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Woolworths sell-off: Prepare for petrol price pain

We could be forking out even more for fuel in 2017 and 2018.
We could be forking out even more for fuel in 2017 and 2018. John Gass /TWE

IF YOU thought there was too little competition in petrol prices already, I have bad news. Woolworths is selling all 527 petrol stations it owns. BP is going to buy them and become even bigger.

Could the sale of all those petrol pumps to BP make matters worse?

The competition watchdog - the Australian Competition and Consumer Commission - is already laser focused on the fuel industry.

It took a bunch of fuel retailers to court recently and is constantly monitoring petrol prices looking for collusive behaviour.

In parts of Australia, fuel prices already move in patterns that imply competition is not too strong.

If the sale goes through, the chances of strong competitive pressure in the petrol market get weaker still. That could hurt all of us when we fill up our tanks.

It comes at a bad time for motorists. The global oil price cartel, the Organisation of the Petroleum Exporting Countries (OPEC), has recently made pledges to cut supply and push up the global oil price.

Prices at the pump could be about to skyrocket just as this deal goes through.

THE MASTERS CONNECTION

Competition is important. Without it, capitalism becomes completely unfair. If big businesses can pocket huge profits and set prices wherever they want, our whole system is broken.

Low profits are ideal, but negative profits are no good. They cause collapses that actually reduce competition.

The Masters hardware collapse was spectacular. Woolworths' attempt to take on the hardware market never got going.

That left Bunnings as the big green giant of the hardware sector. Home and Mitre 10 are trying but they are like a mosquito on the side of a racehorse. Bunnings is boss in that sector and that makes its owner Wesfarmers sit pretty.

Masters cost Woolworths a lot of money. Many millions were spent, for little return. Woolies posted a loss of more than $1.2 billion last year.

Now Woolies is selling up its petrol business, in order to "strengthen the Woolworths balance sheet and reinvest in its core business".

This is the link to Masters. If it had succeeded, Woolies may not have needed to bolster its finances, and we'd have more competitors in both fuel and hardware. Instead, once again, Australia is sliding towards oligopoly.

AUSTRALIA ONLY LIGHTLY COMPETITIVE

Australia is famous for having what is called market concentration, where a handful of firms control much of the market.

Two big supermarkets, for example. Or four big banks, two big airlines, one big telecommunications company, etc.

The head of the ACCC was complaining about this just a few months ago.

"The revenue of Australia's largest 100 listed companies increased from 27 per cent of GDP (gross domestic product) in 1993 to 47 per cent of GDP in 2015," he said.

The big guys are getting bigger - and it is often through mergers and acquisitions like this petrol station deal.

He then argued that mergers can, in some cases, "reduce competition and cause harm to consumers and our economy" mentioning - just by the by - that the largest petrol retailers were "making good profits", while "many retailers with only a few outlets struggle".

What's interesting here is the ACCC will have to approve the Woollies-BP deal before it goes through. Will they do so? It seems likely but is not certain.

BP says it is confident that clearance will be granted.

"Australia has a highly competitive fuel market and we are confident the ACCC will ensure this isn't altered by the transaction," a BP spokesperson said.

"Our partnership with Woolworths has the customer in mind - it is about reinventing the convenience sector in Australia."

COMPETITION - NEXT YEAR?

If the deal goes through, Woolworths gets $1.8 billion dollars and can focus on its supermarket business. If the deal falls apart, then it might be in trouble.

Because 2017 could be the year when really serious competition comes to Australia's supermarket sector.

Amazon has launched its Prime Video service here, and rumours are its fresh food business is not far behind. If that happens, Woolworths will need its A-game.

This kind of pressure - businesses fighting for their lives - is exactly what good competition looks like.

In fact, 2017 could be a very good year for supermarket consumers. Even if Amazon doesn't come to Australia, the threat is going to keep supermarkets on their toes.

Aldi is renewing its stores so it can sell more fresh food and compete better, while Coles is also knuckling down, renovating 50 supermarkets in 2017 and ever-ready to compete on price.

We can only hope that, one day, we see something similar in fuel too.

Topics:  australian consumer and competition commission bp editors picks petrol prices woolworths


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