Woolworths (ASX: WOW) and competitor Coles, owned by Wesfarmers (ASX: WES), are back in the ACCC's bad books after further disagreements over petrol discounts. In early December last year, the retailers agreed to limit discounts to 4c a litre. The ACCC is launching federal court proceedings against both retailers because they are continuing to offer discounts larger than 4c/litre to customers who purchase items in a petrol station.
Coles customers who spend $30 or more in a supermarket are entitled to 4c per litre off at their specific petrol outlets. Those customers can then gain a discount of an extra 10c (for a total of 14c) per litre by spending $20 or more on items other than petrol at a petrol station. Woolworths' customers receive 4c per litre off for spending $30 in a supermarket, and can get an extra 4c (for a total of 8c) per litre off by spending $5 on items in a petrol station.
Not being privy to the full contents of the agreement with the ACCC, it was my understanding (and Coles' and Woolworths' apparently) that discounts of 4c per litre could be offered through the supermarket promotions, whilst larger discounts could still be offered although they had to be funded entirely through the petrol business and not subsidised by supermarkets.
However I also believed that all petrol discounts had to be funded from within the petrol business, even if the voucher was collected at a supermarket. I was further surprised to see Woolies and Coles offering to combine discounts in an additive manner – especially when such discounts can reach 14c per litre – since I feel that this definitely violates the spirit of the petrol discount limits.
The ACCC apparently agrees with me on the latter point, as it is seeking declarations, court costs and other orders against both retailers in proceedings which are set to begin on April 3. It may prove to be a case in which both parties are partially correct, which should hopefully lead to a clarification of the agreement.
Foolish takeaway
I wrote last year that shareholders had little to fear from discounts or lack thereof because petrol retailing makes up such a small percentage of both companies' revenues. It's becoming apparent that volume is the name of the game with these discounts, although I still believe that even if the discounting is strictly limited to 4c a litre or abolished entirely, it will have a limited effect on earnings. Court proceedings could prove to be considerably more expensive, although probably not in this financial year.