Coles Myer is going head to head with Woolworths in the fuel retailing business to drive growth among its supermarkets and other outlets. While the alliance may help grow sales, Coles Myer will need to be wary of the wafer-thin margins in fuel retailing while Woolworths will surely fight hard to maintain its share.
After protracted negotiations, Coles Myer has struck a deal with Shell whereby the former will pay A$100 million for the right to operate Shell's network of service stations across Australia.
The joint venture involves Coles Myer operating Shell's 584 service stations, starting with a trial of 150 sites in Victoria from July, and then extending to the full network by the middle of 2004. Coles Myer will set the pump price and offer its customers discounts on fuel, while Shell will provide the fuel. The sites will be branded both Shell and Coles Express.
Coles Myer is Australia's largest retailer with sales of A$24.5 billion, narrowly ahead of its rival Woolworths. However, the latter successfully achieved much higher sales growth in 2002 - in no small part due to the inclusion of a fuel retail operation driving more customers to its stores. Coles Myer is looking to make gains through a similar strategy. Additional revenue from the sale of fuel is not expected to add significantly to overall sales.
Coles Myer is expecting sales growth of 2-2.5% as a result of the alliance. However, this target is relatively optimistic, since the company will need to discount heavily if it is to take business from Woolworths. Woolworths currently offers a 4 cents/liter discount for all customers spending over A$30 in their stores, and is expected to fight hard for its share of the market. This could further damage the profitability of the fuel retailing operation, which is already a very low margin business in Australia. In 2001, for example, Shell made an A$88 million loss in its refining and marketing operations.
With Metcash potentially also entering the fray and discounting fuel, it is possible that a discounting price war may develop amongst the Australian supermarket operators. This could lead to the fuel retail businesses being run at a loss in order to gain or maintain share in the supermarket segment.