No value in fuelling discount debate
Surprise, surprise - the political combatants chose not to buy into the debate raised by independent grocers this week around the potential threat to competition stemming from the big supermarket chains' use of discount shopper dockets on fuel.
Not a word from Coles, Woolworths, Tony Abbott or Kevin Rudd. Its a no-fly zone in the lead-up to an election.
Even a government with a clear majority and a full term ahead of it would be reticent to pop its head above the parapet on this issue.
The big supermarket chains are desperate to stay off the radar and for politicians there is nothing to be gained by telling consumers that they will inhibit the flow of cheap petrol.
The custodian of competition regulation, the Australian Competition and Consumer Commission, has already made it clear that this is an area within its purview but it won't be releasing any determinations for another couple of months.
The use by big supermarkets of loyalty shopper dockets reared its head this week for two reasons. The first is that independent grocers instigated an advertising campaign in major newspapers in an attempt to force it on to the political agenda - a move that fell fairly flat.
The second was the release of Caltex's half-year earnings. The company operates as a supplier to a slew of co-branded fuel outlets with Woolworths.
Caltex did not want to dwell on the shopper docket issue either - other than to point out Coles started the price war and that as a wholesaler it suffered some collateral market share damage until Woolworths stepped in to match its supermarket rival on discounts. In other words Caltex as a wholesale supplier to Woolworths shares none of the pain of discounting, but only suffers if Woolworths loses market share.
Fuel is one of those products economists like to call inelastic - consumers don't really alter their volume of consumption in response to price. The issue for Coles, Woolworths, suppliers like Caltex and the independent grocers is that discounts move market shares.
The conundrum for the ACCC is that the shopper dockets have been embraced by consumers as a means of lowering their petrol spend, and so to limit them would be extremely unpopular. But to allow unfettered use of discount petrol shopper dockets is to potentially inhibit competition in the longer term from unaligned petrol outlets or independent grocery retailers that may go out of business because they can't furnish the same discount offers.
The regulator's determination will address the where-to for Labor. Abbott has already announced the Coalition will undertake a root-and-branch review of competition policy if it wins government. This presumably will include shopper dockets.
No one other than the independent grocers appears to want to give the debate too much air.
For Caltex this issue was a bit of an aside in a result that was influenced by other factors, the largest of which was the Australian dollar.
The sudden fall in the local currency had a bigger effect on what is still (in part) a manufacturer in Australia. It still refines crude oil into various products for industrial and retailer end-users.
A decision to exit part of the refining process (the transition of the Kurnell Refinery into a storage facility) is Caltex's strategic move away from engaging in the risks associated with local manufacturing.
By the end of next year Kurnell won't be operating as a refiner.
The effects of this will be, firstly, to increases its earnings dependence on marketing and distribution. The second will be to free up capital that will be either returned to shareholders or reinvested in distribution. Thus in future Caltex will rely more heavily on the market share in retail fuel distribution and its commercial customers.
There are plenty of mini-Caltex operators across the country that have distribution and storage facilities that can fill in some of the geographical gaps and provide opportunities for the company's incremental growth.
Its success is now tied into broader refiner margins and increasingly on improving the margins on specialist and value-add product. Already the trend by consumers to move away from commoditised unleaded fuel and towards towards premium products is clear.
Sales of unleaded product and E10 fuel were down 5 per cent and 7 per cent respectively.
In the commercial space where price competition is also heating up, Caltex says delivering value-added product in partnership with its customers is the strategy for retaining or stealing market share.
Perhaps more importantly the health of the economic environment plays into future performance. Caltex says it does not feel the effects of the fall off in capital spend in mining - instead it gets the upside from the increased volume of commodities that are produced.
Perversely, the fall in the local currency that cost Caltex's earnings dearly in the the half it just reported will be recouped in future earnings.
Bottom line, operating as a distributor is a far more reliable earnings future than manufacturing in Australia. And it poses the ultimate question of whether there is a future for refining crude oil in Australia.