Low-cost retailers set to gain market share from petrol giants - investment expert

An investment expert says he expects to see the biggest fuel retailers like Z, BP and Mobil lose market share to low-cost retailers like Waitomo and Gull. Photo / Bloomberg

Rising fuel prices and a slowing economy may lead to an increased market share for low-cost fuel operators, an investment expert says.

Grant Swanepoel, head of research at Craigs Investment Partners, said he expects to see the biggest fuel retailers - Z Energy, BP and Mobil - lose market share to low-cost retailers like Waitomo and Gull.

"As the market slows down, the economy slows down and overall petrol volume starts to taper off, there will be more evidence that the big four have been losing market share," he said.

"Low-cost operators are going to take a big slug, but it is going to be a slow rise."

This week, Hamilton-based fuel supplier Waitomo opened its first central Wellington site in Tinakori and have future plans to expand into the South Island.

Waitomo hopes its presence in central Wellington will disrupt the capital's fuel market, bringing new competition to a city with some of the highest petrol prices in the North Island.

General manager Jimmy Ormsby said when Waitomo opened a station in Upper Hutt, local fuel prices dropped as much as 20 cent a litre and he expects to see a similar effect in Wellington.

The new Waitomo station is charging $1.85 a litre for Unleaded 91, while Z and BP in Wellington are still charging between $2.18 and $2.20 a litre.

Only the Caltex nearest the new Waitomo site on Hutt Road has dropped its price to $1.85.

Swanepoel said high-service stations like Z will still have a meaningful role in the market in 10 years' time.

"Consumer behaviour has already started to change, but people still want to pick up a cup of coffee, people still want to pop in for a pie - so there is certainly going to be a role for that," he said.

Swanepoel said a separated market is starting to form, with low-cost operators offering self-service sites at lower prices and full-service operators charging a premium.

Low-cost fuel operators like Gull could see an increase in market share. Photo / File

He said the challenge for Z is to compete with Mobil and BP, the two major competitors in the full-service market, while potentially repositioning subsidiary Caltex as a low-cost operator to compete with Waitomo and Gull for more price-sensitive consumers.

"There is a certain percentage of the market that is price insensitive, certain parts of the market are actually price indifferent, and there is a part of the market that is price sensitive," Swanepoel said.

The Z group sold about 45 per cent of the country's petrol and diesel in April, while petrol volumes fell about 1.5 per cent in the past year – due in part to high pump prices in mid-2018.

In May, Z Energy chief executive Mike Bennetts told the Herald that keeping consistent earnings in a declining market that is also increasing its capacity was a "fantastic outcome".

Collectively, the retail fuel industry added 35 new fuel sites in the past year – 32 of which were fully automated – increasing retail capacity by about 2 per cent.

Chief forecaster at Infometrics, Gareth Kiernan, said while Waitomo may pick up some market share in Wellington, it will face stanch competition.

"We've often seen is that there is a degree of price matching from the other stations, which means everyone isn't going to flock to the new station because the others are cheaper as well," he said.

There is an element of cross-subsidisation that goes on – retailers will match the price where there is a low-cost competitor just down the road and then look to get better margins or better profit in other stations where they are not under that same competitive pressure."

Ormsby said that seeing competitors using stronger margins on higher fuel prices in some regions to suppressing pricing in others has driven Waitomo to open new stations.

"Unless we introduced that competition, it would be an uneven playing field in the areas that we were operating in. So we were compelled to grow and expand and increase competition in new markets," he said

While Kiernan said research into cross-subsidisation had been mixed, he said he couldn't see any other reason for the way fuel prices were distributed across the country.

"When you look at the geographical distribution of what petrol prices have looked like, it is hard to understand how the petrol price could be cheaper at some of those central north island areas given you have to freight it so far from port," he said.

Whereas the likes of Wellington where we've got a port here and have been paying consistently higher prices for quite a long period of time. So, I suspect regional cross-subsidisation does occur."

Kieran also said fuel-retailers use loyalty programmes to offer discounts to customers who are willing to put in extra effort for a good price, while increasing margin from less price-sensitive consumers by leaving a higher price at the pump.