy’s Float is on track to raise at least $2.4B (see ACAPMAg Article: Viva Energy track 2.4 bill float) – the biggest IPO in Australia for more than 4 years.
Just two days later, BP announced that it had abandoned its’ proposal to acquire Woolworths’ Service station business in the face of ACCC’s opposition to the deal and the lack of an appropriate alternative approach (see ACAPMAg Article: BP will not proceed with aquisition of Woolworths Fuel Network)
Somewhat ironically, the deal would have resulted in the combined business having less total sites flying the BP/Woolworths brand than the number of sites that were flying the Caltex/Woolworths brand before the deal was announced (Although the majority ACCC concern was largely directed at concern about the resultant disproportionate concentration in several local marketing areas around the country).
It would be fair to say that this second announcement was a bit of a blow for both parties but given that both organisations are gifted with outstanding management teams, it is only a matter of time before they have dusted themselves off and re-emerged with their “Plan B’s”.
For Woolworths, Plan B emerged sooner than later with the announcement yesterday that they had struck a new deal with Caltex Australia (see ACAPMAg article: Woolworths/Caltex announcement)
In essence, the deal does not change the number of sites displaying either the Caltex or Woolworths Brand – with Woolworths continuing to operate 531 sites and Caltex maintaining the number of Caltex branded sites.
The deal does, however, provide Caltex with greater certainty in its fuel supply deal with the retailer for the next 15 years while increasing the number of sites participating in the Woolworths loyalty programme – from the current 104 sites to 229 sites across the country.
So, let’s just take a breath for a moment…
What does it all mean for the fuel retail industry in Australia?
Well before we answer that question, it is worth noting that there has been one other significant announcement by a major fuel retailer in recent months.
In March 2018, Wesfarmers announced its plans to demerge Coles from the Group .
While less obvious than the other announcements, this will also likely have a marked impact on the market with a refocussed, leaner and highly capable Coles management team seeking to carve out a greater share of the highly competitive Australian fuel retail market.
The Coles decision, together with the other announcements outlined above, provides a pointer to what is likely to happen over the next 3-5 years in our market.
“We are entering the Convenience Revolution in our industry – where fuel retailers move to broaden their offerings to the point where convenience products become as important as fuel in their day to day operations”, said Mark
“But this revolution isn’t just the playing field of the big guys”, continued Mark
The Independent and Dealer businesses have moved heavily into this space over the last 3-4 years – many of whom are taking advantage of the buying power of co-operative buying groups like UCB and New Sunrise to access a range of convenience items at competitive prices, together with convenience retailing support services.
Mid-cap fuel retailers like APCO and Tasco, together with and smaller retailers like Jack & Co have entered the convenience space with a finesse to match the efforts of the bigger players.
Those of us who work in the industry know that competition in our market occurs on a site by site basis – not at enterprise level and nor on a whole of city level.
Accordingly, all retailers (large and small) are now engaged in a battle to capture increased share of the combined petrol and convenience market within their local communities.
While the bigger retailers have the inherent advantage of scale, the smaller retailers and dealer businesses have the advantage of close connectedness to their local markets – giving them the capacity to move quickly to accommodate the specific consumer purchase behaviours in discrete local marketing areas.
“The interaction between market participants is going to be fascinating and highly competitive, but it will likely make consumers think twice too”, said Mark
For consumers, the challenge will be finding the retailers that provide the most competitive fuel & convenience offering – not simply the best fuel price.
“If you are buying fuel and convenience goods, it is pointless saving 3cpl on fuel ($1.80 on an average 60 litre fill) if you also end up paying $4.50 for a bottle of water that you could have bought for $1.50 at the higher priced fuel retailer”, said Mark
“We think that consumers have already recognised this which is why they already appear to be patronising the retailers that have higher fuel prices, as evidenced by our most recent consumer research” (see ACAPMAg article: Australian fuel consumers becoming less price sensitive ), continued Mark
“The price of fuel will still be important but we believe the price of the convenience basket will be just as important in the future”, Mark added
Different people will have different views on the impact of the recently announced moves on the future shape of the Australian fuel industry in the near term.
“What is certain, however, is that the shape of the petrol-convenience market will be very different 5 years from now”, concluded Mark
Footnote: ACAPMA CEO Mark McKenzie shares some additional thoughts on the recent announcements in a radio interview with 2GB’s Ross Greenwood on 5 July 2018. Click here to listen to the podcast.