Woolworths and BP need to dust off their Plan Bs

The collapse of BP’s proposed $1.8 billion acquisition of Woolworths’ fuel and convenience store business, while perhaps predictable given the stance of the competition regulator, represents a missed opportunity for both and a forgone opportunity to galvanise the convenience store sector.

It isn’t a death blow for either company’s aspirations in convenience retail – both have “Plan Bs” – nor is the failure to cash out the network as significant for Woolworths as it was when the deal was announced in December 2016.

The longer the deal remained unconsummated, the more obvious it became that BP was struggling to come up with concessions that would satisfy both the Australian Competition and Consumer Commission and BP’s strategic and commercial aspirations.

The ACCC was concerned about the increase in the presence of BP-branded outlets when Woolworths’ 531 sites were added to BP’s existing 1400, even though BP owns and operates only 369 of its existing sites. Fuel prices at the independent sites are set by their operators.

While BP knew from the outset that it would have to offload a significant number of sites to placate the ACCC, and indeed offered sizeable packages of sites to the market, it appears it came to the conclusion that the nature and scale of divestment required to be certain of ACCC clearance would undermine the appeal of the deal.

The collapse of the deal is disappointing because it had the potential to drive competition and innovation beyond the retail fuels market.

A core element of the sale was a retail joint venture between BP and Woolworths, modelled on the successful BP relationship with Marks & Spencer in the UK. They planned to roll out a new “Metro at BP’’ format in BP-operated outlets, underpinned by an entirely new small-store supply chain.

Other fuel and food retailers, like Shell and Waitrose in the UK, have tried to emulate the BP/M&S strategy but with less success.

Woolworths, where CEO Brad Banducci has made no secret of his ambition to greatly expand his small store network, was enthusiastic about the ability to leverage the scale and the supply chain that would have been developed had the deal proceeded.

With Caltex aggressively pursuing its own innovative convenience store strategy and Coles also seeing opportunities to expand its offer, the joint venture could have really ignited the competitive intensity and innovation in the sector.

BP, with a global strategy of expanding its convenience offer, won’t abandon its ambitions in this market but will now presumably have to find another partner, or get access to a supermarket supply chain, to realise them.

When Woolworths announced the deal with BP it needed the cash. It had invested more than $1 billion in price, at a cost to its earnings, to try to revitalise its supermarket sales after years of being outperformed by Coles. It was still finalising the exit from the costly Masters’ disaster.

Banducci wanted to use the proceeds from the sale to fund a major refurbishment of his store network but was also excited by the potential of the “Metro at BP’’ partnership concept.

As it happens, the December announcement of the BP deal marked the start of six quarters of comparable stores sales outperformance by Woolworths. That began translating into strongly profitable sales growth in the second half of last financial year, when supermarket earnings jumped 13 per cent. In the first half of this financial year, they were up 11 per cent.

That rebound, and a very significant reduction in the rate of losses within Big W, has relieved the pressure on Banducci to cash out his petrol retailing operation. It won’t, however, have reduced his desire to do so.

“While it would be difficult … to replicate the benefits of the BP deal, there’s no doubt Woolworths can still cash out its network.”

The Woolworths petrol operation sits within the group’s balance sheet as a “discontinued operation”, held for sale. For Banducci, it’s a non-core business which, while profitable – it makes close to $160 million of EBIT a year – is a low margin and volatile line in his results.

While it would be difficult, perhaps impossible, to replicate the benefits of the BP sale and convenience partnership, there’s no doubt that Woolworths can still cash out its network. Indeed, Banducci has said there have been expressions of interest from a lot of parties.

Offshore convenience store operators, private equity groups and independent fuel retailers have been touted as potential buyers, while there has also been speculation of an initial public offering. The imminent $5 billion float of the old Shell downstream businesses – the retail network and Geelong refinery now known as Viva Energy – will indicate the level of investor enthusiasm for the sector.

Just as BP can’t exactly recreate the relationship it would have had with Woolworths, Banducci will struggle to find his perfect match if he wants to pursue a similar convenience store strategy with whoever ends up with his fuels business.

He does, however, have the existing relationships with suppliers and the logistics network from which to develop a more specialised small store supply chain if he does.

 

Extracted from SMH

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