OCTOBER 26, 2018
In a report our today, Errington says if volumes stay at 65 million litres a week, down from 72 million litres last financial year and 93 million back in 2016, then earnings will fall to $85 million.
This compares with the $133m reported for the 2018 financial year and $190m in 2017.
While small in the scheme of $1.4 billion in earnings, new boss Steven Cain is unlikely to welcome such a fall in earnings.
Cain is presently in New York on a road show for the upcoming demerger of Coles from Wesfarmers.
He was in London earlier this week where he reportedly met with management from Vitol which controls 45 per cent of Viva which, in turn, supplies Coles fuel in Australia.
Viva supplies petrol to the 669 alliance sites and the 44 sites owned by Coles and in 2016 it increased its margin which is the price paid by Coles for its petrol.
This was the first time the supplier margin was touched since the relationship was created in 2003.
The big two supermarkets are typically in a position to set margins for supplier sales which means the likes of Coca Cola, Arnotts and Lion take the price set by the supermarkets.
The difference here is that the supplier sets the margin and Coles, which controls the retail price, can adjust prices to set its margin from the fixed wholesale prices.
When Viva increased its margins, Coles simply increased its prices but that meant its prices were six cents a litre above the market and volumes fell from 93 million litres a week in 2016 to 65 million at present.
Coles sets the retail price but has no say in the wholesale price which moves with oil prices and a set supplier margin.
Viva reports cordial relations with Coles and argues talks of a split between the two sides is in the eyes of the media rather than fact.
In his noted today, BAML analyst David Errington noted if Coles were to cut its retail prices by one cent a litre to get closer to market prices this would cost it $35m a year.
If it cuts prices by four cents a litre it would wipe out its fuel earnings.
Fuel is considered a handy product for the supermarkets because it can be used as a loyalty program.
Back in 2003, Coles signed a long term deal with Shell which expires in 2024 but can be extended for five years at the call of either side.
Viva is planning to extend the terms and there is little Coles can do about it which means it is in the unusual position of being a price taker.
While Coles volumes are down 15 per cent in the last year due to its higher prices overall, Viva volumes are down by less than two per cent.
This shows Coles, while an important customer, is not Viva’s only purchaser which in turn reduces Coles’s bargaining power.
Coles is responsible for the site leases and product suppliers but the sites are primarily owned by Viva which has the whip hand in any talks.
Subscribe to our free mailing list and always be the first to receive the latest news and updates.