Geelong fuel users should pay lower fuel prices now Woolworths (Safeway) has entered the market, ACCC Chairman, Professor Allan Fels, said today.
Woolworths (Safeway), through Australian Independent Retailers, has begun selling petrol and autogas from its Waurne Ponds, Geelong store.
While Geelong petrol customers already benefit from petrol prices close to those of Melbourne, there has been concern about the stable and relatively high autogas prices, he said.
Woolworths' entry should mean greater price competition, particularly for autogas. Its pricing policy means its board prices match the lowest prices in the surrounding area but also offers a further 2c a litre discount with $30 plus grocery purchases.
In other country towns in NSW, Victoria and Queensland this has led to competitive pricing. Woolworths' entry has meant lower prices.
With the new entry, it will be interesting to see how Geelong retail autogas prices react.
But consumers should be aware that international LPG prices are on the rise associated with the northern hemisphere winter.
The ACCC recently examined Geelong autogas pricing, finding that Geelong consumers pay more for autogas than their Melbourne counterparts.
This follows from either a lack of incentive or willingness to compete by those in the market, rather than from any apparent breach of the Trade Practices Act.
No evidence of Trade Practices Act breaches was found, but the ACCC will continue monitoring prices and pursue any evidence relating to suspect behaviour.
The study was sought by the RACV after numerous complaints about price differences between Geelong and Melbourne. Significant discounting and price volatility for the product ceased in Geelong in 1993.
Melbourne differs from Geelong in that it has significantly higher levels of competition, with more than 600 service stations selling autogas. There are only about 50 such sites in the Geelong area. In Melbourne there are more players at the marketer/wholesaler level, higher average volume throughputs per retail site and generally greater diversity of products offered at service stations.
Additionally, there are independents in Melbourne who actively seek autogas volume by discounting so there is greater pressure on Melbourne retail prices and wholesalers often must discount their supply prices to protect their volume through retail sites.
Despite the lack of autogas price discounting in Geelong since 1993, the ACCC observed that the persistent discounting of petrol in Melbourne continues to spread into the area. With returns to retailers in Geelong under pressure for petrol and, in many cases, the lower levels of diversification of products sold from local retail sites, the incentive to discount other fuels, such as autogas and distillate, lessens in places like Geelong.
The study found that when discounting of autogas stopped in Geelong, a key player opted to chase margin on this product rather than volume, thereby maximising revenue.
Without competitive pressures that player has not been forced to reconsider that approach, although Woolworths' entry may change this.
Due to confidential information gathered during its study, the ACCC will not release a report on the matter, but a brief summary is available from the ACCC.
For further information about this media release: Professor Allan Fels, Chairman (02) 6243 1129 Alana Woods, Acting Director Public Relations (02) 6243 1108 MR 168/97 16 December 1997 Summary Background
The study of autogas pricing in Geelong was sought by the RACV late last year after numerous complaints about pricing differences between Geelong and Melbourne. In 1993 price discounting of autogas essentially ceased in Geelong.
In a news release of 1 October 1996, ACCC Chairman, Professor Allan Fels, noted that in the early 1990s, active price competition, as evidenced by price discount cycles, was recorded in Geelong. Resultant average retail prices were similar to those available in Melbourne. However, these cycles disappeared in 1993, and in September of that year, prices rose significantly and stabilised. Since then, movements in prices generally have been in response to changes in international benchmark prices, which usually flow into local producer prices.
While prices in Melbourne also rose in September 1993, the prevailing higher levels of competition eroded them with discount cycles continuing to be a feature of pricing. In recent months, autogas users in Melbourne could often fill their cars for less than 20 cents per litre (cpl), while prices in Geelong have remained at 29.9 cpl since early May.
Figure 1: Autogas average retail prices, Melbourne and Geelong; Jan 92 Sep 97.
Sources: RACV and Informed Sources (Australia) Pty Ltd. Main factors influencing Geelong's autogas prices
The investigation looked at a range of factors which may have influenced long term pricing behaviour in Geelong. These included:
the purchase by Elgas of the Victorian Governments Heatane business in mid 1993;
a change in wholesale pricing strategies of some marketers and greater influence over retail price through price support schemes;
exchange arrangements between some players at the wholesale level;
a decision by at least one independent to cease price competition for autogas in favour of higher margins to support petrol price discounting;
moves by Shell and Mobil into multi-site franchising of retail sites in the region; and
growth of sales on marketer cards.
Woolworths (Safeway), through Australian Independent Retailers, will shortly sell petrol and autogas from its Waurne Ponds, Geelong store. The entry of Woolworths into fuel retailing into other country towns in NSW, Victoria and Queensland has led to improved pricing outcomes for consumers.
Despite the lack of autogas price discounting in Geelong since 1993, the ACCC observed that the persistent discounting of petrol in Melbourne continues to spread into the area. With returns to retailers in Geelong under pressure for petrol and, in many cases, the lower levels of diversification of products sold from local retail sites, the incentive to discount other fuels, such as autogas and distillate, diminishes in places like Geelong. The study found that at the time discounting of autogas ceased in Geelong, a key player opted to chase margin on this product rather than volume, thereby maximising revenue. In the absence of competitive pressures, that player has not been forced to reconsider that approach, although the entry of Woolworths may influence that decision.
Another disincentive to discount for some service station operators referred to above may result from the pricing policies of wholesalers/marketers, including price support arrangements. For at least of one of the main marketers in Geelong, its list price is set at such an artificially high level that retailers are constantly in need of price support to remain viable. In addition, price support is provided on the basis that the lower the retail price, the lower the available retail margin (although a minimum level of gross margin is set). In these circumstances, there is little incentive for these retailers to discount prices; in fact, there is considerable pressure to seek higher prices.
During the study the ACCC also noted that if prices moved at one retail site in Geelong, others would soon match the price change. The scope to increase volume throughput is therefore limited. Are autogas prices in Geelong reasonable?
Autogas has been priced at 29.9 cpl in Geelong since 5 May 1997, significantly dearer than in Melbourne where monthly average retail prices since May have been around 23 - 24 cpl. Consumer concern about price differences heightens when price cycles in Melbourne see prices at some sites below 19.0 cpl.
In Melbourne, retail and wholesale margins are constrained by high competition levels with the result that prices are substantially discounted. The discounting spreads to Melbourne's hinterland, including suburbs such as Werribee and Hoppers Crossing. Marketers often have designated zones whereby autogas can be discounted in particular areas without extending it to others. For example, Gogas has at least 6 zones for autogas supply in Victoria, with separate zones for Melbourne and Geelong. The application of differing wholesale prices on a zonal basis (as well as through the offer of varying price support to selected retailers) can contribute significantly to price differentials between and within towns and cities. This appears to be a major factor influencing retail price differences for autogas between Geelong and Melbourne.
Comparisons of average retail prices with other regional Victorian centres and in other capital cities reveals that Geelong's autogas prices are lower than in other cities surveyed by the RACV in Victoria and comparable with those in many capital cities (see Tables 1 and 2).
Table 1: Average retail prices, selected towns, autogas; weeks ending 15/08/97, 26/09/97 and 21/11/97
Town
Ave. Price 5 days to 15/8/97
Ave. Price 5 days to 26/09/97
Ave. Price 5 days to 21/11/97
Bairnsdale
32.9
33.9
33.5
Ballarat
32.5
32.5
32.5
Bendigo
35.9
32.9
na
Geelong
29.9
29.9
29.9
Horsham
38.9
38.9
36.9
Mildura
38.9
38.9
na
Orbost
36.9
35.9
38.9
Sale
33.9
29.9
30.9
Shepparton
34.9
32.9
34.9
Swan Hill
36.9
36.9
39.5
Warrnambool
35.5
34.9
34.9
Wodonga
35.9
35.9
na
na Not available
Source: RACV.
Table 2: Average monthly retail prices, major capital cities and Geelong, autogas, Jul - Nov 97 (cpl)
Melbourne
Sydney
Brisbane
Adelaide
Perth
Geelong
23.0
28.2
29.4
26.7
38.1
29.9
Aug
23.3
27.6
29.8
26.4
37.8
29.9
Sep
24.3
26.9
30.4
27.2
37.4
29.9
Oct
22.5
28.8
29.2
28.5
37.0
29.9
Nov
24.2
30.3
31.6
28.6
36.7
29.9
Sources: Informed Sources (Australia) Pty Ltd and RACV.
Table 3 provides an indicative dissection of retail autogas prices in Geelong, Melbourne and Shepparton during July and October; retail prices in the latter are typical of many other rural towns in Victoria. It shows that indicative producer prices were constant during any month, gross wholesaler margins varied considerably and retail margins in the country were usually similar, but typically higher than in Melbourne (3.0 cpl margin would generally apply to commission agents while up to 5.0 cpl would accrue to other retailers who service their own equipment). It can also be seen that freight costs also contribute to retail price variations.
Table 3: Indicative retail price dissection, autogas; Jul and Oct 1997 (cpl)
July
October
Melb.
Geelong
Shepp.
Melb.
Geelong
Shepp.
Notional import parity producer price [ Based on a one month import parity formula calculation (not lagged).]
17.0
17.0
17.0
19.5
19.5
19.5
Indicative gross wholesaler margin
2.5
5.9-7.9
10.4-12.4
0.0
3.9-5.9
6.4-8.4
Freight
1.0
1.5
3.0
1.0
1.5
3.0
Gross retailer margin
2.0
3.0-5.0
3.0-5.0
2.0
3.0-5.0
3.0-5.0
Retail price
23.0
29.9
35.9
22.5
29.9
33.9
Source: Derived by the ACCC from industry data.
From the data provided in Table 3 indicative gross wholesale margins in Melbourne were relatively low in July falling to around zero in October. In Geelong, while wholesale margins were higher than in Melbourne, they were significantly lower than in Shepparton. There was some contraction in gross wholesaler margins in the three locations between July and October (associated with increases in international benchmark prices without corresponding increases in retail prices).
