Counting the cost of petrol discounts

The ACCC believes that Coles and Woolworths have breached undertakings on petrol discounts with new “bundled” offers, and the two chains have responded with markedly differing strategies.

The ink had barely dried on the voluntary but enforceable undertakings Coles and Woolworths agreed with the Australian Competition and Consumer Commission to limit their shopper docket schemes before they were testing the boundaries of the agreement. Given its view of the discount schemes the ACCC really had no option but to take them to court.

Unfortunately, the Federal Court action initiated by the ACCC doesn’t address the core issue of whether or not the petrol discounts the chains have been offering are likely to lead to the substantial lessening of competition in a market but are confined to the narrow issue of whether or not they are complying with their undertakings.

It would have been interesting to see how a court would have regarded the shopper docket schemes in the context of the Competition and Consumer Act.

Given the recent evidence that Aldi and Costco are accelerating their store network expansion programs on the grocery side and that neither Trafigura (which paid $625 million for the Ausfuels group) nor Vitol (which has just agreed to pay $2.9 billion for Shell’s downstream business, including 870 retail fuel outlets) have been deterred by the schemes from entering the retail fuel market, the chains could have put up a pretty strong argument that they don’t substantially lessen competition.

As it is, the fate of the ACCC action boils down to the detail of what Coles and Woolworths agreed to in December -- and what they didn’t agree to.

Essentially the chains agreed not to offer discounts on petrol that were funded by businesses other than their petrol and convenience store networks; and to limit discounts to four cents a litre which were contingent on past or future purchases of goods from businesses other than their petrol and convenience networks.

Both chains have been offering ‘’bundled’’ discounts. The fact that Woolworths has withdrawn its bundled offer while Coles plans to vigorously defend its offer suggests there could be some meaningful differences between the two bundles.

Coles has offered bundled discounts of up to 14 cents a litre, 10 cents of which relates to purchases of $20 or more on groceries bought at the petrol retail outlet and a further four cents a litre discount on the same fuel purchase if they present a Coles shopper docket that shows they have purchased $30 of groceries in a Coles supermarket.

Coles would presumably argue that the 10 cents a litre element is funded independently by the fuel and convenience store outlet. The other four cents a litre would be funded by its supermarket business.  In other words, these are two separate discounts that can be redeemed in one place – but don’t have to be.

Whether or not that’s a breach of the undertakings it gave the ACCC will depend on a court’s view of the wording of the original undertakings. Those undertakings had a five-year term, although there were provisions for earlier review if circumstances changed.

The chains were prepared to enter them originally because, given that they were matching each other’s offers with ever-increasing discounts, there was no lasting competitive advantage to either of them (relative to each other) from maintaining the original programs.

The outbreak of renewed competition via the bundled discounts tends to underscore how fiercely they do compete and may reflect some perceived advantage that one has over the other in terms of their convenience store networks.

The ACCC action will clarify exactly how limiting the undertakings – and their ability to leverage the combination of their supermarket and convenience store networks to compete against each other – are.

Given that they effectively do match each other’s offer and there is a point at which the level of discounts would impact their profitability, it probably isn’t critical for either of them if the ACCC view prevails and their discounts are capped, although some of their customers might beg to differ.

It remains a peculiar outcome that the Competition and Consumer Commission is seeking to constrain competition between the two big chains and to limit the consumer benefit by imposing the ‘’voluntary’’ undertakings and taking court action to try to enforce its interpretation of them.