What does the future of Woolworths petrol look like?

Ross Greenwood speaks to Australian Convenience and Petroleum Marketers Association CEO Mark McKenzie about why it was Woolworths (ASX:WOW) best option to re-work its 22-year relationship with Caltex (ASX:CTX) after its $1.8 billion BP bid collapsed

Introduction: What does the future of Woolworths petrol look like?

Ross Greenwood: I want to start here with the program by telling you about a deal that’s been done today which is fascinating given a little bit of the recent background. You may be aware that BP had been $1.8 billion for the Woolworths petrol sites. They were rejected by the ACCC and eventually just two weeks ago. BP walked away from that deal said they would not be able to go on buy the Woolworths petrol sites.

Now previously, of course, it was Caltex that supplied the Woolworths petrol stations and they had collaborated in some cases with the if you like, merchandise that you would buy inside the stores. What’s happened just two weeks after BP has walked away taking near $1.8 billion. Caltex has extended its fuel supply arrangements with Woolworths for a further 15 years and 125 Caltex sites are going to be added to Woolworths existing site retention network.

In other words, they’re effectively going to look like mini Woolworths supermarkets. One man who may be affected by this or his members at least is Mark Mackenzie who’s the chief executive of the Australasian convenience and petroleum marketers association. Mark many thanks for your time.

Interview with: Mark McKenzie, CEO, Australian Convenience and Petroleum Marketers Association

Mark Mackenzie: Hey, good day, Ross.

Ross Greenwood: The ACCC knocked the deal back between BP and Woolworths. Caltex now gets a big crack at this, does it really for other independents out in the marketplace threaten there, all their shops in their existence?

Mark Mackenzie: Well not really. I think that the total number of sites that are actually displaying the Caltex brand hasn’t changed. It would have been quite different if BP’s deal would have been successful as you rightly identified earlier but what we’re talking about here effectively is the nature of the relationship between Woolworths and Caltex is actually deepened.

Caltex has actually provided I supposed bit of a defensive action. They’ve learned that they were potentially vulnerable in terms of a supply agreement. They’ve gone back to Woolworths to cut off that loophole and in doing so put some cash on the table and then on the other side they have taken some convenient expertise basically from Woolworths both in terms of scale by and the convenience side as well as expertise to actually start to look at expanding the Metro concept.

For each part, Woolworths basically keeps the same number of sites they actually had and as you identified effectively the Caltex sites that have previously taken the redemption office offer an increase from 104 to just under 230. It’s more than doubled.

Ross Greenwood: A couple of other bits and pieces here also one is the potential as to what would happen to fuel prices because there’s the ACCC noted they were worried about BP and Woolworths getting together because BP tends to be a bit slower on the price cycle and as petrol prices tend to be higher than the average fuel prices out there. Whereas Woolworths, it’s said its average prices were lower and they’ve tended to be one of those that might lead the price cycles down in the major capital cities.

With Caltex and Woolworths getting together given that BP is still out there and is a significant competitor and you’ve then got the 7-11 stores you’ve got a range of others plus the independents out there does it now mean that there is even more competition for fuel prices that we won’t see the margins or read the margins at the retail level is anyway going out of these record levels that we’ve seen over the past 18 months.

Mark Mackenzie: There’s two points here, Ross. The first is that certainly if we consider this in the light of the shell Vital float of their retail business that’s come on the agenda in the last two weeks you actually look at the fact that coals have actually been being spun out of burnings and we’re getting a dedicated concentration on the field of retail business.

I think basically it’s fascinating what we’re actually seeing is everybody line up with a strategy in terms of potential increase in competition where they all compete for share but the other key thing is that all these moves the one element that is similar in all of them is they’re all moving into the convenience side. Traditionally we’ve gone on a basis where fuel has been heavily discounted by the profits that have been earned on the convenience side. Chips, chalks, and greens have been expensive.

If you went back 15 years ago because you’re paying for convenience. We’re now seeing almost Supermarket prices start to appear in those small store formats and we’re seeing growth in that convenience sector as people are moving to look at a service station for more the chip shops and drinks. They’re going to buy fresh food, yogurt, breakfast materials.

Ross Greenwood: Potentially even baked goods. I’ve seen that in the UK because this is where it’s all come from, hasn’t it Mark. This is largely a phenomenon that’s come out of the UK which many of our supermarket trends do. We’ve seen Tesco, into fuel in the UK. There’s been Sainsbury’s, there has been in a big way. There’s been a deal only recently that’s broken apart between I think Marks & Spencer and one of the big fuel companies might have even been BP in that case. Therefore there are really big trends coming out of the UK, that now are going to be alive and well here in Australia.

Mark Mackenzie: Spot-on and it’s not just the UK, we’ve seen it in North America as well and it’s happening in parts of Western Europe. What you’re basically seeing here is these businesses are diversifying from just to focus on fuel to bringing in convenience in a very big way and in that sense, I suppose the question is going to be what does that change actually improve their overall profitability. I suppose given that they’re all going down this path you’d have to say that the current line of thinking is yes.

Ross Greenwood: It’s going to be interesting to watch it there. There’s no doubt always great with his time on this program, Mark McKenzie is the chief executive of the Australasian convenience and petroleum marketers association. Mark, I appreciate your time here on the program tonight.

Mark Mackenzie: Thank you, Ross. Thanks very much.

Ross Greenwood: It’s going to be fascinating to watch exactly what happens. To give you some idea. The idea remember in a petrol station is that they’ve got to get throughput, in other words, it’s all about volume. We have cars across the forecourt so that means your prices got to be competitive but if you’ve got another reason for a person to go into a service station apart from filling up it is to buy the bread, the milk with whatever it might be and if the grocery range gets broader and you’re not losing out of that store.

In fact, making more money out of the store and you’re distributing groceries more widely. You’ve got a pretty compelling case for people who also buy their fuel there`

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