CANBERRA: As more of the nation’s refineries close down and the mining boom ends, fuel companies are investing more than $1 billion in the retail petrol sector to end what has been a 40-year slide in the number of Australian service stations.
And there is growing talk of a $1bn float of Australian petrol station real estate from Viva Energy, which could give investors added exposure to the $22bn-a-year retail fuel sector beyond buying shares in bigger companies Caltex Australia, Wesfarmers and Woolworths.
Since 1970, the number of Australian petrol stations has fallen from 20,000 to a little more than 6000 as the sector rationalised and sold greater volumes of fuel from each site.
But the main players in Australia’s retail petrol industry are now moving to expand their networks and the number of service stations rose last year.
It is a burst of investment that reflects slowing opportunities elsewhere, higher margins available for selling non-fuel products and the investment needed to catch and keep highly mobile customers who are demanding faster evolving offerings.
Viva, which owns the Shell brand and has a joint venture with the Wesfarmers-owned Coles, has earmarked $300 million to expand and upgrade its retail business. BP Australia is spending $450m in the next three years to try to regain lost market share and Caltex Australia is already well into a growth spend of hundreds of millions of dollars.
“There has always been a focus on retail, but with a recent downturn in business-to-business sales, you could argue companies are moving more of their investment to the retail side,” Viva’s head of sales and marketing, Margaret Kennedy, says.
Viva is the local subsidiary of Dutch trader Vitol, which last year paid $3bn for Shell’s service stations and brand rights, the Geelong refinery and wholesale business.
“Retail has always been an important contributor to the business, and now we’re pushing ahead with a pretty aggressive growth plan,” says Kennedy, who has been with what was previously the Shell business for 20 years.
The oil refining and fuel sector has been shifting rapidly in the past four years. In that time, three of the nation’s seven refineries have closed or are in the process of doing so, creating Asia’s biggest fuel-import market and inciting global traders such as Vitol and Trafigura to move in.
Established players Shell, ExxonMobil and Chevron have exited the Australian fuel-retailing sector, although the Mobil and Shell brands remain with the new owners, 7-Eleven and Vitol.
But as fuel refining gives way to fuel trading, the chief source of recent industry sales growth – the mining boom – has ended, meaning retail has become more important.
BP’s local head of sales and marketing, Mike McGuiness, says retailers now have to work harder to keep up with consumers who are prepared to shop around to find the best offers. Things such as loyalty offerings and convenience have become key.
“Traditionally, people sought out things like cigarettes, chips and chocolates but now they want things like prepared meals, or food or barista coffees. They are becoming increasingly time poor and turning to convenience stations,” says McGuiness, who has been in the business since the 1980s.
“On the other side of the retail coin is B2B, which is becoming increasingly competitive and growth is not happening at the same rate, so retail is a good place to spend money because it is growing.”
According to a May report from IBISWorld, there are 6358 service stations in Australia, up from a more than 50-year low of 6092 stations in 2013-14. IBISWorld predicts that by the end of the decade there will be 7005.
“The volume of industry (fuel) sales is forecast to grow modestly over the next five years, suggesting market share and profitability growth will require an ongoing push into areas such as convenience stores and car maintenance,” IBISWorld says.
“The pressure on retailers will continue to drive the trend towards expanding operations and generating higher sales volumes.”
The Viva float, which the company has not confirmed, will be a $1bn real estate investment trust in which Merrill Lynch and Deutsche Bank will test interest next month, according to The Australian’s DataRoom column.
Viva will neither confirm nor deny the reports but has hinted that this is not the only major corporate move being explored.
“We continue to look at opportunities to grow our business,” a spokeswoman says.“As you would expect, we are consulting with a number of advisers.”
Caltex has probably had the jump on investment in new stations, with plans already in place to build up to 25 new sites a year and refurbish another 20. The company also spent $95m last year buying Scott’s Fuel, consisting of 28 retail service stations in regional South Australia, Victoria and NSW.
Caltex marketing head Bruce Rosengarten says a convenient location and competitive fuel price are the main things customers look for but that the convenience store is increasingly important.
“We do about $1.2bn of sales across our franchises and core stores, so we consider that especially important,” Rosengarten says, adding that about half of his customers don’t buy petrol when they shop.
“Because fuel margins are so low, at about 10 or 12 per cent, the convenience store (which has higher margins) plays a role in the building up of profit and sustainability in the industry.”
The importance of the convenience store is evident in the latest report on the industry from the national competition watchdog.
The Australian Competition and Consumer Commission says that while petrol sales contributed more than half of the retail petroleum sector’s $495m of profit in the past financial year, convenience stores represented 40 per cent of the profit ($201m) from 20 per cent of the revenue.
Total retail profits in 2013-14 were the second highest on record, after the previous year’s $535m. But 2012-13 included strong shopper docket discounts funded by Woolworths and Coles in their respective joint ventures with Caltex and Viva (then Shell).
After an ACCC investigation, Coles and Woolworths last year agreed to limit fuel discounts linked to supermarket purchases to 4c per litre, further changing the petrol station landscape.
The retailers differ slightly on what customers are after on top of cheap and convenient fuel.
BP, which does not have a supermarket joint venture, says customers no longer need to be able to buy groceries, because supermarkets stay open longer.
“People need to come for convenience goods, it’s less and less about grocery lines and more about food to go, prepared meals, barista coffees,” says McGuinness.
“Even two or three years ago it was dog food and nappies, but now people can get those at the supermarket at midnight.”
But the Coles view is that convenience shoppers primarily want food and groceries that are good value for money, hence the company’s aim to make Coles Express feel like a small supermarket.
That said, the supermarket has recently introduced lattes and expanded the frozen meals available at its service stations. McGuiness says the speed of change in the retail business is accelerating, which is also driving investment.
“Competitors are changing fast and consumers are changing fast, hence you’re getting this investment,” he says.
“We’re probably the sector where consumers have more choice than any other because they are mobile and can go somewhere else if they don’t like it. We want to invest and make sure consumers choose us.”
