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Z Energy says petrol market is competitive, pushes 'Strategy 3.0' with Foodstuffs tie-up

Thursday 3rd May 2018

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Z Energy, which today reported revenue and profit rose in the latest financial year, has reiterated its view that the petrol market is competitive as it pushes its innovation and capability-led strategy.

 

In the year to March 31, revenue surged 18 percent to $4.57 billion. Net profit rose 8 percent to $263 million, while replacement cost operating earnings before interest, tax, depreciation and financial adjustments - a measure Z uses to strip out the changing value of inventory - rose 13 percent to $449 million. 

 

The fuel industry has come under fire this week after a leaked email from BP revealed that company's pricing tactics, prompting Energy Minister Megan Woods to call in BP to explain. The sector was already under scrutiny after a fuel market study last year found New Zealand's petrol market may not be competitive, with retail margins increasing over the past five years while more expensive petrol in the South Island and Wellington aren't explained by higher costs in those areas.

 

On an investor and media conference call this morning, Z chief executive Mike Bennetts said the difference between the cheapest petrol and the most expensive petrol across the Z network was 20 cents per litre, as of yesterday, and that difference "exists in Auckland as much as across the country."

 

"This isn't a situation of provinces cross-subsidising urban centres, this is all about local individual trading markets competing fiercely on a site-by-site basis," Bennetts said. 

 

"Up until a couple of weeks ago, the cheapest place in New Zealand to get petrol - certainly in the Z network - was Invercargill, not in one of the traditional hotspots around discounting. That's moved, the current cheapest place to get petrol in the Z network is Levin. The market is moving a great deal.

 

"Part of the reason of pointing to Invercargill is it's not a market where we've observed the 'Gull effect', it certainly is an example of there being a lot more competition beyond companies like ourselves, and that manifests in price and non-price offers," Bennetts said, adding that 20 percent of industry sales go through smaller independent brands. 

 

Within its annual earnings today, Z also announced it will take over the Mobil fuel supply contract with Foodstuffs, which covers 53 New World and Pak 'n Save branded service stations, from September. It will supply those stations and its own stations will be the redemption point for discounts on supermarket dockets, if not redeemed at those supermarket stations. Its initial volume forecast for the deal is 150 million litres per year.

 

The company didn't put a dollar value on the partnership, but said its 2019 guidance reflects seven months of the financial contribution, though it doesn't expect to get any value in the current financial year because of the set-up costs.

 

Bennetts told investors and media that the deal is one of six it has been working on, and it will be in a position to name and quantify the other five, "if there is indeed still five", at its half-year earnings announcement. 

 

"It has been a long time coming from our perspective. We have a relationship with Foodstuffs through the FlyBuys activity we do, and in our own ways, each of us were frustrated around having a different relationship when it comes to fuel," he said. 

 

Bennetts said the contract came to market in the past couple of months, as it does periodically. He wouldn't reveal how long the contract will last for commercial sensitivity reasons, but said it was a "medium term" contract and Z won't have to bid for it annually.

 

The company has been moving away from an asset-led strategy to one which is capability-led through its Strategy 3.0 project. That has included its Fastlane trial, where customers can buy petrol without leaving their cars; a new app, launched yesterday; identifying 1.6 million unique named customers and 40,000 unique named commercial/SME customers; and building a predictive model for customers at risk of churn.

 

"It's really important we've got this, it's a great example of strategy in action," Bennetts said. "We've always said that we would prefer an asset-light, structural growth in volumes rather than putting lots of new service stations down on the ground: we don't think that's the way for a company like us to participate going forward. Structural changes that are asset- or capital-light are the best thing for us to do."

 

Bennetts said the current FlyBuys reward partnership it has with Foodstuffs, which replaced supermarket docket discounts, will stay in place for now, but expected that could change in the future.

 

"We've got to work with Foodstuffs to say, each of us are doing a separate thing in separate ways, what can we do together that creates a different customer experience?"

 

The company's shares have gained 1.6 percent today to $7.42.

 

(BusinessDesk)

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