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Deputy CEO Monthly Message

Kellie Dewar

November, 2017

 


At time a when consumers are experiencing ‘cost of living’ pressures, I eagerly awaited the release of the Australian Competition and Consumer Commission’s (ACCC) Report on the Brisbane Petrol Market (the Report). Having been involved closely in petrol pricing advocacy for more than a decade, the expectation was that it would reveal the mystery for why petrol prices in Brisbane have been consistently higher than in the other four largest cities of Sydney, Melbourne, Adelaide and Perth.  

Was I satisfied or disappointed? Continue on. Yes, the Report provided reasons and the analytical data for the price variations between Brisbane and the other four capital cities. But my considered view was that it overlooked a key issue that distorts Brisbane petrol prices. That is the prolonged shopper docket petrol discounting programs by the supermarket majors. I’ll come back later to this matter in Viewpoint but it is necessary to provide you with some detail from the report.  

The structure of Brisbane’s fuel retail market involves 404 fuel retail sites comprising the majors: Caltex (62 sites), BP (74), Coles Express (59), Woolworths (41), and 7-Eleven (70); the independent chains Puma (32), Freedom (22), United (11) and Matilda (11); and 22 small independents (down from 51 retail sites in 2007).

The Report found firstly that retail petrol prices in Brisbane have been higher than in the other four largest cities for many years. Specifically, between 2009-10 and 2016-17 motorists paid on average 3.3 cpl more for petrol than motorists in those other cities, and the cost to motorists in Brisbane of higher petrol prices has been around $50 million per annum. Over the eight-year period, the estimated cost is about $400 million. In considering this, it should be noted that the price differential between Brisbane and Sydney for both the Terminal Gate Price (TGP) and the import parity price was negligible.

Secondly, retail margins and profits are higher in Brisbane. Between 2009 -10 and 2016-17, annual gross indicative retail differences (GRIDS) in Brisbane was 3.2 cpl higher than the annual average GRIDs in the other four largest cities. Brisbane GRIDS was higher in comparison with each of the other four largest cities. As a result of higher retail margins, annual net profits per site in Brisbane were significantly higher than the average net profit per site across Australia. In 2015-16, average net profit per site in Brisbane was about 55 per cent higher than the average profit per site across Australia. (NOTE: GRIDS are the differences between retail prices and published terminal gate prices (TGP). They do not reflect actual retail profits as they include retail costs).

Thirdly, Brisbane has fewer independent chains in Australia than Sydney (which is used as a comparator). An independent operator is considered as one that runs 10 or more retail sites with the same brand, and sets the retail prices at those sites. Brisbane has four independent chains as stated above. At June 2017, these had 138 retail sites in total, accounting for 34 per cent of the total number of Brisbane retail sites. In Sydney, there are seven independent chains with 330 retail sites in total, accounting for 39 per cent of the total number of Sydney retail sites.

Fourthly, the Brisbane independent chains do not price as aggressively as other cities. Changes in market structure may be a reason why independent chains price less aggressively in Brisbane than other states.  The number of independent chains in Brisbane has halved over the last 10 years - from 51 retail sites in 2007 to 22 retail sites in 2017. In contrast, in Sydney the market share of the four lowest price independent chains has increased from around 6 per cent in 2007 to some 18 percent in 2017.

It is when sales volume comes into play that the domination of the supermarket majors in the Brisbane petrol market is revealed. These have 25 per cent of the retail petrol sites but control the petrol market with 40 percent of the sales volume. The small independents, the independent chains and refiner wholesalers, whilst more numerical, each has lower sales volume by retail site - approximately 20 per cent each - than the average supermarket. It is in this instance that the influence
of the supermarket discount shopper docket emerges. 

Over some 10 years, we’ve consistently submitted to ACCC the supermarket major’s petrol discount shopper docket marketing strategies and the enormous market power of this vertically integrated duopoly. At various times, these strategies included super fuel pricing shopper docket discounting programs ranging up to 40 cpl to 4 cpl for a specific spend. It was clear to us that these programs were intended to ultimately reduce the motor vehicle retail fuel market to an oligopoly dominated by the supermarket majors. We’ve indicated to the ACCC on several occasions that in the short term, consumers may benefit from super fuel pricing discounting but in the medium term competition will be diminished by the closure of independent or non-aligned supermarket fuel outlets forced out of the market.

Our advocacy was correct. Competition has declined with the halving of independent or non-aligned supermarket fuel sites. It must be said other factors may have contributed to the closure of independent fuel sites, but the evidence is clear, the supermarket majors dominate volume sales and petrol pricing. 

The super fuel price discounting programs were ceased by the ACCC but the 4 cpl discount shopper docket remains for a $30 spend at both of the supermarket majors. It remains our view that the supermarket majors utilise the cross-subsidies from consumers and grocery outlets to finance the capital requirements of their retail fuel subsidiaries, having the potential to disadvantage the independents and non-aligned supermarket sites and consumers.

In summary, I was disappointed with the Report.

Road Safety

In recent years I’ve collaborated with stakeholders on the issue of road safety. A reputable study on the cost of road trauma indicated that over the last four decades, road trauma levels have declined substantially despite significant population and a threefold increase in registered motor vehicles. Road safety strategies and safer motor vehicles have had the effect of road deaths falling from 3,798 in 1970 to 1,293 in 2016. When an economic and social cost is applied to trauma, it indicates that for the 2015 calendar year the total cost of road trauma was estimated at $29.7 billion.  

The direct cost to government for one year’s worth of trauma - as distinct from the total economic cost - was $3.2 billion. This includes immediate responses to road trauma in health, emergency services and other areas incurring $945 million of this cost in the first year. More than three quarters of this cost comprises the present value of future years of forgone taxation revenue and additional income support payments arising directly from road crash deaths and disabilities. The need to provide additional health services represents 11.8 per cent of this cost. I note the Federal Government has instigated a National Road Safety Strategy 2011-2010 to which I’ll make a submission.

Finally

The 2017 President’s Ball was a tremendous success. An evening which really gave everyone who attended a chance to enjoy themselves and reflect on the achievements of the past year and the challenges ahead, it was a truly entertaining event. I echo Brett’s sentiments in his From the Desk of the CEO column in acknowledging the accomplishments of our members Mark Dodge Motoring (Community Award winner), and EV North (Innovation Award winner), and the outstanding and talented Apprentice of the Year winner Elliott Lemmon and his fellow nominees.  

To our partners and sponsors who make the President’s Ball possible, I thank you.

The plan is to complete this year’s activities with a visit to our central Queensland members set down for Tuesday, 5 December. This will enable the MTA Queensland team to hear first hand member’s views on trade and business issues. I’m looking forward to this event, particularly as our visit schedule fell into abeyance due to a combination of issues and events that overtook the diary. Central Queensland Area Manager Andy O’Hearn will distribute the details of this meeting later this month.
Until December, take care and stay safe. 


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