Australian supermarkets – Large petrol discounts to cease

Deutsche Bank – Equity Research – Australasia
06 December 2013

Download the complete report:

WES and WOW agree to limit fuel shopper docket schemes to 4¢ per litre

The ACCC announced today that it has accepted the undertakings of both Coles and Woolworths to: (1) voluntarily cease making any fuel savings offers which are not funded by their “fuel retailing business(es)”; and (2) limit fuel discounts linked to “supermarket purchases” to a maximum of 4¢ per litre. The undertakings will come into effect from 1 January 2014 and be valid for a minimum period of five years.

Limit on 4¢ per litre only applies to supermarket purchases

Notably, this undertaking means that the major chains can still offer discounts on fuel in excess of 4¢ at their services stations (such as purchasing additional goods from the fuel station convenience store) but this discount must still be funded by their fuel retailing operations. Woolworths has confirmed it will continue to offer a 4¢ per litre discount for supermarket purchases over $30 and an additional 4¢ discount for spend over $5 on merchandise in convenience outlets. We understand the supermarkets can still offer large petrol discounts on retrospective supermarket purchases as a reward to customers.

Co-operation came before the end of the ACCC investigation

The ACCC investigation into whether fuel savings offers by the major supermarket chains were significantly reducing the level of competition in the retail fuel market was not yet complete and a decision had yet to be made on the matter. However, the ACCC believes the undertakings by Coles and Woolworths addresses the principal competition concerns and allows the matter to be resolved “quickly and efficiently”.

DB View

While additional restrictions on behavior are not helpful for the major chains, we do not expect this development to significantly impact on the dynamics of the supermarket industry. In our opinion, these undertakings will benefit independent petrol stations but any lost petrol volume is unlikely to have a material impact on group earnings for Coles and Woolworths given convenience sales make only a small contribution to group sales.

We do not expect these changes to benefit Metcash materially given the chains are likely to redeploy this promotional spend on other targeted offers which are likely to have a similar impact on independents’ sales to the large petrol discounts.

There may be a small benefit for Woolworths relative to Coles given petrol discounting is more expensive for Woolworths than Coles because: (1) Woolworths’ voucher take up rates are higher; and (2) Woolworths has ~130 JV sites which are operated by independents who need to be compensated for petrol discounts.

Food & Liquor margins for both Coles and Woolworths are likely to increase but this will be offset by a decrease in convenience margins given the cost of the 4¢ per litre discounts will shift from the supermarket operations to the convenience division for both groups. This is purely mechanical and the net impact for group earnings from this accounting change will be nil.