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Wesfarmers and Woolworths petrol businesses under threat from Costco

Costco (NASDAQ: COST), with its US$51 billion market capitalisation, is the eighth largest retailer in the world. Having first opened for business in August 2009 in Melbourne’s Docklands precinct, Costco now has a store in not just Melbourne but Canberra and Sydney as well.

According to a report in the Sydney Morning Herald the second Sydney site for Costco, which is due to open later this year, will feature a petrol station with nine fuel pumps. The SMH article suggests that Costco is confident its fuel prices for members will be the lowest in the market.

It’s a claim that should make Australia’s major supermarket chains sit up and take notice. They are already under increased pressure from Aldi, and with Costco aiming to open five stores within the next 12 months as well as launching a discounted fuel offer, the competitive pressure is set to increase further.

Wesfarmers (ASX: WES) — owner of Coles — reported that the Coles Express division, which represents fuel and convenience store sales for the group, reported earnings growth in financial year (FY) 2013 of 33% to $165 million on sales of $8 billion (up 4% year-on-year). Growth in total sales was helped along by a 5.4% increase in total fuel volumes and a 1.5% increase in convenience shop sales. However on a comparable Coles Express outlet basis, fuel volumes were up by a more modest 2.3%, while shop sales actually declined by 0.8%.

Woolworths (ASX: WOW) operates its petrol division under a supply partnership with Caltex (ASX: CTX). For the year ending June 2013, Woolworths reported earnings before interest and tax of $137.7 million from its petrol division, representing a normalised gain of 6.2% on FY 2012.

Woolies reported a 1.4% fall in petrol volumes on a normalised basis and also recorded a 0.8% decline in sales with management highlighting lower average fuel prices as a detractor. The move to more efficient cars and reduced reliance on fuel discounts also didn’t help fuel sales. The petrol division did however record solid growth in merchandise sales. On a normalised basis, merchandise sales were up 6.4%, while on a comparable store basis sales grew 2.4%.

Foolish takeaway

Although Costco and Aldi’s footprints in Australia are currently small, the competitive threat to the majors should not be underestimated. It will be a long time before newer entrants could ever establish a substantial “local” presence, however even as “destination” supermarkets, they could squeeze the margins of the majors and hence damage their profitability.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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