Superstores ignite forecourt price war

Supermarkets are selling petrol cheaply as a loss leader, forcing major players such as Esso and Shell, to slash prices. Is this a prudent loyalty drive, or a reckless war that could change the map of petrol retailing?

In the week that Coventry church-goers were giving thanks for the motor car, drivers everywhere rejoiced at the petrol price war sweeping across Britain’s forecourts.

Esso, the UK’s biggest petrol retailer, announced an aggressive plan to maintain its dominant position. It pledged to under-cut the lowest petrol price offer within a three-mile radius of its outlets with its Price Watch scheme.

Shell quickly retaliated by cutting the recommended price of its four star petrol by 4.4p a litre to 59.5p.

For car owners, such price cutting seems heaven-sent. For the major oil companies, it is a gamble forced upon them by the supermarkets. Esso and Shell are having to take such drastic measures to arrest the decline in their market share as millions of customers switch to supermarket pumps.

Superstores such as Tesco, Sainsbury’s and Safeway are effectively operating as oil companies, buying cheap petrol supplies in huge volume on the open market, and retailing through their on-site filling stations.

They have been able to take advantage of the petrol surplus in recession-hit Europe, which has too many oil refineries, more fuel-efficient cars, and an increasing number of diesel engines on the roads.

Supermarket chains have already grabbed more than a fifth of the total market, in a rapid cultural revolution that has swept across petrol retailing. Two years ago their market share stood at 15 per cent – up from just five per cent in 1987 (Euromonitor).

Despite denials by the supermarkets, there have been widespread claims that they have been blatantly cross-subsidising, using petrol as a loss-leader to attract shoppers into their stores and to win business from the oil companies.

Their overwhelming success is illustrated by Sainsbury’s plan to add to its 170 existing forecourts, by opening another 60 sites this year.

Such ambitions have forced the oil majors to hit back by offering better “top-up” shopping facilities around the clock, with companies such as Shell investing 350m over three years in modernising its outlets.

Filling station snacking and shopping, for both motorists and pedestrians, is one of the fastest-growing but least-predictable areas in retailing today. Underlining the importance of the forecourt shop, most oil companies are branding them separately – Shell Select, BP Express, Texaco Star and Jet Jiffy, for instance.

Now Esso is having to hit back, by reversing its marketing strategy as a premium brand worth paying a bit extra for, to a cut-price product. Consumers have shown they will not swallow the argument that own-brand petrol is inferior, despite its lower cost.

Esso says it is responding to customers’ preferences, and claims this is why it is scrapping its Tiger Tokens gift scheme and concentrating on cutting prices.

Its Pricewatch scheme – where outlets pledge to match supermarkets within three miles and other competitors within one mile – is now rolling out nationally, after being launched in Scotland and the North-east last year.

J Walter Thompson’s television advertising for the Pricewatch scheme broke last Sunday. But a laser show on Battersea Power Station in London showing the piercing eyes of a tiger keeping “A constant eye on fuel prices” opened the latest round in the petrol price war.

Industry analysts say Pricewatch caused prices in some parts of Scotland to drop so low last year that at times they even fell below cost.

Paul Sykes, president of the Petrol Retailers’ Association, predicts the smaller oil companies, which cannot afford to sell at a loss, will pull out of the UK market altogether. The big players will pare their networks, and the independent retailers, which account for an estimated 22 per cent will go bust, creating petrol “deserts” in large parts of rural and inner-city Britain.

He says: “If Esso doesn’t get a 30 per cent increase in its volumes from this price decrease, it will lose so much margin it will be moving backwards.

“Esso is gambling that prices will go below cost, as it did in the North-east and in Scotland. The supermarkets are protected because they have very deep pockets. But the companies who have only sold on price in the past will suffer.”

The Frost Group of independent petrol retailers has already suffered from Esso’s decision – its share price dropped 26p in two days after Pricewatch was launched nationally.

According to a Shell spokesman, competition has been “absolutely cut-throat” in the market, even before the latest developments.

“Companies can’t cut their prices much lower. We are going to have a smaller network, which is being pruned back carefully. We are investing in those sites with a profitable future,” he adds.

The Petrol Retailers’ Association claims the latest round in the price war could force 7,000 sites out of business within two years, putting 50,000 jobs at risk.

It envisages a future where consumers may be forced to drive miles to find a petrol station, and where profits are made not on petrol, but on the carwash and the large forecourt shop.

“Rural areas will suffer terribly. It is verging on the immoral,” says Sykes. “The Government doesn’t want to take any notice. It is so difficult to prove that this pricing is predatory.”

An Esso spokesman says: “The intention of Pricewatch is not to put anyone out of business. Esso is strongly refuting that prices are being driven down.”

The supermarkets are pledging to respond aggressively to Esso’s move.

A Sainsbury’s spokesman says: “We won’t be beaten on price. We will certainly ensure our prices are the most competitive in the area.” The rhetoric at least suggests that as Esso undercuts them, the supermarkets will fight back in what will be an increasingly harmful spiral of self-inflicted wounds.

With petrol prices, excluding duty and VAT and taking into account inflation, already at their lowest since the Fifties, the price war looks unlikely to benefit anyone in the short or long term.

Even if the oil majors claw back customers, it may take years to ride out the damage to their margins.

For the country’s drivers, their delight at cheaper prices could be premature. If the competition is wiped out and prices rise again, motorists may have to get used to driving longer distances to fill up – a development with severe financial and environmental implications.

George Pitcher page 27

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