Ads fuel petrol’s risky price war

The petrol market appears to be in long-term decline. The number of brands is likely to shrink because of mergers and alliances, such as that forged recently between BP and Mobil. And with the price war hotting up between petrol giants and supermarket forecourts, independent retailers are struggling to keep pace.

Advertising spend across the industry has also fluctuated over the past couple of years. As a whole, the industry spent 12.3m on advertising in 1994. This was cut back by 46 per cent to 6.6m in 1995. In the first two months of 1996, Esso alone spent 4.1m on its prowling tiger Pricewatch campaign, but the remaining brands in total spent only 700,000 – the same level as in 1995.

Esso’s campaign, which focuses on long-term low prices rather than gift tokens to attract motorists – dominates the market. Eighty per cent of the company’s total budget goes on TV advertising. The strategy behind the campaign is unclear. It may have something to do with the close interest in the sector being taken by the Monopolies & Mergers Commission, which has been sparked by complaints from the Petrol Retailers Association about predatory pricing policies operated by the major oil companies and supermarkets.

Esso’s competitors are responding to its campaign by moving more of their advertising into press and radio. Supermarkets realised some time ago that petrol can be sold like any other fmcg product. The convenience and low prices made this a highly successful formula and Tesco and Sainsbury’s are capitalising on this by concentrating on price-cutting themes. The role of the supermarkets’ advertising, such as Tesco’s radio commercial, “Every litre helps”, is clearly an effort to extract additional spending from its grocery shoppers. Supermarkets in general are spending more on advertising, with a rise in share of total industry spend from 25 per cent in 1994 to 27 per cent in 1995.

But what will be the role of advertising – and particularly Esso’s campaign – as the battle at the pump continues? The MMC will be monitoring the big players’ movements.

The peak period for petrol sales consumer will be July and August. In 1994, Shell took the lead, spending 1m just ahead of that peak; in 1995, it was Esso and Jet, each spending 700,000-plus in late spring/early summer, who took the advertising initiative. Indeed, in 1994 and 1995 the first two months of the year accounted for about 12 per cent of the total year’s spend.

If Esso, and its main competitors, including the supermarkets selling cut-price petrol, give the MMC indications that the same pattern of advertising is likely to occur through 1996, the year’s total would be well over 30m. Would this be deemed healthy, competitive marketing activity, or unacceptable support for a predatory-pricing policy?

The successful development of retailing outside the core petrol area will make the operators, whether they are supermarkets or oil companies, less vulnerable to the continuing price war in the UK market. Petrol sales alone are no longer enough to generate profits and it is essential to provide consumers with incentives to visit sites.

Such margin-delivering items should take over from petrol as the core product for a forecourt store. However, if consumers are persuaded in by low petrol prices, then it is equally important that those prices remain competitive.

A number of developments in petrol retailing will precipitate structural changes in the whole sector. Tesco has increased the pressure on its rivals by extending its successful Clubcard campaign to forecourt sales. The commodity nature of the petrol market means that price will become more important as each operator undercuts its competitors and this will inevitably cause prices to spiral downwards.

There are no winners in this game and it is likely that petrol retailing will become concentrated on a few high-volume sites, putting smaller companies and rural filling stations under enormous pressure. Even those operators that can maintain a price war will find their profits severely depleted. Indications are that the price war has only just started and the number of filling stations will continue to fall.