Z Energy counting the cost of ‘Gull effect’
Unrelenting competition from discount petrol brands like Gull and Waitomo has seen Z Energy forced into the sort of price discounting you can bet it never intended to resort to
A telling graph, released by Z Energy yesterday, shows over the last three months, the country’s biggest petrol retailer sold considerably more than 95 percent of its 91 octane petrol at below its theoretical benchmark price.
Some weeks it was pretty much 100 percent.
This level of discounting, shown by the orange/brown bars on the graph below, compares to only around 70 percent of its petrol being discounted at the beginning of last year.
Meanwhile, the purple line on the graph shows a consistent increase in the amount by which Z is discounting its petrol. In June and July last year it was offering between zero and 5 cents discount; now it’s 15-18 cents off.
So what happened? Unprecedented growth in unmanned and no-frills petrol retailers like Gull, Waitomo and the South Island’s NPD is what. Waitomo alone added nine new self-service stations last year and is hoping to add another nine this year, according to chief operating officer Simon Parham.
Parham unsurprisingly doesn't relish the term the “Gull effect” - he prefers "the unmanned effect". But whichever you use, the impact for customers is that when a discount brand opens up a petrol station in a particular town or suburb, the mainstream petrol companies with stations in the same area are forced to cut their prices. The difference can be as much as 20-30 cents a litre.
As the number of areas without a discount station shrinks, so does the opportunity for the big operators to charge higher prices. Hence the level of discounting at Z.
Parham says the fall in petrol prices is largely unrelated to government moves to intervene, or to Prime Minister Jacinda Ardern’s comments in October 2018 about consumers being fleeced at the pumps. Instead it’s all about competition.
“We said to the Commerce Commission as part of the retail fuel market study that it was just a matter of time as our network expands and unmanned sites enter different markets that it would bring competition and choice to those markets.
“We’ve seen a 20-30 cent drop in Wellington, and Christchurch is now pretty competitive, led by Z reducing prices as it tried to stem the flow of volume as a result of competition from NPD.”
A complicated market
Z Energy chief executive Mike Bennetts says the increase in competition has made the petrol retail market significantly more complex.
Pricing and profitability “is now driven at a site-by-site level, when before it was based on reasonable profitability across the whole country”, he says.
It’s a far cry from the trajectory envisioned in Z's early days of the company, when it took over Shell’s New Zealand petrol stations in 2010 and started rebranding them in 2011.
Z Energy was originally owned by Infratil and the NZ Superannuation Fund; it was listed on the NZX in 2013. Management, including Bennetts at the helm, planned an upmarket New Zealand-owned retail brand, with the profit margins to go with it.
One of the company’s first moves, according to a 2017 MBIE report, was to shift pricing to benefit the company - at the expense of customers.
Shell's strategy had been to quickly lower prices if crude oil prices fell and be slow to increase prices when competitors did, the report said. Z abandoned that. Instead it tried to lure customers using quality more than price.
As Bennetts said in 2011: “We’ll be delivering a faster, friendlier, more helpful service across all of our sites and top quality espresso coffee and pies, and upgraded bathrooms at the larger sites in our network.”
The company’s 2013 prospectus, which valued Z at $1.4 billion, more than four times the original purchase price, anticipated the profit margin increasing by 1.2 cents a litre the following year.
Margins were so strong BP quadrupled its profits, despite selling less petrol than the year before.
And for a few years the strategy was successful. The 2018 annual report shows dividends increasing by around 10 percent each year from listing in 2013 to a 32.3 cents per share in the 2017-2018 year.
Margins per litre of petrol rose from 18 cents in 2014 to a high of 21.3 cents in 2016. And Z wasn’t the only petrol company cashing in.
In June 2016, number two NZ fuel retailer BP reported that margins were so strong that it had quadrupled its profits, despite selling less petrol than the year before.
But rising petrol prices and company profits left a gap for discount competitors like Gull and Waitomo to expand in the market,with their no-frills and often unmanned stations.
Z Energy’s margins per litre started to go down again. From 21.3 cents in the 2016 financial year, they dropped to 16 cents in 2018 and were just 15.5 cents in the first half of the 2020 year.
Net profit in litres, including store income, was just over 3.5 cents in the most recent half, down from 5.1cents in 2016/17, Bennetts says.
“It shows how marginal we are.”
Z dropped its profit forecasts twice in the second half of last year. In September it warned unprecedented competition and tighter margins could see profit for the year ended March 2020 down from between $450 million and $490 million to $390 million-$430 million.
In December it dropped the forecast range again to $350 million - $385 million.
Bennetts says the company has to be cunning - or at least its software does - to compete on price with its rivals, but also to appeal to a range of customers.
“There’s a broader stakeholder narrative - not everyone wants the cheapest price,” he says.
For example, Z switched two sites over to an unmanned format last year, Bennetts says. At one the model worked - people liked the cheap prices. But the other lost customers. They wanted the service they were used to.
Rather than abandon the ‘nice coffee-clean toilets-forecourt service’ model Z was founded on, Bennetts says the company is trying to introduce a range of discount products for its more price-conscious customers.
For example, Sharetank is a trial product on the Z app, which was introduced just before Christmas. It allows customers to fill up a virtual tank with petrol if they find a price they like. Then they can put that pre-purchased virtual petrol into their vehicle (as real fuel) at any time in the future, from any Z station, at the price they originally paid.
“It’s the world’s first digital fuel tank. We’ve done a soft launch and got people trying it. One of my colleagues has saved $100 already. I expect us to scale it up over the next couple of quarters,” Bennetts said.
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