Coles Myer needs a tiger in its discount tank

The petrol retailing arrangement Coles Myer has been negotiating with the Shell group is going to demonstrate the price of eight years of procrastination.

Woolworths got into the petrol retailing game in 1996, partly out of the need to respond to the Coles Myer shareholder discount card and the revenue it was attracting to Coles Myer stores. Now, having decided to ditch the discount card, it is Coles Myer that is at a competitive disadvantage.

The group on its own estimate has lost supermarket revenue growth of about two percentage points a year to the linked Woolies offer of discounted petrol in return for supermarket sales. And, by acknowledging that fact at the group's first half sales conference last month, Coles chief executive John Fletcher and the group's supermarkets boss, Alan Williams, have cast themselves as needy negotiators.

Coles Myer is expected to clinch a deal in time for its March 17 interim profit announcement. Its shape remains unclear. One suggestion is that the retailer will pay about $250 million to take over Shell's network of owned and franchised petrol stations but industry participants estimate that Shell's network of 650 outlets is worth $1.5 billion. Individual site values ranging from $1 million to over $4 million depending on their state of development (recent canopy upgrades in city locations have cost close to $1 million each), and their location. Suggestions that Shell will allow Coles to cherry-pick the network seem to many industry observers to be fantasy.

But all the reports point to the fact that Coles Myer is negotiating an exclusive supply deal with Shell and, if that is confirmed as expected, it will be a critical variation from the Woolies petrol model.

Done properly, petrol retailing achieves two things for a supermarket business. Firstly, it adds revenue and low margin profit from petrol retailing itself; Woolies booked revenue of $834 million and earned almost $12 million before interest and tax from 277 canopies in the January half year just completed. Secondly, it swells traffic and revenue in the supermarkets, because the discounted petrol offer is made through the supermarket outlets.

But Woolies is an independent operator in the petrol retailing market and this is a crucial element in its petrol business plan. It has petrol storage of its own in Melbourne and Sydney, sourcing product from importers, and from Liberty Petroleum, which tipped 69 outlets into the Woolies network in a lease deal in 2001.

In WA, Woolies buys from Liberty and another independent. In Adelaide, it takes supplies from Mobil and Liberty. In Tasmania, Mobil is the supplier. Liberty has the job in Brisbane but Shell has won the contract to supply Woolies outside Brisbane in Queensland.

It got the job by outbidding the previous supplier, BP, which underlines another important aspect of Woolies' petrol business: the group does not commit to supply long term. The contracts it writes for supply run for only a couple of years.

This matters because the challenge to Fletcher is not just to win back the customers who have migrated to Woolies supermarkets because of the linked petrol offer but to construct an offer that has its own, internal business logic.

But his ability to match the fine margin Woolies is achieving on petrol sales, and to move the petrol discount around to respond to competition could be constrained if he is a price taker at the wholesale level, rather than a price maker.

According to one well-placed petrol industry observer, Woolies' position as an independent in the petrol business is giving it buying leverage that translates to a 2c a litre wholesale price advantage.

Whether Shell is prepared to match that for Coles by varying its ``terminal gate price", that is its standard benchmark, is unanswered. It will be even more important if Coles does not take out the entire Shell network, because Shell would then be supplying to a discount chain competing on price with other Shell outlets.

John Fletcher may well confound the doubters in the petrol industry. But it won't be easy. Coles ceded first mover advantage to Woolies and the lead it has opened up won't necessarily be completely closed by a deal that duplicates the discount at the bowser.

At its latest quote of US60.55c, the Australian dollar is up 8.3 per cent against the greenback in 2003. That's significantly above the average end-of-2003 forecast of US58.54c by 19 economists in the The Age's bi-annual economic survey, published early in January.

At this stage, though, the rally is still a bit suspect.

It's largely a result of the greenback's weakness: the US dollar is also down about 20 per cent against the yen in the past year, and has lost 3 per cent against the euro since Christmas.

There is a smaller component of ``commodity currency" buying of the $A occurring, mainly related to higher oil and gold prices. Oil and gold are in the Commodity Research Bureau's commodity price index, the main commodity currency price benchmark, and the CRB index is about 10 per cent above its trading range in the last couple of years. Last week's push by the $A through the US60c barrier followed a further rise in oil and natural gas prices after data showed that Americans had stepped up energy consumption in one of the coldest winters in memory.

But oil and gold are higher mainly because of the tensions surrounding Iraq. Economic growth is needed to drive a more sustainable rise in commodity prices, but economic growth remains lacklustre everywhere.