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This is not it, but it is similar'
New Coles managing director Steven Cain says
he is willing to exit the $35 billion retail fuel market at the right price to end a deal that has saddled the retailer with Australia's highest petrol prices and led to a one-third slump in sales volumes over the past two years.
Mr Cain revealed on Monday that Coles, which is soon to demerge from Wesfarmers, is experimenting with a convenience store format that sells on-the-go foods such as sandwiches and snacks and a range of grocery staples, but crucially does not sell fuel.
Asked if Coles, like Woolworths, would consider exiting the low-margin fuel business, Mr Cain said: "Our approach going forward will be like the Wesfarmers one – if someone comes along and offers the right price for the business clearly we'd look at it."
Higher prices, falling sales
However, he also said Coles Express, which accounts for 18 per cent of the retail fuel market, was "something of a powerhouse" and was a business that had further upside.
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Mr Cain's comment followed another sharp fall in Coles' fuel sales volumes, which took the shine off an otherwise strong first-quarter sales result.
Coles' pump prices are routinely several cents higher than those at rivals such as Woolworths and Caltex, BP and 7-Eleven and it is rapidly losing market share due to an uncompetitive fuel supply agreement with the recently listed Viva Energy, which took over the Coles contract in 2014 after buying Shell's retail fuel and refinery businesses.
Coles Express comparable fuel volumes slumped 15.9 per cent in the September quarter after falling 15.8 per cent in the June quarter and 21 per cent in the September quarter 2018.
Higher fuel prices, which have risen about 20 per cent over the past year to 4½-year highs, added to the pressure on volumes.
Despite the fall in fuel volumes, same-store sales in convenience stores rose 3.4 per cent, compared with 4.6 per cent growth in the June quarter and 0.2 per cent in the first quarter 2018 as Coles improved its food-to-go range in an attempt to offset weaker petrol sales.
Wesfarmers managing director Rob Scott said Coles believed weekly fuel volumes were starting to stabilise at around 60 million litres a week (compared with 90 million litres a week two years ago), but analysts questioned this assumption, saying quarterly sales were still falling at a rapid rate.
Coles Express earnings fell 9 per cent in 2018 after a 6 per cent fall in sales to $5.7 billion and Bank of America Merrill Lynch analyst David Errington said Coles was facing a similar fall in earnings this year unless the volume decline was arrested.
Viva unwilling to budge
"What are you going to do? This is a volume game and a fixed-cost industry," Mr Errington said.
"You might sell a few more coffees and sandwiches but that won't offset another 15 to 16 per cent drop in volumes – what can you do here to avoid another step down in earnings if petrol prices stay up at these levels?
"It looks like your joint venture partner is not going to come to the party. If volumes don't pick up you're sitting on a pretty hefty drop in EBIT again."
Coles has been in discussions with Viva for two years to improve the terms of the supply deal but
Viva, which floated in July, has been unwilling to budge. The current agreement is due to expire in February 2024.
Mr Scott said Coles Express was trialling different pricing initiatives, without giving details, and continued to discuss the issue with Viva.
"Coles Express is not an overly material contributor of earnings to the group and we're focused on improving it," Mr Scott said.
Coles has been selling fuel since mid-2003, when it established an alliance with Shell. Shell sold its refining and fuel retailing business to Viva Energy in 2014.
Coles Express accounts for about 18 per cent of retail fuel sales but under the Viva agreement pays the highest wholesale fuel prices in the market. It also leases its 711 sites from Viva.
Woolworths is still considering
selling or floating its $5 billion fuel business, which delivered a 7.1 per cent increase in earnings to $168 million in 2018 as sales rose 3.1 per cent to $4.8 billion.
https://www.afr.com/business/retail/...0181015-h16nec