Petrol deals a blow to the average consumer
Australian Financial Review, 20th August 2003.
 Joshua Gans and Stephen King

Coles has rolled out its petrol discount scheme with Shell across Melbourne, with plans to extend it nationwide by mid-2004. (Woolworths started a similar scheme with Petrol Plus in 1997.)

The deal has been approved by the Australian Competition and Consumer Commission and the RACV has claimed it will be good for motorists. But which motorists?

Since the schemes were launched if you spend more than $30 at a Coles, BiLo or Woolworths supermarkets, you automatically get a 4¢ per litre discount on any petrol purchase (at participating outlets). This sounds good, until you look more closely.

Customers with vouchers are presumably willing to pay a pump price of up to 4¢ more at either Shell or Woolworths Petrol Plus than at rival petrol stations. After all they get a 4¢ per litre discount.

For these customers, Shell or Petrol Plus can raise its prices up to 4¢ higher than rival petrol stations without losing any sales. So what do we expect them to do? Raise their prices by 4¢ per litre.

Of course, without a voucher you get no discount so you will want to fill up elsewhere. And here is the problem. Facing less competition, rivals of Shell and Petrol Plus, including independents can now raise their pump prices, too. In fact, they can push their prices up by just under 4¢. So long as they are cheaper than Shell and Petrol Plus, they will get the rest.

So overall we expect all petrol stations to raise their prices by about 4¢ per litre.

Who wins and loses? If you are single and spend more than $30 per week at Coles or Woolworths you are probably a winner. A two-car family needs to get about two vouchers a week to be winners. But even then, the winnings will be small. Your discount is eaten up by the higher pump price.

What about the petrol stations and supermarkets? Shell and Petrol Plus along with their associated supermarkets look like winners. They have a group of captive customers with vouchers and have raised the petrol price to every customer without a voucher.

The rival petrol sellers also look like winners. So long as there are enough customers who do not have a voucher handy when they need petrol, these rivals can sell petrol at a higher price.

But the big losers are the customers who do not have a voucher when it is time to fill up. The elderly and single poor, who do not spend enough at a supermarket to get a voucher, are big losers. So, too, are poor families who shop around for cheaper food rather than just buying at a convenient supermarket.

The so-called discount scheme will force these poorest households to pay more for their petrol.

You might think that our predictions here are too dire. Let's wait and see. Perhaps some rival petrol retailer will try to take advantage of this, offering real discounts on petrol to build up market share. Or maybe all the rest of the supermarkets, green grocers and butchers will find a way of offering discount vouchers for petrol at the remaining outlets. Then we will be back where we started. For the moment, simple economics tells us no petrol consumer will win out of this.