Trouble in Paradise: Why Coles’ petrol prices are under investigation

Coles has been cast into the spotlight for the wrong reasons again with the corporate watchdog reportedly investigating the group’s petrol prices.

In 2014, the supermarket chain, which is owned by Wesfarmers Ltd (ASX: WES), was investigated by the Australian Competition and Consumer Commission (ACCC) for effectively subsidising fuel discounts through supermarket profits. Now, it is alleged the roles may have been reversed whereby Coles is charging higher prices for fuel in order to offset any food and grocery discounts at its supermarkets.

Indeed, Australia’s supermarket space has become increasingly competitive in recent years. Woolworths Limited (ASX: WOW) is quickly losing market share and, although Coles is still growing at a reasonable clip, international discount retailer Aldi is certainly a feasible threat to the traditional oligopoly. As such, the price tags on many items across the industry are dropping.

At the same time, petrol prices have decreased as a result of falling oil prices. In recent years, it was feared petrol prices could soon balloon out to more than $2 a litre. But an oversupply in the global market has pushed prices down significantly whereby shoppers can typically buy a litre of fuel for a little more than $1.

Right now, for instance, the NRMA Motoring & Services fuel price report showed an average price of 114.3 cents per litre for Sydney residents in the week ending 8 May.

As is being reported by The Sydney Morning Herald, however, ACCC Chairman Rod Sims said the watchdog was looking into reports that Coles Express fuel prices were 2 cents to 3 cents a litre higher than average market prices. They will also look at whether the additional profits made from the fuel sales are being used to bolster the earnings in Coles’ food, liquor and convenience store business as the company continues to make its supermarket prices more competitive.

The investigation comes after a report from Deutsche Bank analyst Michael Simotas, who said retail fuel prices had fallen 7% on a year-on-year basis in the March quarter, compared to a 2.6% decline from Coles. As noted by The SMH, this could benefit the margins in the division by 12 to 34 basis points, or $22 million and $65 million for the business in the June half.

Rod Sims reportedly said that it is unlikely to be a breach of the act, but that it is still a concern if consumers are being forced to pay more for fuel.

Of course, nothing has been proven at this point and is instead subject to investigation. However, if proven to be true, investors should only look as far as Woolworths to know that such a strategy is unlikely to work in the long-run.

After all, Woolworths focused its attention on maximising margins at the expense of consumers, many of whom have since taken their business elsewhere. Woolworths is in the process of pumping hundreds of millions of dollars into lowering prices to attract customers back to its stores, and Coles would be wise to avoid a similar situation.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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