Enhancing Competition
in the Petroleum
Industry —
The Role of
Co-Operatives
Prepared for the
Department of Fair Trading
by the
Western Research Institute
December 1999
TABLE OF CONTENTS
Executive Summary
3
1.
What is the Brief of this Project?
7
2.
Does Australia have a Petrol Price Problem?
8
3.
How important is the Country-City Petrol Price Differential?
9
4.
How complex is the Country-City Petrol Price Differential Problem?
10
5.
What are the causes of the Country-City Petrol Price Differential?
12
6.
What are the Barriers to Entry in Country Markets?
15
7.
How did the Petroleum Industry Operate Pre 1996?
17
8.
What has happened to the Industry since 1996?
19
9.
How have Post 1996 Developments Affected the Country-City Petrol
Price Differential?
23
10.
What are the Current Changes taking Place in the Petroleum Industry?
25
11.
Is Cross Subsidisation and Cherry Picking an Issue to be Considered
in any Solution to the Country-City Petrol Price Differential Problem?
28
12.
What is Terminal Gate Pricing?
29
13.
What are the Pre-conditions for a Sustained Narrowing of the
Country-City Petrol Price Differential?
31
14.
What are the Proposals from the Market Participants to Solve the
Country-City Petrol Price Differential Problem?
32
15.
Would the above Proposals Individually or Together Narrow the
Country-City Petrol Price Differential?
36
16.
What are the Possible Competitor Responses to the Establishment of
Co-operatives?
40
17.
What are the Major Findings of this Study Concerning the CountryCity Petrol Price Differential?
42
18.
What are the possible roles for Co-Operatives?
44
19.
What are our Recommendations Concerning Co-Operatives?
45
20.
The Authors
46
Appendix 1
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Executive Summary
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Australia’s petrol price problem is essentially the differential between
country and city petrol prices. The problem is important because petrol is a
highly visible cost of living and a factor cost of virtually all business. The
differential inhibits regional economic development both by the cost impact
and the perceptions it helps create about performance of regional business.
The major causes of the country-city petrol price differential are: local
competition factors, such as a non-price competition culture among country
service stations; cost and efficiency factors related to freight, small volumes
and lack of attached shops etc in country service stations; differential
wholesale pricing where country retailers do not receive the same level of
rebates from the wholesale price as do city retailers; and regulation factors,
where the Sites Act inhibits the oil majors from competing directly in
country retail markets.
In 1996, the ACCC linked deregulation with the need to establish non-major
branded independents with independent supply (including imported) and
the need for country site rationalisation. Considerable progress has been
achieved on this agenda and the benefits have started to move into country
areas.
Non-major branded independents, such as Woolworths, Liberty, Burmah,
Diamond and Volume Plus, have lowered metropolitan petrol prices and
accentuated a strong weekly price cycle in both Melbourne and Sydney.
Only Woolworths has a wide spread presence in country areas but Diamond
and Volume Plus are now making inroads and Liberty has intentions of a
major entry into country markets.
The Orana Petrol Gauge produced by the Western Research Institute and
funded by the Orana Regional Development Board estimates the Notional
Retail Margin for approximately sixty country (defined as outside Sydney,
Wollongong and Newcastle) and metropolitan sites. The Notional Retail
Margin is the difference between the retail price and a calculation based on
the Singapore petrol price, the local component, any applicable state tax
adjustment and freight to that centre. The Gauge found that on the four
survey days, over the last eighteen months, country towns with a nonmajor branded independent had a Notional Retail Margin of 2.2 cents per
litre compared with an average of 6.2 cents per litre for country towns
without a non-major branded independent. The average for metropolitan
centres was –1 cent per litre. One oil major argues that this overstates the
differential but the major has included Newcastle and Wollongong as
country.
There are a number of positive proposals from petrol market participants to
solve the country-city petrol price problem. These include:
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a) Liberty is anxious to establish Liberty controlled retail sites in country
areas. Liberty is capable of making major inroads into the NSW country
petrol retail market by virtue of its long-term supply agreement with a
major domestic refiner and with its access to the import terminal at
Botany. Liberty has also offered technical expertise to assist with the
installation of petrol reselling equipment and provision of low cost
product on long-term supply arrangement for the establishment of cooperative distributors and retailers in small country centres. Liberty
maintains that covenants and deeds of option of the sale of old service
station sites, (to prevent the re-use of these sites as service stations)
are obstructing their entry into country markets.
b) Diamond wishes to extend the service it currently provides to large NSW
farmers, to small and medium sized farmers. Diamond is prepared to
offer its expertise to assist in their establishment and to provide longterm low cost product. Diamond is also prepared to supply fuel
wholesale to any service station.
c) Woolworths has offered to supply wholesale product to existing service
stations and co-operatives on the same terms that they secure product
plus a small margin.
d) BP through its Terminal Gate Pricing (TGP) system provides a platform
for ending wholesale price discrimination against regional centres. The
TGP system operated by BP has greater transparency and represents a
more logical cost/price build up without “top down” rebates confusing
the issue. The cost build to a rural consumer then becomes more
transparent to the extent that the difference between the TGP and the
rural price represents freight, distributor costs and margin and retail
margin.
e) Mobil maintained that they had an active terminal gate market. This is
reinforced by the number of contracts they have entered into to supply
independents such as Burmah and Apco. They also have a growing
network of independent brand retail sites that they are supplying. Mobil
appears willing to participate in genuine wholesale marketing
independent of their own retail business.
f) Caltex focussed on cost and efficiency factors. For them the key to
narrowing the country-city petrol price differential was removal of the
Sites Act to increase competition and consequent rationalisation of the
number of sites in country areas to reduce cents per litre costs.
Removal of the Sites Act would give Caltex the ability to pursue a low
price/high volume marketing strategy to compete directly with
Woolworths and other independent chains. An interesting issue for
Caltex is the need to transform work practices in country areas to
improve efficiency.
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g) Shell also focussed on cost and efficiency factors and argue that the
removal of the Sites Act would allow them to invest in and compete
actively in country markets. Shell has significantly restructured its
distribution and retail network via the adoption of the multi-site
franchise system. However, it is yet to achieve significant country site
rationalisation.
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In combination these proposals are likely to significantly close the countrycity petrol price gap. However, to ensure the continuance of this process it
is essential that a competitive and transparent wholesale market be
established to ensure supply to all retailers for both existing and new
entrants. BP and Mobil appear to have moved further in this direction than
Caltex and Shell.
There are a number of complexities in facilitating the entry of non-major
branded independents into country areas to lower petrol prices. These
include the closure of service stations and the resulting job losses and
cherry picking by new entrants with the loss of cross-subsidisation of
pricing and services to particular groups, such as, subsidised delivery to
farmers by local distributors. Research by Caltex suggests that lower petrol
prices in country areas would result in a net increase in jobs even though
there would be job losses in service stations. A substantial amount of
capital would also be released from service stations to be used for other
investment. The cross-subsidisation losses however need to be addressed
and co-operatives may be a means of achieving this.
Petrol is a volume driven industry and hence it is unlikely that non-major
branded independents will, of their own accord, enter small communities.
Therefore, small communities may be excluded from the benefits of greater
competition in the petroleum industry.
Repeal of the Sites Act will be required to enable the four majors to
restructure their country networks. However, this is seen as a necessary
but not sufficient condition for lowering the country price differential. The
timing of the repeal is currently a political issue that rests on an assessment
of the degree to which necessary improvements to competition in the
wholesale and retail markets, outlined in the ACCC report of 1996, have
been achieved.
An important role for co-operatives in country petrol pricing can be
identified. However, it is considered that this role would be restricted to
those geographical areas and market segments that would be least likely to
receive market led competitive benefits that are currently moving into the
country market. These geographical areas and market segments such as
small towns and farmers groups could even be disadvantaged with an end
to cross-subsidisation as country distribution and retailing becomes more
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competitive. For them a co-operative may be the means for competitively
priced delivered petrol.
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Progress is being made on the issue of the country-city petrol price
differential. This progress can be hastened by a receptive approach by
regional NSW to structural change taking place in the industry. But
government interaction to establish co-operatives is likely to be an
important initiative to ensure that the benefits of restructuring are enjoyed
by all of regional NSW. It is also important to monitor both the country-city
petrol price differential and outcomes from the recently released
Commonwealth Government “Downstream Petroleum Products Action
Agenda” which addresses the issue of investment in the refining part of the
industry.
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1.
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What is the Brief of this Project?
The New South Wales Minister for Fair Trading, The Hon John Watkins, is
addressing the issue of unfair petrol prices in country areas and this study
is supporting this initiative.
The aim of this study is to broadly examine the economic issues associated
with the formation of co-operatives to address petrol pricing issues and
ways in which competition can be promoted in the petrol industry.
The outcome of this study is a set of recommendations about ways in which
the Department of Fair Trading can enhance competition in petrol markets
with particular emphasis on the possible role of co-operatives.
The focus of this study is on petrol industry issues. It should be read in
conjunction with a companion study, “Development of Co-operative Type
Structures for Lowering Petrol Prices in Rural New South Wales” prepared
by the Australian Centre for Co-operative Research and Development.
The project has been funded under the Co-operative Development Fund.
The approach in this study included face-to-face interviews with:
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Mr Robert Condor, Manager, Wholesale Systems and Mr Frank Topham,
Government Affairs Manager, Caltex Australia Limited;
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Mr Ian MacKenzie, Retail Strategy Coordinator, Shell Ltd;
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Mr Lex Cusin, General Manager, Distributor Australia/New Zealand, and
Mr Andrew Van Der Zwan, National Operations Manager, and Ms Sam
Potts, Manager External Relations & Communications, Mobil Oil
Australia Ltd;
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Mr Mike McGuinness, Manager, Fuels Product & Pricing and Mr Bill
Frilay, Manager Government Relations, BP Oil;
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Mr Bruce Dunsmore, Director and Mr John Rathgeber, Diamond
Petroleum Pty Ltd;
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Mr Mark Kevin, Chief Executive and Mr David Wieland, Joint Chairman,
Liberty Oil Pty Ltd;
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Professor Alan Fels, Chairman, Mr Geoff Asher and Ms Margaret
Arblaster, General Manager – Transport Regulatory Affairs Division,
Australian Competition and Consumer Commission;
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Mr Brian Marks, Executive Officer, Service Station Association;
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Mr Merv Bilske, Marketing & Operations Manager, Westoil Petroleum
Pty Ltd, a country based distributor; and
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Mr Hans Sidler National Manager, Petrol, Woolworths Plus Petrol.
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Additional resources employed included analysis of petrol pricing data and
industry information formulated by the WRI over a number of years of
research into petrol pricing in country areas.
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2.
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Does Australia Have a Petrol Price Problem?
Figure 2.1 suggests that Australian average petrol prices are competitive
compared to other OECD countries (AID News, 1999, Number 3).
Petrol prices world wide have risen as a result of the OPEC decision in
March 1999 to cut production by 2 million barrels per day which
subsequently took crude oil prices from $10 per barrel in January to the
current $26 per barrel.
Prices in Australia were also affected in Mid 1999 by rising refining margins
caused by the closure of some refineries on the West Coast of the USA.
There is considerable variation in the typical retail petrol price in Australia.
Country areas in particular pay a much higher price for petrol than capital
cities. It should be noted that other variations include a differential in
prices in some capital city areas such as prices in the Northern Suburbs of
Sydney are usually higher than those in the Western Suburbs of Sydney.
There is also a weekly price cycle in capital cities where prices typically rise
at the end of each week.
It is the differential between country and city petrol prices and the practices
that cause the differential that have created a poor public image and
distrust of the oil majors despite claims that returns to the industry in
Australia are very low.
Australia’s petrol price problem is essentially the differential between
country and city petrol prices.
Figure 2.1
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3.
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How Important is the Country-City Petrol Price
Differential?
Petrol is a cost of living and a factor cost to virtually all business. Noncompetitive high country petrol prices reduce the competitiveness of
country business at a time when the pressures of globalisation and national
competition policy are being keenly felt.
There is a misconception within Australia that all country areas are in
economic decline.
The Western Research Institute Business Survey
confirms the strong performance of some regional areas such as the Central
West of NSW. Petrol prices are the most visible price in a community so
large differentials between country and city prices reinforce this
misconception and could cause potential investors to doubt the viability of
investing in country areas.
Petrol pricing arrangements particularly in country areas create a situation
of dependency on metropolitan-based oil majors further reducing the
attractiveness of locating or investing in country areas.
Lack of competition in country areas translates to as much as ten cents per
litre difference between country and city prices. Research by the Western
Research Institute shows that competition from non-oil major brand outlets
in country areas can reduce the difference between country and city prices
by between three and six cents per litre. (See Orana Petrol Gauge and The
Supermarket Revolution in Australian Petrol Retailing, Implications for
Country Australia, Regional Economics Research Unit, October 1997)
If NSW country is defined as all of NSW excluding Sydney, Hunter and
Illawarra regions and car owners are assumed to drive on average fifteen
thousand kilometres per year with consumption of petrol at ten litres per
one hundred kilometres then reducing country petrol prices by five cents
per litre would save country consumers thirty-six million dollars per year.
Caltex commissioned Corporate Economics Australia to study the potential
impact of lower prices of petroleum retailing. This study found that if petrol
prices fell by five cents per litre twice as many jobs would be created in
other businesses are lost in service stations and $500m in capital would be
freed up for other investments instead of being tied up unproductively in
country service stations. The study also found that a five cent per litre fall
could reduce the number of country service stations by fifty percent over
five years. (see Caltex Agenda No 7).
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4.
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How Complex is the Country-City Price Differential
Problem?
The country-city price differential problem is not a simple issue. The nature
of the problem varies between large provincial cities, medium sized towns,
villages, hamlets and farms. It also has the dimension of employment and
the promotion of small business.
In large provincial cities price parallelism and even tacit collusion can result
in high prices and high Notional Retail Margins (the Notional Retail Margin is
the retail price minus the wholesale price). The high returns from these
retail operations can be captured by the local retailers or by the oil majors,
the latter through a mechanism called “claw-back” (identified in Murphy et
al, “Efficiency and Competition in Rural Petrol Markets” Agenda Vol 3 No 4
pp 441-448). The Orana Petrol gauge has identified some centres with
very high Notional Retail Margins such as Albury-Wodonga, Armidale,
Coonamble and Coonabarabran.
In other country centres high prices may be the result of too many small
scale service stations who incur inefficient handling of fuel, lack economies
of scale and do not have an adjoining store or food outlet.
In small villages and hamlets the survival of the local service station can be
under threat by price competition in the adjacent larger town brought on
for example by the entry of Woolworths Petrol Plus. The loss of a service
station can, like the loss of a bank, cause the village or hamlet to lose
critical mass and ultimately cease to exist.
In all country centres there is a substantial amount of “under canopy”
pricing where farmers, local government, business and other organisations
receive discounts and hence pay less than the posted price. Making the
posted price more competitive may lead to a reduction in or loss of “under
canopy” pricing for some country consumers.
Any attempt to make country service stations more competitive will
inevitably raise concerns about service station closures, job losses and the
impact on small business. However, the Caltex report referred to in the
previous page shows that lowering petrol prices has a net job creation
effect. Moreover, restructuring of petrol retailing is already underway and
initiatives such as multi-site franchising are moving petrol retailing out of
the hands of small business anyway.
Reported low returns to the oil industry have made the industry far more
“cost conscious”, so some services in country areas such as “on demand”
delivery to farms are already being phased out. Thus, farmers in particular
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are under threat of further fuel delivery cost increases which further
reduces their competitiveness in an already tight economic environment.
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The existing distributor retail network in country areas is, in many
instances, a long-standing one involving personal relationships between the
players.
In this context rationalisation of the industry in country
communities can be difficult.
Country service stations face challenges in addition to those from the
petroleum industry. The traditional model of a service station with the
adjoining workshop is under threat from national automotive repair
franchisees such as Ultratune.
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5.
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What are the Causes of the Country-City
Price Differential?
There has been considerable debate in recent years as to the causes of the
country price differential. However, regardless of the different positions
adopted, it is generally accepted that the debate focuses on four key
factors which are:
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4.
Local Competition Factors;
Cost and Efficiency Factors;
Wholesale Pricing and Supply Factors; and
Regulation Factors.
Local Competition Factors
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Nonprice competition. A culture amongst country resellers of non-price
competition and conscious or unconscious price parallelism.
Collusion? Extreme interpretations include claims of tacit collusion and
“local community” pressure on individual dealers who attempt to discount
fuel.
Attitudes. Other claims include a “country” attitude that lacks the
competitive profit driven culture of the metropolitan markets. The country
attitude also applies to consumers of petrol and local government. There is
some evidence that country consumers are less responsive to petrol
discounting than city consumers and local governments have frequently
obstructed the entry of new petrol suppliers to their communities.
Cost and Efficiency Factors
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Volume. Principal amongst these factors is the smaller volumes sold by
country dealers so that the considerable fixed costs of a service station are
spread over fewer litres on a country site. This volume differential may be
rising with the extensive restructuring of outlets that has occurred in
metropolitan areas.
Storage. Country outlets with smaller volumes typically have smaller
storage tank capacity. This necessitates small delivery loads, which not only
adds to costs but also entrenches the country distribution system with
distributor depots and double handling. (Each handling of the typical
40,000 litre load of petrol can result is losses of 600 to 700 litres). Larger
sites with large capacity tanks are capable of receiving direct deliveries from
city terminals in the same manner as their metropolitan counterparts.
Freight Charges. Undeniably, the cost of freighting fuel to country areas
from city based terminals must generate a country price differential.
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(Freight costs are between 0.8 to 1 cent per litre per 100 kms for large
tanker direct delivery.)
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Shop. The modern metropolitan outlets typically have an attached “shop”
business, which contributes significantly to returns on that outlet. In some
cases this is claimed to be the major source of revenue.
Staffing Inefficiencies. Claims of over staffing and driveway service in
country outlets are said to increase country costs and add to inefficiencies.
Retail Margins. It is claimed that cost and efficiency factors necessitate
retail margins of 4 to 7 cents per litre in country areas while metropolitan
outlets can operate on margins of 2½ to 3 cents per litre or less.
Wholesale Pricing and Supply Factors
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Differential Wholesale Pricing. Country dealers have traditionally been
charged a notional maximum wholesale price. (Previously the maximum
Wholesale Endorsed Price or MEWP approved by the ACCC). In contrast,
most metropolitan dealers are supplied at the maximum wholesale price
minus rebates, thus providing metropolitan dealers with an effective lower
wholesale price. The major brand companies dispute that this practice
represents wholesale price discrimination, arguing that the metropolitan
discounts are necessary to enable metropolitan dealers to survive in a more
competitive market. This practice of providing rebates to city retailers but
more rarely to country retailers has continued despite the removal of the
MEWP in August 1998.
Independent Supply. Without access to guaranteed supply at competitive
wholesale prices, it has been extremely difficult for any country retailers to
countenance a price driven competitive strategy. Prior to 1996 independent
supply was problematic for independent retailers. However, as shown
below the situation has since improved.
Regulation Factors
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Background. The principal form by which competition was regulated was
via wholesale pricing endorsement and two Acts of legislation commonly
referred to as the Sites Act and the Franchise Act. (The Petroleum Retail
Marketing Sites Act 1980, and the Petroleum Retail Marketing Franchise Act
1980). The wholesale pricing endorsement involves the Prices Surveillance
Authority and subsequently the ACCC setting the MEWP across Australia.
In practice all retailers were charged the MEWP but city retailers received a
rebate in the form of price support. Therefore, the MEWP provided a
platform for price discrimination against country retailers.
The regulations only applied to the major oil companies. The ACCC in its
report on the industry in 1996, recommended that all three forms of
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regulation be removed but on a phased basis and subject to certain
competitive conditions being met. Fundamentally, the key area of concern
was the creation of an openly competitive wholesale market with no
barriers to entry for potential new entrants to the industry. In this respect,
the provision of access to imported fuel for new entrants and the
undertaking by Caltex/Ampol under its merger approval conditions, to
supply a minimum volume of its refinery supply to independents, and the
development of an import market for supply of independents, were critical
developments.
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Sites Act. The Sites Act is a critical factor in the country pricing debate. It
limits the number of outlets that the majors can own and operate. In order
to work around this Act, the majors are forced to operate many of their
outlets on a franchise basis. The oil majors argue that this Act is a major
impediment to restructuring of their country networks.
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6.
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What are the Barriers to Entry in Country Markets?
Typically the absence of effective competition in markets is underpinned by
barriers that prevent new entrants to the market. Such barriers to entry can
come from a variety of sources, including regulatory.
Wholesale Supply. Traditionally supply has been a critical barrier to entry
for new competitors in both metropolitan and country markets. The
indications are now that this barrier is eroding. Imported fuel supplies, large
independents and a shift in market attitudes by the major brand refiners to
sell openly into the wholesale market, have contributed to this.
Local Government. For Woolworths and their Supermarket model (see
page 16), the local government approval process for new sites has proven a
major impediment that has hindered their rate of penetration of country
markets. The power of local small business lobby groups has also proven to
be significant in delaying entry to some communities. A role for State
Government in facilitating the development application process may be in
order.
Local Community Perception. A possible degree of misconception or
manipulation of community views and interests may be evident in some
communities. If local communities want lower petrol prices they must be
prepared to accept new entrants and changes to their local industry. Local
government in country areas must also embrace this message.
Covenants on Existing Sites. An issue raised by some independents is
the difficulty they have in acquiring discarded petrol sites in country areas.
Intense debate exists about the rights of major brand operators to place
covenants (that restrict the future use of that site for petrol retailing) on the
sale of sites they wish to close. The oil majors claim that they are acting in
the industry’s and the community’s interest when they apply such
covenants in order to ensure that the number of retail outlets is
rationalised. From a public policy viewpoint, competition should determine
the number of retail outlets, not individual players. Legally, however, the
position is far from clear cut and needs further investigation at both State
and Federal level.
Regulatory Factors.
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The oil majors argue, to varying degrees that the remaining regulatory
impediment to country industry restructuring is the Sites Act. To date
abolition of this Act is still blocked by the Senate. Counter views are held by
non-oil major operators. Some, such as Woolworths, have argued for its
retention to limit oil major capacity to fight off the entry of new entrants
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until such time as these new entrants are fully established. Other
independent operators now appear less concerned about the Sites Act.
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Critically for the country issue, the Sites Act is becoming increasingly less
relevant. Indications are that country markets are not necessarily part of
the long-term strategies of all of the major brands. Some have already
embarked on restructuring of their operations to work around the Sites Act.
Abolition of the Act may therefore be a necessary condition for the major
brands to operate competitively and efficiently in country areas but, of itself
it is not seen as a sufficient condition to trigger price competitive behaviour
in such markets.
THE WOOLWORTHS SUPERMARKET MODEL
The Woolworth’s formula is a simple one. Small scale petrol vending outlets are
built in existing supermarket car parks, ideally near the exit so as not to impede
traffic flows. Basic petrol products such as fuel, water, oil and air are the only
products sold. There is no motoring shop attached, only a small payment office.
The model is based on the one stop shop concept, with petrol being seen as simply
one more product line to be added to the supermarket range. Third party
operations such as franchising which are common in the rest of the petrol industry
are not adopted. The marketing strategy is the same as that for normal
supermarket products: convenience of “one stop” location and competitive pricing
underpinned by volume sales. In addition to a competitive listed price, Woolworths
offers a further 2 cpl discount to customers who produce a Woolworths’
supermarket docket of $30.00 or more. It is understood that approximately 90% of
supermarket customers spend this amount when they visit the supermarket.
Petrol is sold under the Woolworths name with “Petrol Plus” added, viz, Woolworths
Petrol Plus, with the exception of Victoria, where it is marketed under the brand of
Safeways Plus Petrol, and in Tasmania where it will be marketed under the brands
Roelf Vos Plus Petrol and Purity Plus Petrol.
Location of the first Petrol Plus outlets in country towns could be seen as a
surprising move, however it is simply a factor of car park availability. Access to
suitable car park space is a key ingredient in the location decision and country town
supermarkets are more likely to have excess car park space available to be turned
over for use as a petrol outlet. There is also less competition in country towns and
hence higher margins to be captured. Woolworths appears prepared to consider
alternatives to the car park model, such as adjacent existing service station sites, as
it did with its Cooma location.
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7.
How did the Petroleum Industry Operate Pre-1996?
Retailing and Wholesale Model
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The traditional retailing and wholesaling model in Australia has been a
uniform approach of vertically integrated operations with branded retail
outlets being considered essential to guarantee sale of Australian refined
product. A policy of retail outlet ownership and market share driven
competitive strategy was employed. As metropolitan sites were considered
the more attractive, this policy resulted in a higher concentration of oil
major owned sites in metropolitan areas. In contrast country areas have
had a lesser concentration of oil major owned sites (and thus a higher
concentration of owner operator sites.) However until recently, country
outlets, regardless of ownership structure were overwhelmingly oil major
branded sites. The Sites Act restricted the capacity of the oil majors to
directly operate their own retail outlets so a franchise system was adopted
to operate those sites in excess of the maximum number allowed by the
Sites Act. (The Franchise Act was thus introduced as a necessary
complement to the Sites Act to protect franchisee operators).
Retail Price Support Schemes. Under the franchise model, the oil
majors lost direct control over retail pricing. However indirectly they were
able to restore a degree of control under the rebate scheme outlined above.
Here the franchisee was usually charged the MEWP to which rebates were
provided if margins and profit returns fell below a certain level, according to
a business plan agreement between franchisee and the oil major owner of
the site. In general, country area franchisees were not in receipt of rebates
under these support schemes. Their retail margins were considered
sufficient as to not justify support. (Certain metropolitan areas also fell into
this category, for example, North Sydney)
Wholesale Country Price Differential? As discussed previously, this
discounted price scheme generated an effective wholesale price differential
that discriminates against country retailers. The oil majors argued that this
was justified because these country outlets were not subject to the vigorous
price competition found in metropolitan markets.
Responses to the Sites Act. The wind back in the number of retail sites
in recent years has seen the oil majors concentrate their limited number of
permitted company operated sites in metropolitan areas. As this process
has also involved upgrading and new outlet development, the process has
not been without sizeable investment cost. (A new site can cost in the order
of $1 – 3 million). Given investment budgetary constraints and Sites Act
limits, the major brand companies argued that they have had no incentive
to restructure their country operations. This was reinforced by the apparent
profitability of country operations.
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Profit Cross Subsidisation. Whilst this can be seen as a justifiable
strategy for the majors to pursue, from a country area perspective it again
presents as a form of discrimination: in this case a form of competition
discrimination and a form of profit cross-subsidisation of metropolitan areas
by country areas.
Multi-site Franchising. Another response by the oil majors to the Sites
Act restrictions has been the advent of multi-site franchise operations.
Here one franchise operator may operate anything from 5 to 70 retail
outlets. Adoption of this strategy varies considerably between the major
brands. Shell has proven the most vigorous exponent of the multi-site
franchise model with a massive overhaul of its retail franchise network.
There are several implications of this model. It strengthens the indirect
control mechanism implicit in the rebate pricing model across the franchise
network. It transfers much of the responsibility for cross subsidisation of
retail sites to the multi-site franchise operator. Rationalisation of retail
outlets may also be facilitated. A side effect in country areas of multi-site
operations is the removal of the “local small business” element from the
rationalisation and price competition argument. No longer can the
introduction of price competition in a country town be opposed on the
grounds of loss of a local small business: the small business franchisee has
already been replaced by a multi-site operator from another area; possibly
located in a major city. A merging of distributor and retailer roles is also
facilitated by this model. Many distributors now operate retail outlets. Their
experience at wholesale and retail levels makes them well qualified to
become multi-site operators.
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8.
What has happened in the Industry since 1996?
Inquiry into the Petroleum Products Declaration
•
•
•
•
In August 1996 the Australian Competition and Consumer Commission
released its “Inquiry into the Petroleum Products Declaration”. The Inquiry
found oil companies had a strong influence on prices and on terms and
conditions of supply throughout distribution and retailing.
Even so,
competition was seen as sufficient in the metropolitan areas of some of the
larger cities where independents had a greater presence (p 137). Implicitly
the ACCC suggested that there was insufficient competition in regional
areas.
The ACCC recommended the repeal of the two industry regulation Acts and
wholesale pricing endorsement subject to concerns related to competition
being fully addressed.
Woolworths’ plan to move into petrol sales was hailed by the Australian
Competition and Consumer Commission as pro-competitive (ACCC Media
release August 1996).
The year 1996 was a watershed for the industry. However, many of the
changes in the industry which began in 1996 were made possible by the
intervention by the ACCC in the Ampol-Caltex merger in 1995. The
intervention secured import terminal facilities, retail sites and supply of
product for independent players such as Liberty, Burmah and Woolworths.
Four Key Factors
Local Competition Factors
•
Independents. Major independent players such as Liberty and Burmah
were already present in capital city markets prior to 1996. Post 1996 their
penetration into city markets has increased thereby tending to widen and
deepen the country-city price differential. They have also caused a strong
weekly price cycle in both Melbourne and Sydney.
Beginning in Dubbo in 1996, Woolworths adopted a strategy of modern but
small car park outlets (Petrol Plus) to complement their supermarket
operations. By the end of August 1999, 102 Petrol Plus sites had opened
across Australia, 60 of which are in regional and rural Australia.
In February 1998, the NSW Farmers’ Association introduced their fuel
scheme, designed to bring competition and lower fuel prices to the
membership throughout NSW. The Coordinator for the scheme was
Diamond Petroleum Pty Ltd of Melbourne who organised the delivery of
petrol and distillate in full tanker loads of 33,000 to 40,000 litres to go
19 of 47
direct to the farms from the seaboard terminals located in Sydney, Brisbane
and Melbourne. (Deliveries were possible only to farms or groups who
could each take a compartment of approximately 6,600 litres).
In 1998/99 a third round of low cost independent brands such as Volume
Plus and Diamond entered both city and country markets.
Prices Oversight. The Orana Petrol Gauge, other price monitoring
schemes and the NSW Petrol Hotline have focused very much on the
country-city price differential.
•
Cost and Efficiency Factors
Rationalisation – Retail. Rationalisation of retail sites has continued
apace across Australia. Large numbers of sites have been closed, and new
sites that have appeared are typically larger with additional product lines
such as a convenience store, fast food outlet or car wash facilities.
However, this rationalisation has been largely restricted to metropolitan
areas. Even where competition has intensified such as with the entry of
Woolworths Petrol Plus, there have been relatively few service station
closures in country areas. Oil majors argue that they will not engage in
restructuring their country sites with its associated new investment until the
Sites Act is repealed.
•
Rationalisation – Distributors. For country areas the distributor network
is highly relevant as the majority of retail outlets are supplied by
distributors. Country distributors also have significant capital investment
that is geared to double handling of product and small volume supply. The
extent of distributor rationalisation is still unclear, however it appears some
of the four major brands have in mind a super distributor model with as few
as one or two distributors in each state. Some distributors are essentially
acting as brokers for some retailers by organising direct drop from city
terminals to the retailer. Distributors are partly or wholly owned by oil
majors. The relationship between oil major and distributor is a contentious
issue. In this rapidly changing market the extent of ownership and control
of distributors is in a state of flux. Claims by non-major operators of major
brand control of their distributors are met with claims of denial from the
majors. Specifically, majors argue that even though they partially or wholly
own distributors they treat them at arms length and the distributor makes
decisions in its own business interests.
•
Wholesale Pricing and Supply Factors
•
Imported Product. In 1994/95 imported petrol represented only 3.4%
of refinery output with the bulk of imports accounted for by the majors.
Now imported product is available to independents through facilities at
Botany, Newcastle and Melbourne, made available through undertakings
20 of 47
associated with the Caltex/Ampol merger. The major user of imported
product is Woolworths.
•
•
•
Physical Access. In 1996 many in the industry expressed concern about
physical access to product. This concern has disappeared. The oil majors
claim that they are now prepared to supply any buyer subject to
commercial terms.
There is also wholesale product available from
independents such as Woolworths, Liberty and Diamond.
Spot Market. The current wholesale market is not a true spot market. It is
a term contract market. The industry is unlikely to be able to move to a
true spot market without significant expense on storage facilities. However
further down the distribution chain a form of spot market has the potential
to develop into an important competitive source of wholesale supply. This
market is to be found at the distributor level and now includes the major
independent operators (for example Liberty and Woolworths) who have
long term supply contracts and are also prepared to on-sell into the
wholesale market.
Terminal Gate Pricing. All the oil majors claim that they currently provide
petrol at a terminal gate price. All post indicative terminal gate prices but
the actual price paid depends upon negotiations with the oil major on terms
and conditions such as credit, freight, volume and duration of the contract.
There are mixed views about the genuineness of the terminal gate price.
For the country petrol price problem, a key aspect of this regime is that a
terminal gate price is not available to franchisees so that in its current form
terminal gate pricing does not prevent wholesale price discrimination
against country retailers.
It is our view that BP is the only one of the four major refiners to move to
an open “Terminal Gate Price” (TGP) regime. Under this arrangement a
daily basic price for fuel at the terminal gate is available. It should be noted
however that this price is for a cash purchase, with no delivery or other
services and for a term period (such as a year). A range of additional
charges is added to the TGP for services such as credit, delivery and use of
the BP brand. Significantly BP has also elected to apply TGP to its own
distributors. The other majors offer a negotiated wholesale supply and price
but without the transparency of the BP approach. More importantly the BP
approach signals an open supply approach that is essential if a competitive
wholesale market is to survive. In turn, a competitive wholesale market is
seen as a prerequisite for a competitive retail country market.
•
Terminal Gate Pricing vs. Support Pricing. A significant difference in
approach to distributors is evident with the BP move to apply TGP (on a no
credit basis) to its distributors, regardless of BP’s equity position in these
distributors. This move places greater pressure on BP’s distributors to act
independently. It adds to the transparency of their own operations and
empowers their downstream customers with wholesale pricing information
21 of 47
that is simpler to understand (as it is a cost plus pricing structure). The
responsibility for efficient retail networks operations is thus transferred to
the distributors. In contrast, Shell’s approach is to apply the same
relationship that they have with their retail franchisees (the retail franchise
model also employed by the other major brands) to their distributors. This
approach involves the use of an indicative (delivered) wholesale price with
rebates that are applied under a price and profit support scheme. The
effective price for supply is thus a discounted price, with the discount being
a discretionary price in the hands of the oil major. In practice, the extent of
the rebates varies between distributors based on individual profit plans,
network operations and local competitive factors. The effective supply price
thus varies between distributors, but more critically, the oil major that has
control over the rebate indirectly controls this price. Distributors under the
BP approach will, in theory, have more freedom to make independent
actions including to extend their operations into the general wholesale
market and non BP retail markets, whereas distributors under the Shell
rebate model will be under pressure, be it actual or implied, to not move
out of the Shell network.
•
Extent of Open Access Arrangements. The Motor Traders Association
of Australia estimates that only a very limited percentage of retailers
(approximately only 7%) would be able to employ so called open access
(which is purchasing direct from terminal) arrangements. (Productivity
Commission Inquiry, Report No 8, 8th September 1999, pg 4).
Regulation Factors
•
•
MEWP. The role of the ACCC in setting the MEWP was removed on the
1st August 1998. The role of the ACCC was replaced by monitoring
undertaken through cooperation between the Australian Automobile
Association, the ACCC and the major oil companies.
Sites and Franchise Acts. A Bill to repeal the Sites and Franchise Acts
was rejected by the Senate in 1999.
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9.
How have Post 1996 Developments Affected the
Country-City Price Differential?
Independents in Country Areas
•
•
•
•
•
•
•
NSW country areas have experienced the arrival of some independent
petrol sellers (non-brand major dealers including Woolworths Petrol Plus
and Volume Plus etc) in recent times.
Other large independents such as Liberty and Burmah have not penetrated
rural NSW but have opened in outer metropolitan areas and fringe country.
(eg. Blue Mountains)
The introduction of an independent reseller to a country town initially
resulted in significant price reductions in the order of 5 to 6 cents per litre.
The major brand dealers in these towns initially matched Woolworths lower
price. It is assumed price support would have been introduced for the
major brand dealers.
The impact of these price reductions led to a lowering of the Country price
differential.
Considerable price variation between country towns was witnessed, based
on the presence or non-presence of Woolworths.
In some instances prices have risen again after the initial entry of
Woolworths. However, the new price is still 3 or more cents per litre below
the pre entry price.
Orana Petrol Gauge Results
•
•
•
The Western Research Institute produced the Orana Petrol Gauge which
involved four surveys of New South Wales petrol prices. The gauge was
funded by the Orana Regional Development Board. They were conducted
on the 30th June 1998, 1st October 1998, 30th June 1999 and 10 th November
1999.
The gauge involved a telephone survey of approximately sixty centres in
country and metropolitan NSW for retail prices and a calculation by the
Australian Competition and Consumer Commission of the MEWP. (The
MEWP for each centre is based on the Singapore price, the local
component, any applicable state tax adjustment and freight to that centre).
The difference between the retail price and the MEWP is called the Notional
Retail Margin and is a measure of competitiveness or fairness of the petrol
price for that centre.
Centres were classified as competitive or non-competitive. Competitive
centres had an independent non-major branded petroleum retailer such as
Woolworths Petrol Plus, Liberty, Burmah, Volume Plus or Diamond. Noncompetitive centres had only oil major branded outlets.
23 of 47
The Orana Petrol Gauge is a useful measure of the country-city price
differential because it is conducted entirely independently of motoring
organisations and the oil industry.
•
The gauge found that over the last eighteen months the average price
difference between country and city centres was 7 cents per litre with a
wide variation. For example, the average difference between the city price
and Coonabarabran was 11 cents per litre.
•
•
•
•
The gauge found the average difference in the Notional Retail Margin
between country and city was 4.5 cents per litre (7.5 cents for
Coonabarabran).
An important finding of the gauge is that the average country-city gap in
Notional Retail Margin for competitive centres was 2.5 cents per litre, while
for non-competitive towns it was 7 cents per litre (this excludes any
additional discounts for dockets provided by Woolworths). Clearly the
existence of a non oil major in the centre provides a more competitive and
fairer price.
Table 9.1 shows the average Notional Retail Margin for all four surveys and
the maximum and minimum recorded in any survey. It should be noted
that the 1.9 cents per litre Notional Retail Margin for non-competitive towns
was for Wellington which is influenced by the Woolworths at Dubbo, 50
kilometres away.
Table: 16.1 Notional Retail Margin
Average
Metropolitan
Competitive
Non-Competitive
Maximum
Minimum
-1
2.9
-4.2
2.2
8.1
-6.1
6.2
9
1.9
Shell disagrees with the Orana Petrol Gauge and stated that “the average
difference between Sydney and non metropolitan prices was 4.3 cents. 9 of
the 305 country service stations were more than 10 cents above the
average Sydney price. An additional 24 outlets were between 8 and 10
cents more expensive. Over half of the non metropolitan service stations
were less than 5 cents above the average Sydney price”. The Western
Research Institute believes that the difference lies in Shell regarding
Newcastle and Wollongong as part of country NSW. Shell and Caltex have
offered to allow the Western Research Institute to examine all of their
petrol prices data. The Western Research Institute would accept this offer
if independent funding was made available to carry out the work.
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10.
What are the Current Changes Taking Place in the
Petroleum Industry?
The petroleum industry is undergoing significant structural change. Therefore
it is important to understand some of the emerging developments and
initiatives in the industry.
Retail
A range of possible retail outlet models can and are being pursued by the
industry. The previous uniformity of approach by the major brands is breaking
down. There are two broad types of emerging models. There are those
favoured by the oil majors (large scale outlets) and those favoured by the
independents (alternative outlet models). Each is discussed below.
Large Scale Outlets
There are four large scale outlet models being pursued by the oil majors.
These are: Volume Fuel (Key commuter location), Plus Mini-Market (“Mars Bar”
model), Plus Food and Highway Roadhouse.
Volume Fuel Models are found on major metropolitan arterial roads. It is
usually price driven and does not require the same degree of other product
services such as a mini-market. It therefore also does not require as a large
area and infrastructure. It depends heavily on fuel for its revenue and in this
respect location and volume are the critical drivers of its success. This model
appears to be contestable by the metropolitan independents with smaller
investment funds but access to keenly priced fuel supply.
Plus Store and Plus Food Models require heavier investment, larger area
and additional facilities in the form of longer term parking and Mini-market and
Restaurant infrastructure are required. These are the super sites that favour
the larger operators with their greater financial resources. The second tier
independent operators find the models harder to duplicate.
Highway Roadhouse Model is a potential high revenue earner as well as
heavy investment model. It would be expected to be attractive to the major
brand operators. This is perhaps the most viable large scale model for country
locations. To date these are the models that have featured most strongly in
the restructuring of metropolitan markets but apart from the Highway
Roadhouse, have been withheld from country markets.
25 of 47
Alternative Outlet Models.
The independent retailers are also pursuing four basic models. These are: Plus
Supermarket (Woolworths model), Plus Corner Store and “Basic Bush” Fuel
models.
The Supermarket Model has already proven suitable for country towns. In
fact country towns provided a more favourable location for this model than did
metropolitan locations due to the more ready availability of supermarket car
parking space on which to locate this model.
The Plus Corner Store Model already exists in some small rural towns. The
local store (in very small towns maybe the only store) also retains a couple of
petrol pumps. Just as with general retail business, the corner store has come
under considerable pressure from the competition of the down-town
supermarket, but it still survives. Supply of goods (including petrol) is critical
and margins are higher. The customer trades off price for convenience.
The “Basic Bush” Model refers to those retail outlets in country towns that
are old and of poorer quality in comparison to their metropolitan counterparts.
They are most likely, locally owned and there is not a ready market for
alternative use of the assets. In some country towns such outlets are often
closed down and remain unused for many years. Potentially, a basic fuel
service is a viable proposition for such outlets. Until recently such a model
seemed unlikely. They were targeted for rationalisation by the major brands.
However they also likely have a mix of oil major, distributor and local
ownership. With the expansion of independently sourced supply this model has
recently emerged as a longer-term option. A range of new brand names such
as Prime, Major and “Save on Fuel” are attaching to such outlets. However,
rather than being high margin low volume sites these “Basic Bush” models are
providing discount pricing. With their low capital investment, they represent a
potential low volume low price model that would not be sustainable in
metropolitan areas where high capital values attach to retail sites. In fact, the
major brand companies may not even wish to supply such country sites on
their own brand basis. If they decide to pursue a retail market strategy based
on the high investment metropolitan models, then an image problem may
present with the “Basic Bush” model.
Wholesale
There are three major developments in the wholesale market. The first is the
provision of terminal gate access by all of the oil majors. However, this access
is frequently regarded as not very competitive in terms of prices, is not
available to franchisees, and is not a genuine spot market. By itself, this
development is unlikely to have much impact on the country-city petrol price
differential issue. The second is the provision of wholesale product by
independents such as Woolworths, Liberty and Diamond. The provision ranges
from terminal gate access to on-site delivery as conducted by Diamond to NSW
26 of 47
Farmers. The third is the more transparent, cost plus, terminal gate pricing
provided by BP which departs from the rebate system that has confounded
those trying to understand the industry for some time.
This greater
transparency has the potential to reduce the country-city petrol price
differential as well as lessen the impact of the image of dependency created by
the rebate system.
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11.
Is Cross Subsidisation and Cherry Picking an Issue to be
Considered in any Solution to the Country-City Petrol
Price Differential Problem?
Despite the appearance of stable pricing reflected on retail price boards,
country markets have traditionally exhibited an extensive amount of price
variation and hence cross subsidisation amongst customers. For the retail
petrol market, this frequently involved discounts for both retail and commercial
customers in so called “under canopy” pricing. The recipients of “under
canopy” pricing include petrol cardholders, such as private firms, educational
institutions and local government. In addition, country areas have a farm
supply market that does not exist in metropolitan areas. However, the country
farm and commercial markets are highly diversified in their scope and range.
The farm diesel market for instance ranges from highly inefficient small farm to
million litre farm requirements in the broadacre farming areas. In sustaining
this range of customer demands, country retailers and distributors have
traditionally operated cross subsidies between customers. The major source of
cross subsidy being the retail driveway customer who faces the highest posted
price board prices.
This situation could be exposed if the phenomenon known as “cherry picking”
in the banking industry were to be introduced to country petrol markets. Here
new suppliers would target profitable segments of the market that are the
source of cross subsidisation for other less profitable (or favourably priced)
segments of the market. In banking it was the housing market. In petrol, it
could be the country driveway retail market or certain large volume segments
of the farm diesel market.
In banking, the targeting of housing loans drove down retail loan prices and
reduced the profit margins that were the source of cross subsidisation for other
bank products. This forced the banks to restructure their pricing system and
they have subsequently revealed an ability to recover these lost margins by
increasing fees of other services, such as transactions. It also forced the banks
to re-evaluate their country operations. Decisions were made to close down
retail outlets. However, this opened the market to new entrants such as credit
unions, community banks and co-operatives. Joint venture and agency
arrangements are also emerging with supermarkets, pharmacies, newsagents
and Australia Post.
In the petrol industry, “cherry picking” by new entrants is driving down posted
prices in service stations that could result in a rise in prices to those currently
being cross subsidised by “under the canopy” pricing (such as country based
petrol card holders and farmers). However, it could also (as witnessed in the
banking industry) open up the market to new entrants and new operating
models. Co-operatives may be one such model.
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12.
What is Terminal Gate Pricing?
All of the oil majors claim that they have Terminal Gate Pricing (TGP) and
access. However, in our view TGP means selling motor spirit and diesel at
simply-calculated, transparent prices at the terminal gate to contractual
customers – dealers, and distributors. Apart from providing fuel at the
terminal gate petrol companies offer other services to the customers, such as
the brand name and logo, consumable and other activities, delivery, credit,
equipment and so on. It is up to the customer if they want to buy those other
services.
According to our view only BP currently provides a genuine transparent TGP.
The BP TGP is calculated as follows:
The first step – Base Product Price (or the BP-Alternative Acquisition
Cost-AAC):
The Base Product Price includes all the costs of getting the fuel from the
international market (Singapore) to the terminal.
World Price + Quality Adjustment + Working Capital + Freight +
Wharfage + Pipelines = AAC (Alternative Acquisition Costs).
The second step – TGP Build up:
A company sets its TGP price by adding to the AAC price the following costs:
Terminalling + Stocks + Wholesale Costs + Profits/Return to Assets
+ Federal Excise = TGP.
The third step – Final Price:
The final price is built up by dealers and distributors choosing the service they
want over and above the base product charged at Terminal Gate Price. These
services can include delivery, brand name and consumables, credit, provision
of equipment and so on.
TGP + Delivery + Brand + Credits + Equipment = Final Price
29 of 47
The BP TGP is shown diagrammatically in Appendix 1.
Caltex, Mobil and Shell also claim to have TGP open access petrol prices as is
shown in table 12.1. However, in general these prices are too high to be
genuinely competitive and hence are only indicative. The actual price is
determined by negotiation. A TGP is not available to franchisees of any of the
oil majors.
Table 12.1. TGP (Open Access) Petrol Prices in NSW
Sydney
Unleaded
Leaded
Caltex*
77.10
79.70
Mobil**
78.61
80.82
Shell***
77.26
79.48
Newcastle
Unleaded
Leaded
77.70
80.30
77.26
79.48
*Source: <http://www.caltex.com.au/pricing/openaccess.html >
Effective as at 28.11.99. These are pick up prices for full tanker loads, of no less than 15,000 l
from the applicable terminal in each city.
** Source: <http://www.mobil.com.au/products/prfuelpbody.html >
Effective as at 30.11.99. These prices are for customer collected Full Tanker Loads only – min
35,000 litres.
*** Source: <http://www.shell.com.au/business/bc_tgp_prices.html >
Effective as at 26.11.99. These are pick up prices for full tanker loads, of no less than 15,000 l
from the applicable terminal in each city.
30 of 47
13.
What are the Preconditions for a Sustained Narrowing of
the Country-City Petrol Price Differential?
For competitive conditions to spread to country areas and for the country price
differential to fall, a number of necessary preconditions must be in place. In
outline these include:
Local Competition Factors
A more competitive culture needs to be developed amongst country petrol
suppliers, consumers and local government.
Cost and Efficiency Factors
Rationalisation, restructuring and new initiatives need to be implemented in
order to reduce the margins required for the survival of country retailers.
Wholesale Pricing and Supply Factors
Country retailers need access to alternative supply of product to eliminate the
current wholesale price discrimination that is practised against them.
Regulation Factors
Currently local government often obstructs new entrants into petrol retailing in
country areas. This obstruction needs to be removed to facilitate new
entrants, which will make for a more competitive market. In addition,
consideration should be given to the removal of the Sites Act to provide
incentive to the oil majors to invest in the restructuring of the country retail
network. However, removal of the sites act could be used as a bargaining chip
to induce the oil majors to increase the transparency of their terminal gate
price arrangements and the development of a genuinely open and competitive
wholesale market. The progress made by BP in increasing transparency is
acknowledged.
Individually these preconditions, whilst necessary will not, of themselves, be
sufficient to ensure removal of the pricing differential. There remains a need
for a “trigger” to country markets to ensure this goal is achieved.
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14.
What are the Proposals from Petrol Market Participants to
Solve the Country-City Petrol Price Problem?
The following proposals are the outcome of face-to-face interviews with
representatives of market participants. In each case the proposals were sent
to the participants for comment and amendment on the understanding that
this material would be published.
Caltex
Caltex focussed on cost and efficiency factors. For them the key to narrowing
the country-city petrol price differential was removal of the Sites Act to
increase competition and consequent rationalisation of the number of sites in
country areas to reduce cents per litre costs. Removal of the Sites Act would
give Caltex the ability to pursue a low price/high volume marketing strategy to
compete directly with Woolworths and other independent chains. Their
preferred approach is commission agency for petrol sales and franchise for
sales of the on-site store and, in the case of large convenience stores and
supermarkets, direct company operation. Caltex saw driveway service and
provision of credit in country outlets as a significant cost difference between
country and city, adding to differences due to lower petrol and shop sales and
greater discounting in city areas. Caltex said that there was very little activity in
their “open access”: terminal gate market because the prices and terms offered
by distributors were presumably competitive. However, the availability of
petrol ex-terminal was important in providing market contestability.
Mobil
Mobil argued that the future of petrol retailing lay in the “Mars Bar” model.
This is the Mobil variant of the Plus Store – Plus Food model. Mobil’s view is
that entrenched low margins mean that petrol is secondary to non-fuel offers,
and may even be used by retailers as a loss leader to attract customers to buy
from the adjoining store. This view has been formed given ongoing deep
discounting cycles which are now a defining characteristic of metropolitan
markets. The deep Melbourne cycle which was occurring at the time of the
interview was at least partly driven by the illegal supply of low or nil excise fuel
substitutes by some non-major wholesalers. Overall, Mobil has a strong
interest in the country petrol price problem, acknowledging that the issue was
a major contributor to the poor public image of the oil majors – despite the
fact that, in their view, it was due mainly to the large number of low volume
outlets, over which the majors have little influence or control.
Mobil
maintained that they had an active terminal gate market. This is reinforced by
the number of contracts they have entered into to supply independents such as
Burmah and Apco. They also have a growing network of independent brand
retail sites that they are supplying. Mobil appears willing to participate in
genuine wholesale marketing independent of their own retail business.
32 of 47
Shell
Shell prepared an extensive paper on their position and contribution to the
country-city petrol price differential problem.
Some key points from this paper are that:
•
•
•
•
•
•
•
Shell supports regular monitoring of country petrol prices.
Shell supports informed debate and practical steps to address the
issue.
Shell supports identifying and removing barriers to new entrants in
the service station industry.
Shell believes that the repeal of the Sites Act would allow oil majors
to participate directly in the retail market and put downward
pressure on prices.
Shell believes that proposed mandating of price boards at NSW
service stations would increase costs and raise prices.
Shell believes a reduction of the number of service stations in
country NSW is required to lower unit costs by increasing the
average size of the remaining outlets. Most country outlets supplied
by Shell are not owned by Shell.
Shell acknowledges that in a few isolated country markets, relatively
weak competition contributes to high retail margins.
It should be noted that Shell holds a different position on the extent of the
country-city price differential to the Western Research Institute.
BP
BP has largely withdrawn from direct involvement in the country retail market.
BP service stations in the country for the most part are owned by private
operators and/or by the distributors and have contract arrangements with the
respective distributor.
BP sells at a base Terminal Gate Price (TGP) to distributors, privately owned
service stations, and independents. Most TGP sales in country areas are via
distributors who then onsell at commercially negotiated rates to their service
station customers. The TGP is the same whether the buyer is in the
metropolitan area or in the country. All other costs – freight, brand, etc – are
additional to the TGP where they are applicable. Rebates do not apply under a
TGP – it is a “bare bones” price.
This approach separates retail sales from wholesale sales and is nondiscriminatory to country buyers since the TGP is uniform. The TGP system
operated by BP has greater transparency and should be welcomed by country
retailers and consumers. It also represents a more logical cost/price build-up
without “top down” rebates confusing the issue. The cost build to the rural
consumer then becomes more transparent to the extent that the difference
33 of 47
between the TGP and the rural price represents freight, distributor costs and
margin, and retail margin.
However, the rebate system still operates between BP distributors and their
retailers. It would be difficult for the distributors to depart from the rebate
system without causing financial difficulty to their retailers. It is possible that
the rebate system is slowing the rationalisation of country retail sites.
Overall, BP strongly endorses the TGP approach as the best avenue for pricing,
as a more transparent and more logical pricing approach, and one showing
equity between city and country. It is directionally towards encouraging
competition at each level of the chain. We believe the use of a genuine TGP –
i.e. one that is without hidden discounts or rebates – will achieve the best
outcome for country consumers and the industry, and that it should be
encouraged across the industry.
Diamond Petroleum
Diamond currently supplies NSW farmers capable of receiving a full load of fuel
personally (33,000 litres) or in groups of five, each receiving a compartment
(about 6600 litres) individually. The petrol and distillate is delivered direct to
the farms from the seaboard terminals located in Sydney, Brisbane and
Melbourne. Diamond provides fuel at a significant discount to its customers.
Diamond wishes to extend this service to small and medium size farmers
through the appointment of new distributors. This would not only extend the
cost savings but would also offset the current trend of existing distributors
servicing farms “not on an as required basis” but on a system designed to
minimise distributor cost. The latter means that farmers either fall in line with
the new patterns or are left without fuel for certain times of the year.
Diamond believes that one way of appointing new distributors is to set up local
co-operatives. Funds would be needed to establish small regional fuel depots
and a delivery truck. The co-operative would employ local people and any
profits could be used to develop local activities. Diamond is prepared to
provide its expertise to assist in the establishment of these distributor cooperatives. Diamond believes that this initiative would help close the countrycity price differential, make country NSW more competitive and therefore
create jobs. It also believes that such co-operatives would help maintain small
communities who are currently losing critical mass with the exit of banking and
other services including petrol and distillate services.
Diamond has also indicated a willingness to supply fuel wholesale to any
service station. For small town outlets especially the “basic bush” model this
presents a potential source of competitively priced supply. A co-operative
model is envisaged so that the co-operative is a group of several small retail
outlets who receive a direct “milk run” delivery from a city terminal. There are
interesting parallels to be drawn with the country banking experience in recent
times as the large players restructured and reduced their involvement in many
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country markets, new entrants including co-operative models have emerged.
Like petrol, banking is also an industry dominated by a small number of large
companies and with a history of cross subsidisation.
Liberty
Liberty claims that it has already sold fuel wholesale at discount price to
country retailers, but the savings were not passed on to country consumers as
the retailers kept the extra wholesale margin as there was no pressure on the
retail price. Therefore, Liberty is anxious to establish Liberty controlled retail
sites in country NSW, particularly in high priced areas such as AlburyWodonga. Liberty is capable of making major inroads into the NSW country
retail petrol market by virtue of its long-term supply agreement with a major
domestic refiner and with its access to the import terminal at Botany. Liberty
maintains that covenants and deeds of option on the sale of old service station
sites, (to prevent the re-use of these sites as service stations) are obstructing
their entry into country markets. Liberty would like to be able to purchase the
old service station sites that the major oil companies are closing and selling.
The majors are so determined to avoid allowing independent retailers into the
country areas that they are selling their surplus sites with restrictive covenants
with the express purpose of limiting retail competition in regional areas.
Liberty has also offered technical expertise to assist with the installation of
petrol reselling equipment and provision of low cost product on a long term
supply arrangement to encourage the establishment of co-operative
distributors and retailers in small country centres.
Woolworths
Woolworths has found it more difficult to enter some country markets with its
Petrol Plus outlets than expected due to planning approval obstruction by local
government. Increasing outlets is critical for Woolworths’ long-term survival in
the industry because of the need to secure economies of scale for its imported
product. (It also has contracted supply from Australian refineries).
Woolworths is also prepared to supply other service stations and cooperatives
in most markets with petrol.
Service Station Association
The Service Station Association was particularly concerned about regulations
on price boards. They argue that margins are already tight and that price
board requirements would add to costs. They were also not convinced that
displaying retail prices and possibly wholesale prices would be necessarily
competitive. Instead they may facilitate price parallelism. They were sceptical
that a genuine spot wholesale market could be established in Australia along
the lines of the “American Jobbers”. They argued that the size of the
Australian market is too small and the American market is not the genuine spot
market that it appears.
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15.
Would the Above Proposals Individually or Together
Narrow the Country –City Price Differential?
It was previously argued that there are four preconditions required for the
country-city petrol price differential to narrow (local competition factors, cost
and efficiency factors, wholesale pricing and supply factors and regulation
factors) but that there also needs to be a trigger to set these competitive
conditions in train (the trigger is usually a new entrant into the market). In
this section we assess how the initiatives and proposals outlined by the market
participants meet these conditions and the necessary trigger.
Local Competition Factors
New non-major brand entrants in country markets have already proven to be
an effective means of increasing competition in country areas. Therefore, the
entry of Woolworths, Diamond, Liberty and Co-operatives should be
encouraged. The advantage of such entrants is that their culture and
dynamics are different to those of major branded service stations so that
conscious or unconscious price parallelism is less likely.
Woolworths further entry into country areas could be facilitated by providing
local government information about the considerable advantages of lower
petrol prices in increasing the competitiveness of local business and thereby
increasing net employment (even though there may be some loss of
employment in the local service station industry). State Government should
examine means of facilitating the planning approval process for new sites.
Non-major independent entry could be facilitated by action, which discourages
the use of covenants and deeds of option which prevent independents buying
sites of existing service stations. The availability of such sites would allow
independents to enter even smaller country towns where the capital cost of
building a new site would be prohibitive. It is our view that the benefits of
attracting a non-oil major into a regional market far outweigh the possible
efficiency benefits of reducing the number of service stations by means of a
covenant or deed of option.
While Woolworths Petrol Plus and Liberty branded service stations could bring
a new dimension to local competitive factors in large country centres, more
competitive prices to smaller centres might be secured by the establishment of
co-operative wholesale and retail outlets. (This role could even be important
for higher priced medium sized centres such as Coonamble and
Coonabarabran). Both Diamond and Liberty have expressed an interest in
providing technical expertise and supply to such co-operatives.
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Cost and Efficiency Factors
Both Diamond and Liberty include the “basic bush” model service station as
part of their marketing strategy. The low capital cost of such service stations
would be a cost saving, facilitating the provision of low cost fuel. In addition
the “milk run” freight delivery approach by Diamond can reduce the costs of
double handling if a chain of smaller outlets is established.
Investment by the majors in large store plus and food outlet plus sites would
allow the margins on fuel in country sites to subsidised by sales of other
products. This approach is probably only appropriate for large provincial cities
and highway locations. Removal of the Sites Act would encourage this
initiative.
Woolworths low cost new Petrol Plus sites attached to the supermarket is a
proven strategy for closing the country –city price differential. The attached
supermarket also can also allow a reduction in the Notional Retail Margin.
Co-operative distributors of the type envisaged by Diamond could reduce costs
of freight and handling by organising “milk runs” to smaller service stations and
farms. The most efficient form of the co-operative distributor is where its role
is essentially broker organising the delivery of fuel to farms and service stations
but not taking delivery or storing fuel itself.
BP terminal gate pricing (TGP) by making costs transparent could facilitate
more efficient delivery from the terminal gate to the distributor and retailer.
Effectively TGP provides the distributor with information and alternatives to
become more efficient. This is in sharp contrast to the rebate system where
there is little incentive to save costs as this may affect the rebate. Again, the
distributor would be most efficient when its role became entirely that of broker.
Wholesale Pricing and Supply Factors
The offers by Woolworths, Liberty and Diamond to provide fuel to country
service stations and co-operatives at wholesale prices similar to those charged
to their own retail outlets, including those based in the city, would clearly help
address the issue of wholesale price discrimination against the country. The
limitation of this initiative is that the bulk of country service stations are under
contract to the oil majors. However, even one non-major supplier in a town
can force the majors to offer price support effectively cutting the wholesale
price. Furthermore, many country service stations are owner-operated so that
once contracts expire they could opt for supply by a non-major. The BP TGP,
in principle at least, also removes wholesale price discrimination by BP against
country retailers.
However, the rebate system still operates with BP
distributors.
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Regulation Factors
Repeal of the Sites Act would remove a disincentive for oil majors to upgrade
their branded sites to the Plus Store or Plus Food models. Of its-self however,
we doubt the repeal of the Sites Act would provide the trigger for a more
competitive country market.
A more positive approach by Local Government in terms of planning approval
for Petrol Plus outlets would facilitate Woolworth’s entry into more country
centres.
Legislative action, moral suasion or even Local Government action to prevent
covenants and deeds of option being placed on sale contracts of existing
service stations would facilitate the entry of independents such as Liberty and
Diamond into country towns.
Summary
In summary, the proposals recommended by the market participants would
contribute to further narrowing of the country-city petrol price differential.
We believe that;
a)
there are a number of preconditions to be met in order to achieve
price competitive country markets.
The preconditions are
improvements in the following factors:
Viz – Local Competition Factors;
Cost and Efficiency Factors;
Wholesale Pricing and Supply Factors; and
Regulation Factors.
b)
of themselves the preconditions are necessary but not sufficient
to introduce price competition. The most effective “trigger” for
price competition is a new entrant into the local market.
c)
this process is already underway. However, there may be a role
for Local and State Government to facilitate and accelerate its
spread.
d)
petrol retailing remains essentially a volume driven business.
That is, new entrants are attracted to volume sites. Therefore,
non-major branded independents may not enter all parts of NSW.
Specifically, they may not enter smaller country towns, villages
and hamlets. Indeed, the entry of these independents in the
larger country centres that adjoin these smaller communities may
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create competition which threatens the viability of the local
service station. In these smaller communities a co-operative may
be the only means of maintaining petrol retailing. If the cooperative has competitively priced supply from wholesalers such
as Liberty, Diamond, Woolworths or even a major then it could
be viable and make a contribution to the survival of its
community. It is in smaller areas that the greatest potential for a
role by co-operatives exists.
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16.
What are the Possible Competitor Responses to the
Establishment of Co-Operatives?
Competitors may respond to the establishment of a co-operative by
passively accepting its entry or by aggressively trying to block its entry. In
the former, competitors responses may range from not responding at all to
the co-operatives price, to simply matching the co-operatives price or even
encouraging the co-operative to engage in the existing conscious or
unconscious price parallelism. In the latter, competitors may try to prevent
the co-operative setting up at all or once it is established try to drive it out
of business.
•
•
Possible aggressive competitor responses fall into five categories. These
are:
1.
2.
3.
4.
5.
Planning approval obstruction. Competitors may lobby their
local government to obstruct planning approval for the co-operatives
retailing sites thus inflating legal and other set up costs.
Predatory pricing. It is to be expected that competitors will
match any price discounting by new entrants. They may also
engage in temporary deep price discounting to limit market share or
drive-out the co-operative. In this, they will be supported via
rebates on their wholesale price from the majors or their distributor.
Therefore, the co-operative would need sufficient funds to cover this
initial very competitive period.
It should be noted that the
international oil price can be very volatile and funds may also be
needed to cope with this volatility.
Supply constraint. Access to competitively priced supply of
product is critical for any petrol retail outlet. If this supply is not
secure than competitors may well attempt to constrain or cut off
supply altogether. It needs to be recognised that the refiners and
distributors extend their interest to major branded retail outlets so
there is at least notionally a conflict of interest for a major or their
distributor to supply the new entrant under-cutting the local retail
market.
Concerns about product quality. Accusations are often levied
against new independents regarding product quality and excise
avoidance. Competitors could make allegations either explicitly or
implicitly about the legality of the co-operative’s product, its quality
or its facilities, such as the environmental condition of its petrol
tanks. Therefore, the co-operative would need to ensure that its
petrol is excised and unadulterated and its station and equipment
meet all environmental and other standards.
Security issues. It is claimed, within this industry, that new
entrants or even existing service stations which have competed too
strongly on price have their equipment damaged by vandals.
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6.
•
Local Community Issues. Attempts to discourage patronage
of new co-operative entrants by means of adverse publicity and
appeals to local community support for jobs may be launched.
Therefore, any proposal to establish a co-operative should include a check
list covering: planning approval, sufficient funds to sustain a period of
severe discounting, guaranteed competitively priced supply, guaranteed
product quality, legality and security issues.
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17.
•
•
•
What are the Major Findings of this Study Concerning the
Country-City Petrol Price Differential?
The country-city petrol price differential is an important issue for regional
development in NSW.
This is particularly the case in the current
environment of rising prices due to the increase in the world crude oil price.
There has been progress in narrowing the country-city petrol price
differential particularly in centres which have a non-oil major branded
retailer. Indeed, having Woolworths, Liberty, Diamond, Volume-Plus,
Burmah or other such retailers in a local market seems the surest way of
narrowing the gap. Therefore, any action which facilitates the entry of a
non-major will help solve the problem.
Means of extending non-major retailers into more country centres include:
•
•
•
•
•
Local governments could adopt a pro-active role to facilitate the
entry of larger independents. At the very least local government
could be more receptive to development applications of new entrants
such as Woolworths.
Local communities being more receptive to new entrants.
Covenants and “deeds of option” which prevent service stations
being reused as service stations after their sale could be
discouraged. This would facilitate volume sales by independents
such as entry by Liberty and Diamond including the “basic bush”
model.
Establish co-operatives to service farmers and small town service
stations. Supply may need to be sourced from larger independents
such as Diamond, Liberty or Woolworths for this operation. This
initiative is particularly important because “cherry picking” by new
entrants could erode “under the canopy” discounts by existing
distributors and more competitive prices in larger centres could put
the survival of service stations in small towns at risk unless they
have access to competitively priced supply.
The oil majors are also playing a part in closing the country-city price
differential. Specifically, the BP TGP is to be commended and the other
majors should be encouraged to follow BP’s lead. With a transparent TGP,
distributors and retailers have more information about their cost structure
and have scope to become more efficient. The Caltex suggestion of
investment in country areas in upgrading service stations to include a food
outlet, store or car wash also has merit, in the context of large country
centres or highway locations. Such developments are also directly linked to
the oil majors request for a repeal of the Sites Act.
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•
•
•
•
Some of the above proposals may result in the loss of some existing jobs in
service stations. However, a more competitive petrol price would make all
country industry more competitive resulting in a net increase in jobs in
country areas.
This study has shown the petroleum industry to be undergoing major
restructuring and change. This is expected to continue so that the countrycity petrol price differential needs to be continually monitored.
The Commonwealth Government’s “Downstream Action Agenda” which is
concerned about restructuring Australia’s refinery capacity could involve
further mergers and concentration in the industry which, in turn, could
change the dynamics of the supply of competitively priced product to
independents. Therefore, this Agenda requires considerable attention.
In summary, the country-city petrol price differential can be reduced by
new entrants into country markets. In most instances, this will be achieved
from market initiatives already in train by independents such as
Woolworths, Burmah, Liberty and Diamond. The process can be hastened
by a more receptive approach to new entrants by local government and the
removal of obstacles such as covenants and deeds of option that prevent
independents taking over sites sold by majors or their franchisees. In some
centres, particularly small communities, co-operatives may be the only way
of securing competitively priced petrol. However, all independent initiatives
ranging from Woolworths to co-operatives rely on access to competitive
wholesale supply. Therefore, there should be continued efforts to secure a
genuine open and competitive wholesale market with transparent terminal
gate pricing.
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18.
•
•
•
•
•
What are the possible roles for Co-Operatives?
The companion study to this study outlines six options for establishing cooperatives. These are:
•
Option A: Setting up a wholesale and retail network.
•
Option B: Setting up a retail network of new outlets.
•
Option C: Co-operative arrangements for existing outlets.
•
Option D: Co-operative arrangements for large volume end users.
•
Option E: Co-operative arrangements for large and small users within
a region.
•
Option F: Co-operative arrangements for large and small end users
across the state.
The companion study identifies advantages and disadvantages and issues
to be addressed in establishing each co-operative type. We broadly agree
with the analysis of the companion study, but would emphasise that access
to competitively priced secure supply is critical to the establishment and
survival of any co-operative venture.
An important point to recognise is that actual or potential new non-major
entrants into country petrol markets such as Woolworths, Liberty, Diamond
and Volume Plus, are already providing both the pre-conditions and the
trigger for the achievement of more competitive petrol prices in some
country areas. Therefore where a non-major has appeared and is behaving
competitively there is no need to use scarce resources to establish a cooperative.
Furthermore, care should be taken to ensure that the co-operative does not
simply add another player to a local market worsening cost and efficiency
factors while making only a marginal contribution to local competitive
factors and wholesale price and supply factors.
However, in some circumstances particularly in smaller country centres
there may be little likely-hood of entry by a non-major. In these
circumstances a co-operative may be the appropriate model for the
achievement of competitive petrol prices.
The existing arrangement
between Diamond and NSW Farmers, and the proposed new Diamond
arrangement for medium to small sized farms are good examples of how
co-operatives could provide small communities with competitively priced
petrol.
Co-operatives may also play a role in larger communities where “cherry
picking” may end “under the canopy” discounts and service provision to groups
such as farmers. For example, the entry of a non-major branded retailer may
lower the posted price of petrol in that town but, may cause the existing major
branded retailers or distributors to curtail their farm delivery service as a cost
cutting measure. In this example, a co-operative arrangement of the type
proposed by Diamond could restore this service to farmers.
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19.
•
•
•
What are our Recommendations Concerning
Co-Operatives?
The role of co-operatives should be focused at the smaller end of the
country market where disadvantages of location and market size provide
little incentive for existing operators or potential new operators to provide
new investment and competitive pricing. Specifically, co-operatives are
relevant for small country centres and groups such as farming groups.
Cooperatives may provide a solution to those areas and segments of the
country market that suffer as an outcome of competitive restructuring of
the country petrol industry. This is especially so, if “cherry picking” by new
entrants leads to re-pricing or even withdrawal of services of existing
distributors and retailers.
Where co-operatives are established they need to be cognisant of:
a) Possible vigorous existing competitor responses;
b) The crucial importance of securing long-term supply of product; and
c) The complexities of supply associated with this product, and hence the
need to link with industry expertise and networks.
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Authors
Mr Tom Murphy, Director of the Western Research Institute
BEc (Hons) NE MSc Lancaster
Associate Professor Greg Walker, Associate of the Western Research
Institute
MCom DipEd UNSW PhD Macq
Mr Patrick Bradbery, Research Leader, Western Research Institute
BSc UNSW, DipEd MCAE, DipRE SACAE MBA UNSW
Mr Hazbo Skoko, Senior Research Officer, Western Research Institute
BBs, MSc (Econ), PhD (cand)
Mr Craig Nalder, Research Officer, Western Research Institute
BBus (Econ/Fin) C.Sturt
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