5

5.1

Industry structureretail
Industry structure

Petrol retail sites in Australia can be separated into four broad categories on the basis of ownership and wholesale supply arrangements. These are: refiner-marketer owned sites refiner-marketer branded independent and distributor-owned sites supermarket operated sites independent operator sites selling their own brands. Retail sites within these categories are operated in one of the following ways: Owner operatedthe owner of the site is free to choose its wholesale supplier and determine its retail price. An independent owner-operator may choose to align its site with the brand of fuel sold by a particular wholesaler, by receiving branding (signage identifying that site as sourcing its fuel from a particular wholesale supplier). Commission agentan individual manages a site (owned by a refiner-marketer or independent chain), and compensation is generally in the form of a commission based on the quantity of product sold. Franchise operatedan individual rents a site or a number of sites, (generally owned by a refinermarketer) and operates under a franchise agreement. At these sites, fuel is sourced from the owner of the site and branded accordingly. Franchise operated sites may receive price support from their wholesaler. Price support enables the wholesaler to influence the retail prices set by the operator of the site. Owner-operated sites may receive price support from their wholesaler. The operation of price support is outlined in more detail in chapter 9. The business structures observed in the retail market largely reflect the operation of two pieces of recently repealed legislation: the Petroleum Retail Marketing Sites Act 1980 (the Sites Act), which placed a quota on the number of retail sites that the refiner-marketers could operate directly or on a commission agent basis the Petroleum Retail Marketing Franchise Act 1980 (the Franchise Act), which specified minimum terms and conditions for franchise arrangements. The Sites Act was designed to counteract the dominance of the petrol retail market by the refinermarketers by restricting oil companies from operating or controlling more than 5 per cent of total retail sites. The Franchise Act set out minimum terms and conditions governing a franchise agreement in the retail petrol market and covered all retail outlets selling above a certain minimum quantity of petrol a year. In response, the refiner-marketers adopted other marketing strategies (including multi-site franchising). Under the Downstream Petroleum Reform Package, the Sites Act and the Franchise Act were repealed and a mandatory code (the Oilcode) under the Trade Practices Act (the Act) was introduced. The

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Oilcode, among other things, provides wholesalers and fuel resellers with specific rights and obligations in relation to fuel reselling arrangements. The Oilcode is discussed in more detail in chapter 6 of this report.

5.1.1

Refiner-marketer owned sites

The refiner-marketers own and operate their own sites, have commission agent sites, and market their fuel through single or multi-site franchise operations. The refiner-marketers determine prices at company owned and commission agent sites. While prices are determined by franchisees at franchise sites, the refiner-marketers may influence prices at these sites through the provision of price support. BP owns and operates approximately 260 retail sites, most of which are located in major metropolitan areas in and around capital cities.1 There are a further 10 sites supplied by BP under a temporary agency arrangement under which BP sets the retail price. BP also supplies a handful of BP branded sites under longstanding single site franchisee agreements under which the franchisees set prices, but receive price support.2 BP has a franchise agreement to operate 14 BP branded truck stops, which predominantly sell diesel and provide specialist services to heavy road transport operators. Under its truck stop franchise arrangement with the independent operator BP sets the retail price.3 Excluding the Woolworths joint venture sites, Caltex owns a total of 778 retail sites. Of these sites, 43 are owned and operated by Caltex, 28 are operated by commission agents and 332 are operated by franchisees. There are also 299 Caltex branded sites owned by Caltex that are either owned or supplied by distributors, and a further 76 Caltex owned sites that are either distributor owned or operated, which are independent branded.4 Before the alliance with Coles Express, Shell owned approximately 600 branded sites that were operated by franchisees. As part of the alliance with Coles Express, Shell transferred the operation of virtually all of its franchisee-operated sites to Coles Express. Shell retains ownership of these sites.5 Shell also owns 41 sites as part of its commercial vehicle refuelling network which are located mainly in regional areas to service large fleets travelling throughout Australia. At these sites 85 per cent of the fuel sold is diesel. Shell sets the prices of the sites in Shells commercial vehicle refuelling network and most of the sites are owned by Shell.6 Mobil owns or leases approximately 280 retail sites. All but one of these sites is operated by a single multi-site franchisee, Strasburger Enterprises (Properties) Pty Ltd (SEP), which is 50 per cent owned by Mobil. SEP owns or leases a further 30 sites which are Mobil branded.7

5.1.2

Refiner-marketer branded independent operators and distributor-owned sites

Independent operators tend to own their site but retail the fuel of one of the refiner-marketers. There are also distributor-owned sites that do this. The price of fuel at these sites is determined by the operator.

1 2 3 4 5 6 7

BP submission, p. 21. ibid., p. 26. ibid., p. 25. Caltex submission, p. 54. ACCC, public hearing transcript, Melbourne, 13 September 2007, p. 5. Shell submission, p. 7. Mobil submission, p. 1.

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Distributor-owned sites are run by a local fuel distributor, some of which are owned or part-owned by the refiner-marketers and others which, like branded independent operators, use their own site and equipment and have a brand and supply agreement with a refiner-marketer. These sites tend to be located in rural and regional areas. BP supplies fuel to 333 privately owned sites operated under the BP brand and a supply agreement under which prices are determined on the basis of a TGP. The operators of these sites make their own retail pricing decisions.8 BP also supplies 860 sites (predominantly located in rural Australia) that are either owned by distributors or independent third parties, are supplied by BP distributors and operate under the BP brand. In particular, BP supplies fuel at the wholesale level to its distributors (on the basis of TGP) who then onsell to rural operators. The price of fuel at these sites is determined by the site operator.9 Caltex supplies fuel to 100 Caltex branded sites that are independently owned and operated and to 441 Caltex branded sites that are independently owned and either distributor owned or supplied.10 Shell supplies fuel to 350 Shell branded sites that are dealer owned and operated. The dealer owner sets the price of fuel at these sites. Shell supplies fuel to these sites on a TGP basis, plus a fee for branding rights and credit charges and, where applicable, delivery charges. Shell also makes its Shell Card facility available for use at dealer owned and operated sites. Prices at these sites are determined by the dealer owner.11 Mobil supplies fuel to a large number of independent branded distributors in regional Australia. While these independent branded distributors supply 500 branded and unbranded service stations in Australia, the number of Mobil branded sites is not known. In addition to supplying Mobil branded and unbranded service stations, the Mobil branded distributors also supply fuel directly to farmers and other small rural and regional businesses.12

5.1.3

Supermarket operated sites

The two major supermarket chains in AustraliaColes and Woolworthsoperate sites which have shopper docket discount schemes linked to grocery sales at their supermarkets. These are the Coles Express and Caltex/Woolworths joint venture sites. Prices at these sites are determined by Coles Express and Woolworths. The supermarket operations, including the operation of the shopper docket discounts, are discussed in more detail in chapter 12.

Caltex/Woolworths
Caltex supplies fuel to approximately 505 sites which are supplied under an arrangement with Woolworths supermarkets. Of these sites, approximately 134 are co-owned under a joint venture between Caltex and Woolworths with the remainder wholly owned by Woolworths.13 Under the supply arrangement between Woolworths and Caltex, Woolworths owns the petrol sold at all 505 outlets. Woolworths also sets the pump price at these outlets.

8 9 10 11 12 13

BP submission, p. 21. ibid. Caltex submission, p. 54. Shell submission, pp. 67. Mobil submission, p. 1. Woolworths submission, p. 2.

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Shell/Coles Express
Shell supplies fuel and branding rights to a network of approximately 600 Coles Express and Shell branded sites, located predominantly in metropolitan and large regional areas. While Coles Express operates and determines the prices at these sites, it also receives price support from Shell.14

5.1.4

Independent operator sites selling their own brands

Independent operators selling their own brands range from the large independent chains to small one- to two-site operations. There are also independent operators that buy fuel from independent wholesalers and align themselves with that independent wholesalers brand. Independent chains generally purchase fuel in bulk from local refiner-marketers and sell it through their company-owned sites. Sites are generally operated on a commission agency basis. The smaller independent operators tend to use their own site, equipment and brand name and purchase fuel on an ad hoc or contractual basis from local refiner-marketers or independent wholesalers. Liberty supplies 140 Liberty branded independently owned sites around Australia.15 It also supplies fuel to a number of independent service stations that operate under their own brand. The major unbranded sites supplied by Liberty are Refuel Zone, which has four sites and Oz Zone, which has seven sites.16 United owns and determines the retail price at 189 retail sites across Australia. These sites are operated under commission agency arrangements. United also supplies fuel to approximately 100 independent resellers that sell under their own brand.17 It also supplies approximately 200 United branded independent sites. At these sites the owner determines the retail price.18 Gull owns 55 sites that are operated on a commission agency basis. Gull determines the retail price at these sites.19 It also supplies 25 Gull branded sites that are independently owned. The owner of the site determines the retail price at these sites. 20 Neumann Petroleum has four company operated sites and 44 Neumann branded retail outlets under a brand supply arrangement with independent operators. Neumann sells fuel to independent branded resellers on the basis of its TGP.21 Neumann also supplies fuel to a number of smaller independent distributors and resellers on a spot basis in northern New South Wales and country south-east Queensland. 22 7-Eleven owns 182 sites in Australia at which fuel is sold by a commission agent. 7-Eleven determines the retail price of fuel at these sites.23 Matilda operates at the retail level in Queensland. Matilda owns 19 sites and has a head lease on a further 18 sites. Matilda operates these sites on a commission agency basis and determines the retail price at these outlets. Matilda also supplies fuel to four sites at the wholesale level. Matilda does not determine the retail price of fuel at these sites.24

14 15 16 17 18 19 20 21 22 23 24

ACCC, public hearing transcript, Melbourne, 7 September 2007, p. 25. ACCC, public hearing transcript, Melbourne, 5 September 2007, pp. 867. ibid., p. 87. ACCC, public hearing transcript, Sydney, 3 September 2007, pp. 34. ibid., p. 4. ACCC, public hearing transcript, Perth, 28 August 2007, p. 46. ibid., pp. 467. ACCC, public hearing transcript, Brisbane, 22 August 2007, p. 16. ibid. ACCC, public hearing transcript, Melbourne, 7 September 2007, pp. 412. ACCC, public hearing transcript, Brisbane, 22 August 2007, pp. 437.

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Of the refiner-marketers, BP supplies 11 privately owned unbranded sites.25 Caltex supplies 13 independently owned sites that have their own brand. It also supplies 167 independently owned sites that are either distributor operated or supplied which have their own brand. Mobil supplies over 500 Mobil branded and unbranded service stations across Australia. It also supplies fuel to an even larger number of independent resellers across Australia.26

5.2

Market shares

The ACCC received data from the refiner-marketers, the supermarkets and Liberty, United, 7-Eleven, Neumann, Matilda and Gull on sales volumes of unleaded petrol at branded retail sites for 200203 to 200607 under s. 95ZK of the Act. The ACCC has used this data to compile retail market shares.27 These shares have been compiled on the basis of the brand of the retail site. 28, As the market share data compiled by the ACCC does not include information from the smaller independents in the retail market, the total market will be understated.29 These independents represent only a small part of the market and therefore their absence will have only marginal influence on the results. Chart 5.1 illustrates the market share of retail sales by volume by brand in Australia for 200203 to 200607.

25 BP submission, p. 21. 26 Mobil submission, p. 1. 27 The data compiled by the ACCC from information provided by these companies includes all grades of unleaded petrol (i.e., 91, 95 and 98 RON) and ethanol blended petrol but excludes lead replacement petrol. One refiner-marketer provided information on a calendar year basis, which had to be converted by the ACCC into financial year data. 28 Therefore, the sales by a franchisee or commission agent operating a site on behalf of a refiner-marketer would be classified as the sales of that refiner-marketer. Similarly, the sales of an independent that owns and operates a site but sources its fuel and branding from a refiner-marketer would also be classified as the refiner-marketers sales. 29 The compiled data was compared with total retail sales data reported by DITR. The comparison indicated that the data compiled by the ACCC was lower for 200203 to 200607. This is likely to be attributable to the methodological issues associated with the compilation of the data noted above.

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Chart 5.1

Market share by sales volume by brand, Australia: 200607

Independents, 7% Mobil, 11% Shell, 3%

Woolworths/Caltex, 22%

Caltex, 16%

Coles Express, 22% BP, 19%

Source: ACCC from data supplied under s. 95ZK of the Act.

It can be seen that Woolworths/Caltex and Coles Express were the market leaders in 200607, both with 22 per cent shares of retail sales by brand nationally. BP had the highest retail market share of the refiner-marketers at 19 per cent, followed by Caltex at 16 per cent, Mobil at 11 per cent and Shell at 3 per cent. In 200607 the combined retail market share of the supermarkets was 44 per cent, which was 4 per cent lower than the combined market shares of the refiner-marketers (49 per cent). The independents had a 7 per cent share.

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Table 5.1 shows shares of retail sales by volume by brand in Australia for 200203 to 200607. Table 5.1 Shares of retail sales by volume by brand in Australia: 200203 to 200607
200203 % BP Caltex Coles Express Mobil Shell Woolworths/Caltex Independents 20 24 0 19 20 10 6 200304 % 20 22 16 17 3 14 7 200405 % 18 18 25 12 3 18 6 200506 % 19 16 25 11 3 20 6 200607 % 19 16 22 11 3 22 7

Note: Percentages may not sum to 100 due to rounding. Source: ACCC from data supplied under s. 95ZK of the Act.

The key trend shown in table 5.1 is the change in the nature of petrol retailing associated with the alliances between the supermarkets and Shell and Caltex. Under the alliance between Coles Express and Shell, Coles Express took over the management of Shells core franchise network across Australia from July 2003. This is reflected in Coles initial market share of 16 per cent and the corresponding sharp decline in Shells market share between 200203 and 200304 from 20 per cent to 3 per cent. In August 2003 Woolworths and Caltex announced that they were proposing to enter into a joint venture for the retailing of motor fuel through up to 450 petrol retail sites. Longer term arrangements (involving up to 500 sites) were announced in 2004. In contrast to the sharp shift in retail market share from Shell to Coles Express, Caltexs market share of retail volumes by brand declined from 24 to 22 per cent between 200203 and 200304, while Woolworths market share increased from 10 to 14 per cent. The market shares of the refiner-marketers that did not participate in an alliance with the supermarkets (BP and Mobil) have declined over the period. Mobils market share declined more sharply than BPs market share. Mobils market share declined from 19 per cent in 200203 to 11 per cent in 200607 while BPs market share has fallen marginally from 20 per cent in 200203 to 19 per cent in 200607. The independent retailers market share has not substantially changed over the period. It was 6 per cent in 200203 and was 7 per cent in 200607. Table 5.2 shows the HHI of retail sales by brand in Australia over the same period. The HHI of shares of sales volume by brand is substantially lower than the HHI of wholesale sales volumes. 30 The HHI of shares of retail sales volume by brand in Australia has declined from 0.1872 in 200203 to 0.1738 in 200607. This indicates that shares of retail sales volume by brand have become less concentrated from 200203 to 200607. The HHI of the share of retail sales of unleaded petrol volume by brand in 200607 of 0.1738 compares with the HHI of production of unleaded petrol of 0.2752, discussed in chapter 3, and
30 The HHI is the sum of the market shares of each individual firm. The HHI ranges from 0, which indicates a high number of firms with small market shares, to one, which reflects a monopoly.

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the HHI of wholesale sales volumes of unleaded petrol of 0.2752, discussed in chapter 4. This indicates that the Australian retail market is significantly less concentrated than the refining sector and the wholesale market. Table 5.2 HHI of share of sales volume by brand in Australia: 200203 to 200607
200203 HHI 0.1872 200304 0.1668 200405 0.1737 200506 0.1772 200607 0.1738

Source: ACCC from data supplied under s. 95ZK of the Act.

5.3
5.3.1

Changes in the nature of petrol retailing

Site rationalisation

There are currently around 6500 retail sites in Australia. There has been continual rationalisation of retail sites in Australia over the past 30 years. In 1970 there were 20 000 sites, in 1980 there were 12 500 sites and in 2000 there were 8000 sites. Service station rationalisation has been a feature of most developed countries over recent decades. While rationalisation of service stations has occurred for many reasons, changes in underlying supply and demand factors in the petroleum market have been important contributors. On the supply side, lower operating costs have been achieved with the development of high volume service stations, the use of self-service technology, and the availability of complementary goods and services (such as the sale of convenience goods) with petrol. The entrance of large independent chains, convenience stores and, more lately, supermarkets into the market has provided greater competition. At the same time, demand has changed for service stations. Motorists have different driving patterns because of the development of highways and major arterial roads to accommodate higher traffic volumes. Consumers desire longer shopping hours and more convenient arrangements for purchasing goods and services (such as the inclusion of ATMs at service stations). The small service station with one or two pumps is being replaced by more modern sitesgenerally located on major thoroughfares with multiple pumps, a shop and other facilities. There is likely to be further rationalisation in service station numbers as the industry continues to respond to the above forces.

5.3.2

Increasing importance of non-fuel competition

A number of industry participants indicated that, while the board price was an important component of the competitiveness of a retail site, there was an increasing focus on deriving revenue from non-fuel products and services. Mobil submitted that competitive pressure on fuel margins has led retailers to focus on developing sites that are capable of delivering very high fuel throughput, as well as additional margin from nonfuel offerings such as convenience stores, car washes and repair facilities. Mobil noted that, while price competition on fuel is important, there is non-fuel price competition through factors like brand and product differentiation, site facilities, customer service, and site condition and appearance.31
31 Mobil submission, p. 7.

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While Coles Express considered that price was the key competitive measure at the retail level, it also stressed the importance of non-price competition to differentiate its retail offer. In particular, Coles Express noted that it differentiated its fuel offer with the supply of Shell premium quality fuels, loyalty programssuch as fly buys and retail offersand prime site locations.32 Coles Express identified that other fuel retailers have different models, some co-locating with other businesses on their sites, such as fast food stores, mechanical services and car washes.33 Coles Express also noted that the proportion of revenue it sourced from convenience stores as compared with fuel had increased since the commencement of the alliance with Shell. In particular, Coles Express noted that at the start of its alliance, approximately 60 per cent of its revenue came from fuel and 40 per cent came from convenience stores. Coles Express stated that this balance was changing over time, and the proportion of revenue sourced from fuel sales and convenience stores was now closer to 50:50.34 Woolworths noted that petrol retailers have taken advantage of the location of their sites by driving non-fuel sales and that the majority of gross profit comes from the selling of products other than fuel.35 BP submitted that the proportion of shop revenue compared with petrol sales over the last five years has increased from 40:60 (shop, petrol respectively) to 50:50. BP noted that it had made significant investment in its company network to drive growth in both fuel and non-fuel categories and to differentiate BP from its competitors. BP considers that investment in the non-fuel side of the business can and does influence fuel sales performance.36 Caltex noted that its service stations were more convenience retailers than fuel retailers given that shop sales at its service stations on average account for 70 per cent of gross margins.37

5.3.3

Bundling with groceriesshopper dockets

The shopper docket schemes, first introduced in Australia by Woolworths in 1996, provide consumers with an incentive to link their purchases of groceries to a particular petrol retailer. Coles Express matched Woolworths shopper docket scheme when it entered the market in July 2003. The use of shopper dockets by motorists has increased significantly. The 2007 ANOP survey commissioned by the ACCC found that 77 per cent of motorists had used shopper dockets.38 This compared with only 52 per cent of motorists in 2003. The survey also found that 49 per cent of those motorists that use shopper dockets claim to use dockets at least most of the time they buy petrol. Since February 2004, and as at 30 September 2007, more than 600 shopper docket notifications have been lodged with the ACCC covering over 1100 service stations. The majority of these notifications involve localised arrangements with independently owned major branded sites or independent fuel retailers. While these schemes initially focused on the two major supermarket chains, they have extended to include the Metcash/IGA group, Foodland group, Dimmeys department stores and the Servo Saver scheme.

32 33 34 35 36 37 38

Coles Group Limited submission, p. 5. Coles Group Limited submission, p. 3. ACCC, public hearing transcript, Melbourne, 7 September 2007, p. 4. Woolworths submission, pp. 56. BP submission, p. 36. Caltex submission, p. 50. A summary of the 2007 ANOP survey commissioned by the ACCC is attached at appendix H.

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The ACCC has also received a number of notifications involving fuel discount arrangements that are alternatives to the shopper docket schemes. For example, these arrangements may provide consumers with a discount on fuel when they use credit card or telecommunication services. The ACCC considered the impact of the introduction of the shopper dockets on the retail market in its 2004 shopper docket report.39 The impact of the shopper dockets on competition in the retail petroleum market is considered in detail in chapter 12 of this report.

39 ACCC, Assessing shopper docket petrol discounts and acquisitions in the grocery and petrol sectors, February 2004.

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