Woolworths, BP deal a marriage of convenience
December 28, 2016
It comes as no surprise that BP has won the contest to buy Woolworths’ fuel and convenience store network. The complexity of the deal and the layers to the structure of the relationship the companies have agreed, however, ought to be regarded as a big win for Brad Banducci and his team.
BP was, with Caltex — the existing supplier of fuel to the Woolworths network — an obvious frontrunner in what developed into an auction that was decided more on terms than on price, even though the $1.785 billion price-tag is beyond most market expectations.
The deciding issue wasn’t the price, with Caltex (which triggered what developed into an auction after it approached Woolworths offering to buy the network) apparently offering a similar amount of cash to BP, but the collision between Banducci’s strategy and aspirations and Caltex’s convenience store strategy.
Banducci sees Woolworths’ “Metro’’ convenience store format — whether combined with fuel or as stand-alone stores — as a long-term growth strategy, while Caltex has committed to its “Starmart’’ branded network as the core to its growth strategy.
BP offered Woolworths an opportunity to enhance the format and expand the footprint for its Metro offer, whereas Caltex would have closed off that option and reduced that potential growth opportunity.
In fact BP has done more than that.
Woolworths entered the petrol retailing business 20 years ago as a means of providing a competitive edge over its biggest rival, Coles, in the supermarket sector. Its primary interest in petrol was the ability to offer a discount on petrol to its supermarket customers. It wasn’t until about 2003 that Coles, via an alliance with Shell, was able to counter Woolworths’ strategy.
Under the deal with BP not only will the four cents a litre fuel redemption offer be retained under a contract that will be in place for at least a decade, but it will be jointly funded and expanded to include BP sites.
Beyond the discounted fuel, BP will also become a partner in the Woolworths loyalty program, which is good news for the Qantas frequent flyer program and BP customers but not such good news for Virgin Australia and its private equity partner, Affinity Equity Partners, in their Velocity rewards business.
For Caltex, of course, separate to the lost opportunity to dramatically increase the scale of its convenience store network, is the loss of wholesale fuel volumes that will occur if and when BP displaces it as the supplier to the Woolworths outlets.
The core of the BP relationship with Woolworths goes beyond the discount and loyalty offers.
BP has partnerships with other food retailers overseas, most notably with Marks & Spencer in the UK, where BP operates the M & S “Simply Food’’ stores.
Under the deal announced today it will partner with Woolworths, leveraging its supply chain and the Metro brand as well as BP’s experience in convenience store offers, to jointly develop a new “Metro at BP’’ format that will result in up to 200 BP stores being upgraded.
It is the partnership nature of the relationship and the increased visibility and expanded footprint for its Metro brand that excited Woolworths, whose team visited the UK to see the BP/M & S operation.
The cash will also be important, even though the deal will take at least 12 months to be consummated and the cash received.
Banducci has a balance sheet that, after the Masters debacle, is stretched and investors who are concerned about the sustainability of the group’s credit rating and dividends in an environment where the price competition is lowering the rate of earnings growth across the sector.
The sale proceeds will shore up the balance sheet and remove those concerns, as well as giving Banducci the financial capacity to accelerate his planned major store refurbishment program.
With the loss-making Masters buried, and the profitable (but not spectacularly so) petrol business conditionally sold, Banducci’s chairman, Gordon Cairns, has dealt with the two non-core businesses in the group.
The fate of the “other’’ loss-maker, the BigW discount store business, has yet to be decided but, having lost the division’s CEO, Sally Macdonald, within a year of her appointment, its continued existence within the Woolworths portfolio is obviously in question given the decisiveness of the “new brooms’’ now sweeping through the group.
There is a very visible potential obstacle to the deal with BP being concluded, given the intensity of the Australian Competition and Consumer Commission’s interest in the petrol retailing sector.
The ACCC is the key regulatory hurdle for the deal (Foreign Investment Review Board approval ought to be a formality given BP’s long history and major investments here).
The minimum of 12 months before the parties are expected to complete reflects both the complex logistics of changing fuel supply from Caltex to BP but also its sensitivity for the competition regulator.
While BP is a relatively less sensitive prospective owner/operator of the Woolworths sites than Caltex, the clear market leader, its acquisition of the Woolworths network will result in a significant increase in BP’s market share.
How significantly the ACCC will regard consolidation at the wholesale end of the market is unclear, given that the majority of BP’s outlets (around 75 per cent) and about half the Caltex sites are not company-owned, but dealer-operated. The dealers control the retail prices.
Adding 527 Woolworths’ sites to its own 350 or so company-owned sites would, however, represent a major change in the structure of the sector, a very significant increase in concentration and an expansion of the petrol “shopper docket’’ schemes the ACCC doesn’t like, albeit offset to some degree by the blunting of what has been Caltex’s clear market leadership.
The other major players in the sector are the Shell-branded, Vitol-owned network that supports the Coles Express convenience and petrol discount offers and controls about 700 sites, the 7-Eleven alliance with Mobil, United Petroleum and Puma Energy.
Given that there will inevitably be some overlap between BP’s network and Woolworths’, it is conceivable that BP could offer a concession to the ACCC by offloading some owned and/or operated sites to its competitors.