Accord reached on petrol prices

The ACCC has finally reached an agreement with Woolworths (ASX: WOW) and Coles, owned by Wesfarmers (ASX: WES), over long-running petrol discount schemes at their branded service stations.

Currently customers can receive discounts of up to 45 cents per litre by spending a certain amount of money in the supermarket giants’ grocery stores. Such large discounts are currently subsidised from profits in the grocery business, and were thought to reduce competition in the petrol retailing market by allowing one group of retailers an unfair advantage.

This will end from January 1 next year, with Woolworths and Coles agreeing to limit the price of discounts to no more than 4 cents a litre. Discounts in excess of 4 cents a litre may still be offered, however all discounting must be funded entirely from within the petrol retailing business.

It will be interesting to see the impact of the reduced discounts on the petrol retailing market next year. Without the large discounts, consumers may no longer be induced to go out of their way to buy Woolworths or Coles-branded petrol, instead shopping where is most convenient for them.

As I wrote in my article last week, any impact to Coles and Woolworths will depend on the point at which a discount becomes psychologically (or financially) appealing. I personally will not be driving out of the way for a discount of 4 cents per litre (which saves me $2.80 on a 70-litre tank), and my car has one of the largest petrol tanks on the market.

Foolish takeaway

Coles and Woolworths may instead have to gain customers through the usual methods of service station placement and in-store service; an area at which both already excel. It may be that the discounts will have no difference on petrol profits, as reduced volumes could be offset through higher margins caused by lower discounts. Investors may have to revisit the FY2013 annual report after FY2014 comes out to see if there are any adverse impacts to Woolworths or Wesfarmers.

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Motley Fool contributor Sean O’Neill doesn’t own shares in any company listed in this article.

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