Coles Express and Viva Energy have agreed on terms for a 10-year extension of their current alliance.
According to ACAPMA, the announcement comes in the face of “sustained public criticism” over the high fuel prices Coles Express’ 780 service stations have allegedly charged in recent years.
Some industry analysts expect the new alliance to lead to more competitive fuel prices at Coles Express outlets.
Coles Express and Viva Energy have both released statements to the Australian Stock Exchange about the terms of the alliance.
Selling fuel on an ‘agency basis’
In the new arrangement, Coles Express will sell fuel on an ‘agency basis’ – that is, on commission.
Viva Energy will take control of the service station forecourt by setting retail prices and making marketing decisions. Under the previous arrangement, Coles bought fuel from Viva wholesale then set its own retail prices.
Coles Express will continue to take care of the convenience component, using its FMCG expertise. But it will pay Viva an “enhanced royalty” from convenience-store sales, ACAPMA reports.
“The commercial merits of the terms of the new alliance are self-evident,” ACAPMA CEO Mark McKenzie said. “The two organisations (will assume) responsibility for each element of the combined petrol convenience proposition, based on their respective strengths.
“We also expect that the re-entry of Viva Energy into the market as a fuel retailer, coupled with the disclosed financial terms of the new alliance, will further intensify market competition in the fuel retail industry.”
A lesson for industry?
According to ACAPMA, the original Coles Express venture represented a kind of experiment in consumer behaviour.
The traditional market approach is to offer competitive fuel prices but higher-margin convenience products.
But Coles sought to turn this model on its head by offering higher average fuel prices but lower average convenience-product prices.
Not everyone is convinced it has worked.
“The fact that Cole’s weekly fuel volumes fell by around 38 per cent over this period – thereby decreasing foot traffic and the opportunity to sell convenience products – provides an important message to our industry,” Mr McKenzie said.
“This is a salutary finding for all of us. It raises an important question about the rate of industry transition to expanded convenience offerings that increase operating costs in anticipation of a substantial increase in convenience-product sales.”