New Coles managing director Steven Cain has flagged a potential exit from the $35 billion retail fuel market as sales continue to decline at 711 Coles Express convenience stores.
Mr Cain revealed on Monday that the retailer, which is soon to demerge from Wesfarmers, is experimenting with a convenience store format which sells on-the-go foods such as sandwiches and snacks and a range of grocery staples, but crucially does not sell fuel.
Asked if Coles, like Woolworths, would consider exiting the low-margin fuel business Mr Cain said: “Our approach going forward will be like the Wesfarmers one – if someone comes along and offers the right price for the business clearly we’d look at it.”
Mr Cain’s comment followed another sharp fall in Coles’ fuel sales volumes, which took the shine off an otherwise strong first quarter sales result.
Coles has the highest retail fuel prices in Australia and is rapidly losing market share due to an uncompetitive fuel supply agreement with the recently listed Viva Energy.
Coles Express comparable fuel volumes slumped 15.9 per cent in the September quarter after falling 15.8 per cent in the June quarter and 21 per cent in the September quarter 2018.
Higher fuel prices, which have risen about 20 per cent over the last year to four and half year highs, added to the pressure on volumes.
Despite the fall in fuel volumes, same-store sales in convenience stores rose 3.4 per cent, compared with 4.6 per cent growth in the June quarter and 0.2 per cent in the first quarter 2018 as Coles improved its food-to-go range.
Wesfarmers managing director Rob Scott said Coles believed weekly fuel volumes were starting to stabilise at around 60 million litres a week (compared with 90 million litres a week two years ago), but analysts questioned this assumption, saying quarterly sales were still falling at a rapid rate.
Coles Express earnings fell 9 per cent in 2018 after a 6 per cent fall in sales to $5.7 billion. Bank of America Merrill Lynch analyst David Errington said Coles was facing a similar fall in earnings this year unless the volume decline was arrested.
“What are going to do – this is a volume game and a fixed cost industry,” Mr Errington said.
“You might sell a few more coffees and sandwiches but that won’t offset another 15 to 16 per cent drop in volumes – what can you do here to avoid another step down in earnings if petrol prices stay up at these levels?” he said.
“It looks like your joint venture partner is not going to come to the party – if volumes don’t pick up you’re sitting on a pretty hefty drop in EBIT again.”
Coles has been in discussions with Viva for two years to improve the terms of the supply deal but Viva, which floated in July, has been unwilling to budge. The current agreement is due to expire in February 2024.
Mr Scott said Coles Express was trialling different pricing initiatives, without giving details, and continued to discuss the issue with Viva.
“Coles Express is not an overly material contributor of earnings to the group and we’re focused on improving it,” Mr Scott said.
Coles has been selling fuel since mid-2003, when it established an alliance with Shell. Shell sold its refining and fuel retailing business to Viva Energy in 2014.
Coles Express accounts for about 18 per cent of retail fuel sales but under the Viva agreement pays the highest wholesale fuel prices in the market. It also leases its 711 sites from Viva.
Woolworths is still considering selling or floating its $5 billion fuel business, which delivered a 7.1 per cent increase in earnings to $168 million in 2018 as sales rose 3.1 per cent to $4.8 billion.