Oil giants turn the screw on retailers

BP: The proposed merger, combined with current price war, could see the number of independent petrol stations slashed by half to only 5,000

It is difficult to imagine that anyone would ever underestimate the clout and staying power of major oil companies; but there is a real possibility that this is exactly what food retailers who moved into the petrol business have done.

Last week’s announcement by BP and Mobil to agree in principle to combine their European operations in the refining and marketing of fuels and lubricants was seen by most as the inevitable result of the continuing UK forecourt price war.

To be fair, the oil majors themselves have been mewling about the price competition from Sainsbury’s and Tesco who now operate almost 25 per cent of the petrol retail market.

There is, however, another theory. Some analysts believe the oil companies are not too distressed about food retailers moving into selling petrol. Some even suggest they have deliberately allowed the grocery multiples to get in on the act as a means of securing a long-cherished end.

By allowing food chains to get a grip on the petrol retail market, and it is a very firm grip at this stage, this scenario will finally allow oil companies to do what they have wanted to do for so long – get rid of the independents.

Before the BP-Mobil announcement, it was estimated by the Petrol Retailers Association that about 2,000 independent retailers would disappear under the weight of the price war. This latest flexing of muscles could see another 2,000 to 3,000 disappear. At the moment, there are just under 10,000 independents across the country.

With them out of the way, the oil giants can then square up to the food retailers.

The oil industry is highly political, international and very large. The likes of Shell and BP have been playing one of the toughest games in business for generations and have every intention continuing to do so.

In comparison, the food retail industry is short term and essentially parochial. When the going gets really tough and oil companies and the OPEC countries start fighting in earnest, the food retailers, say observers, will be completely out of their league.

A cursory look at the oil industry’s recent past, so the theory goes, will explain why they have dealt with the threat to their business from food retailers in the low-key way they have.

During the Seventies and early Eighties, oil companies were public enemy number one. They were consistently accused, and with good reason, of operating as a cartel and ensuring that petrol prices were never undercut.

During that period, the oil business was investigated more frequently by the Monopolies & Mergers Commission than any other sector.

More recently attention has been diverted from them, as the public and politicians have found other targets for their ire – most notably public utilities.

However, the oil companies’ poor public standing, on the forecourt at least, has made it difficult for them to react ruthlessly, so when food retailers entered the petrol retail market a few years ago, the expected backlash was remarkably mild.

True, there was an increased advertising presence and petrol retailers did start selling groceries in an attempt to turn their forecourts into the corner shop. A plethora of gift tokens and loyalty programmes also made an appearance.

Oil companies were in any case happy to bide their time before launching an all-out assault on the grocery chains for other reasons. The combination of tight margins at the pumps and an increase in profits from grocery goods kept a full-scale war at bay.

If they had really wanted to and if it had been worth their while, the oil majors could have started playing dirty a long time ago.

Two pence off the price of a litre of petrol costs the larger oil companies about 75m a year. Not an easy loss to stomach by any standards. But oil companies can cope with that cost much easier and for much longer than food retailers.

To complicate matters further, OPEC countries, in an attempt to improve revenue, are starting to build their own refineries. This will bring real clout to the petrol sector as Middle East countries could launch their own brands on the market.

In the UK, this is already happening with Kuwaiti-owned Q8, which holds about two per cent of the retail market.

The petrol is still subject to UK tax, but removing the refinery and middleman costs puts retailers like Q8 in a much stronger position than before. And one the food retailers won’t find at all appealing.

As one analyst says: “Originally, selling petrol enabled food retailers to put a sign in the road with a low price on it. It got the shoppers in.

“When the food retailers saw they could actually make money out of it, they got excited. But they are only retailers and are heavily margin-driven. The oil majors have got a much longer-term strategy.”

It is this perceived long-term competition from OPEC-owned refineries that some see as one of the real motivations behind the BP-Mobil deal.

Therefore it should be no surprise that most of BP and Mobil’s competitors have applauded this merger, citing the real need for rationalisation in the industry. In Europe there is overcapicity in the refining industry, resulting in a glut of petrol on the market.

OPEC has its own reasons for getting into the refinery business. At the moment, it sells oil on the open market at about 12 a barrel. The end product is sold at UK pumps for about 52p a litre, which translates into oil companies buying the crude oil from OPEC at 10p a litre.

The refinery costs, profit margins and most significantly the tax and VAT that the Government takes means that everyone, including the Government, is making a lot more money out of a barrel of oil than the oil countries. Understandably, these countries are looking for ways to improve their own revenue and refining their own oil will help.

These macro movements are unlikely to have a direct impact on food retailers for some time. The BP-Mobil merger still has to be approved by the European Commission and no-one is expecting to see the results of the deal in this country until 1998.

Nevertheless, food retailers would do well to reconsider their petrol strategy and decide whether they are in the petrol business for now or the long-term. Either way, the oil industry is likely to come out on top.