This week saw yet another major announcement in respect of the future structure of the fuel retail industry in Australia, with Coles Express and Viva Energy announcing that they had reached an agreement on terms for a 10-year extension of their current alliance.

The announcement comes in the face of sustained public criticism by the national competition regulator (and motoring associations) in respect of the consistently high average fuel prices charged across Coles Express’ 780 strong service station network in recent years.

Whether it is appropriate for national competition regulator to criticise a single market participant based on their independent pricing decisions is a question for another time, but the new alliance is expected to result in an improvement in the price competitiveness of Coles Express’ current fuel proposition – and will likely have market competitors looking over their shoulder in the future.

Both Coles Express and Viva Energy released formal statements to the Australian Stock Exchange about the terms of the new 10-year alliance on Wednesday morning.

A good summary of the new arrangements – which come into effect from early March 2019 – is provided in the Coles Group’s ASX Statement of 6 February 2019 (See https://acapmag.com.au/wp-content/uploads/2019/02/Coles-ASX-Announement.pdf)

The new arrangement will see Coles Express selling fuel on a commission (or ‘agency basis’), with Viva Energy taking control of the service station forecourt in terms of setting retail prices and responsibility for fuel product marketing (Under the previous arrangement, Coles purchased fuel from Viva on a wholesale basis and then set its’ own retail prices).

Coles will continue to lead the convenience offer under the terms of the alliance agreement, utilising its extensive FMCG retail expertise and substantial grocery buying power to strengthen the convenience proposition, but will pay Viva an enhanced royalty from convenience store sales.

“The commercial merits of the terms of the new alliance are self-evident, with the two organisations assuming responsibility for each element of the combined petrol convenience proposition based on their respective strengths”, said ACAPMA CEO Mark McKenzie.

“We also expect that the re-entry of Viva Energy into the market as a fuel retailer, coupled with the disclosed financial terms of the new alliance, will further intensify market competition in the fuel retail industry”, added Mark.

But the structure of the new Coles Express-Viva Energy alliance isn’t just notable in terms of what it means for fuel retailing.

The deal also provides some strong insights in respect of the challenges now being faced by participants in the Australian petrol-convenience market, as they seek to respond to the evolving convenience market.

In some ways, the Coles Express experience in recent years represents an ‘experiment’ where a major retailer (albeit operating within the constraints of the terms of a fuel supply arrangement) sought to differentiate itself by the provision of a total petrol-convenience offering developed around a higher average fuel price and lower average convenience product prices.

This approach was different to the traditional market approach of leaning out fuel prices to attract customers and then encouraging them to purchase higher margin convenience products.

The increasing focus on convenience products within our industry suggested that, at least at one level, this approach was strategically sound given emerging customer trends and Coles’ strong retail expertise and convenience product buying power.

In short, Coles’ approach provided our market with an opportunity to discover whether consumer patterns had changed to the point of the convenience proposition being as important as the fuel proposition given increasing cash-rich time poor consumer behaviours.

“The fact that Coles’ weekly fuel volumes fell by around 38% over this period – thereby, decreasing foot traffic and the opportunity to sell convenience products – provides an important message to our industry”, said Mark.

Virtually every fuel retailer in the country is seeking to understand how best to diversify earnings beyond fuel and are implementing business models that load up business operating costs to different degrees.

The Coles’ announcement this week suggests that many motorists are still selecting service stations primarily based on fuel prices and therefore any expansion of the convenience offer cannot come at the cost of decreased competitiveness of the fuel offering.

“This is a salutary finding for all of us and raises an important question about the rate of industry transition to expanded convenience offerings (with increased operating costs) in anticipation of a substantial increase in convenience product sales”, said Mark.

Coles and Viva appear to have utilised this knowledge to strike a new agreement that provides a high level of agility in respect of responding to future changes in the petrol-convenience market by assigning responsibility for each element of their petrol-convenience proposition (i.e. fuel and convenience), according to the respective strengths of each organisation.

Interestingly, the Coles-Viva strategy appears to be consistent with the approach being pursued by Woolworths and Euro Garages and to a lesser extent, the 7 Eleven and Mobil arrangement.

The question now is how the rest of the market will respond in the future.