Last year, Z Energy announced its plans to buy Caltex’s New Zealand operations. The merger was approved in April 2016, and took effect last week on 1st June.

This is quite a shakeup in the fuel retailing market – we’re going from four major companies to three – but in a way, the consolidation was inevitable, and reflects the way the market has been heading for a number of years.

A 2008 report identified 1,265 petrol stations, with 20.2% branded as BP, 18.5% as Shell (now Z Energy), 17.0% as Mobil and 16.9% as Caltex. The remaining 27% were independently branded. It’s all a bit more complicated than that, though, since many of the ‘corporate’ branded stations were actually run by franchisees (who may or not have the ability to set their own prices), and most of the ‘independents’ are, at least, supplied by the big corporates.

Fuel retailing (aka petrol stations) has changed a lot over the years. 50 years ago, every small town had one, and they were often “garages” as well, servicing and fixing cars, changing tyres and providing all sorts of other services.

That’s changed, and most of the small stations are now gone. Instead, modern petrol stations tend to be large, selling much higher volumes than they used to. They don’t service your car anymore, but they have a heavy focus on food/ convenience items sold in store.

As a result of this, the number of stations has dropped from around 3,800 in 1976 to 1,265 in 2008:

Petrol station numbers historical

Numbers have levelled out over the last few years, but we’re now sitting a little below 1,200.

On the topic of “food/ convenience”, the 2008 report mentions that for Australia, non-fuel sales actually make up about 70% of the gross profits. The report also makes a rough calculation which suggests similar figures for New Zealand. As surprising as it sounds, petrol stations actually make most of their money from what they sell in the store, rather than petrol.

Since 2008, many of the big oil companies (i.e. Shell, Caltex, Mobil, BP) have been selling their fuel retailing businesses, not just in New Zealand but in a number of other countries. Mobil were looking to sell in 2009, but nothing came of it. Shell sold their business to what is now Z Energy in 2010. And effective from 1 June 2016, Caltex has also sold their business to Z Energy, which brings us up to the present day.

In cases like this, the Commerce Commission looks very hard at whether the merger will “substantially lessen competition”, both at the national level and for smaller markets (e.g. a town or city). They’ve decided that, provided Z Energy sells 19 petrol stations to other operators, the merger can proceed. For example, Z Energy and Caltex are the only operators in Kaikohe, so the Commission will probably require one of the stations to be sold to BP, Mobil or another company to keep the market competitive.

Z plan to keep the Caltex chain under separate branding – they currently have two years’ rights to retain the Caltex branding, and presumably have the choice of either creating a new brand (Y Energy: you heard it here first) or paying to extend their rights over the Caltex brand.

Z Energy will now have a much higher market share, so it’s unlikely to go through any other major mergers. However, it’s quite possible that some of the smaller companies that compete with Z could merge. Even a merger of BP and Mobil isn’t out of the question – this would be similar to what happened in the supermarket industry a decade ago.

Foodstuffs (operating New World and Pak ‘N Save) had a commanding market share, but the two smaller companies (Woolworths, Countdown and Foodtown) were allowed to merge. Supermarkets are now essentially a duopoly, with Foodstuffs on the one side and Progressive (who have rebranded all their supermarkets as Countdown) on the other.

Even if something like this happened with BP and Mobil, there would still be more competition in the fuel retailing market than there is for supermarkets.* There are more outlets in total, and independents also have quite substantial market share.

* Probably. I’m oversimplifying things, and there are also other markets which would get considered besides just petrol stations: wholesaling, refining, bitumen and so on.

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  1. A contact in Z told me that the plan was to keep the Z and Caltex brands separate, so following the Foodstuffs model rather than the Countdown one.

    And petrol stations follow a similar model to airports, making more money out of ancillaries (e.g. retail, parking) than out of what appears to be their core product.

    1. That’s an odd decision. Pak N Save and New World operate differently, one focusing on a perception of value and the other on a perception of quality. As far as I’m aware Caltex and Z don’t have that same difference.

      1. I think Z will focus on quality and service, caltex on the lower end market. Total guess based on no facts!

    2. I wonder if that will be the initial idea until they merge them a bit further down the road for synergies.

  2. Ha. Gas stations are the video stores of the 2020s. Watch em all go… Just a question of how long this takes.

    1. Why concern yourselves about competition at the retail end of the process? NZ refining is the sole oil refinery in NZ and has a shareholding that is split between the Govt and the Energy companies. On top of that NZ imports refined gasoline to address the supply shortfall from Whangarie. The Energy companies take it in turn to negotiate the purchase of these imported cargoes and then split the costs.

      1. If only the government owned a stake then at least NZ inc would get a cut. Unfortunately it was paid for by government and basically handed over for free to the oil companies. This is where they make most of their money. Their overall margins including refining have tripled in the last 3 or so years. If they hadn’t of increased their margins then petrol would probably be about $0.25 per litre cheaper (which is why they have no problem doing $0.10 off specials etc).

        1. I stand corrected. I assumed the Govt still had a vested interest. That still does not alter my point that the bulk of the money is made at the refinery and not downstream in retail. As you say, refining margins have strengthened in the last few years, with not enough of the savings passed on to the end users. The NZ energy sector is too small to encourage real competition. In order to bring a competitive edge there would need to be independent storage with access to pipelines and distribution points. No one is going to invest in that for a small economy like NZ.

        2. Yes there should be some regulation (perhaps some sort of price comparison to international margins) to stop the price gouging. It is effectively a monopoly/collusion since they are all in on it (except Gull) again which is why where Gull stations are the others end up price matching.

        3. As Bruce mentioned NZ refining’s major shareholders are the big oil companies, along with a significant proportion listed on the sharemarket, so the oil companies are doing well out of high margins on refining at the moment. This is pretty typical in a commodities market, when the commodity prices rise so do retail, but when commodity prices fall, the middle man generally increases their cut, along with a more modest fall in retail prices. This is because the customer becomes used to higher prices and increase consumption even with a relatively modest fall in price as they appear cheaper even if they are much more expensive they were 15 years ago.

        4. I totally agree that the Energy companies are able to set pricing to a level that they can always make money, however to be fair, refining margins over the past 10 years have mostly been negative or poor with an exception of the last 2 years. With crude rising rapidly in value and yet product demand being static, margins in the main markets (Europe/USA/Singapore) are likely to get crushed.
          Hopefully NZ refining forward hedged the cracks (the value of the product minus the crude) and will continue to enjoy profits. I doubt this though, refining companies are usually very poor at recognising pricing risk.
          The biggest issue facing the NZ motorist will be the strengthening US dollar. That will have an impact on pushing retail fuel prices higher as again, I bet the Energy companies did not hedge the FOREX.
          Ditto with Air NZ – top tip, if you are considering an overseas trip, book your flights now before airfares go up again.

    2. Disagree, Gas stations will merge into energy stations, Z energy already starting the transition both in name and in installing quick chargers. They will probably end up having more cafe style services for profit, e.g wild bean

  3. “petrol stations actually make most of their money from what they sell in the store, rather than petrol”

    That explains the ludicrous “pre-pay” policy at NZ fuel outlets. More than 20 years ago I was paying at the pump in the UK and the US and that facility was widespread. They want you to come into the shop so that they can sell you overpriced high-margin junk.

    1. Surprisingly Z reintroduced prepay at the pumps I believe because their research found those who just want fuel will not buy any of the other overpriced retail goods they have in the showrooms anyway and I concur with that 100%. So good on Z. More’s the pity with Mobil who don’t have prepay and seem to refuse to turn the pumps on unless you’ve paid and hence get minimal business from me.

        1. I ignore the pre pay signs, put the nozzle in the car, and the guy in the store turns it on.
          I too get the feeling it might not work like that if you are of different ethnicity

        2. I’m fair skinned, dress professionally, drive a sign written company car and they still don’t turn on for me. So this is wrong.

      1. I wish BP would do the same, at least on some lines, so i don’t have to wait for ten minutes behind an empty vehicle while some numpty queues up inside for coffee that just can’t wait!

    2. Prepay is the only way I buy my fuel. The Gull on Karamu Rd in Hastings is self-service with pumps only and no shop. And the great thing is it is ALWAYS at least 5c a litre cheaper than anywhere else. I like to laugh at the suckers filling up at the Z across the road who are at lot of the time paying 10c a litre more.

    1. By the time driverless cars are commonplace, I doubt they will powered by petrol – most likely they will be electric.

      In any case, you can easily have an automatic refill/recharge station. Or recharge stations that are staffed so human robots can plug in the driverless car.

    2. They won’t. Because they’re pie in the sky nonsense, a wet dream for PT-hating, car-loving dinosaurs but not achievable in the real world.

      1. I think most of the world disagrees with you.

        It is essentially a software challenge only at this point. (not a physics challenge like flying cars)

        It will come in gently as advanced cruise control systems (like Tesla autopilot) requiring driver supervision, until they get statically safer than human drivers, and we gain enough confidence to allow un-maned cars on the road.

        Even the humble Rav 4 has dynamic cruse control, and lane assist…

        1. Yes, it’s just a software challenge, but that’s no minor thing. Lane assist, Tesla autopilot etc only go a tiny fraction of the way towards full driverless cars requiring no user input, and don’t actually address the real challenge. I actually think the physics problem of flying cars etc is much more likely to be solved. Actually it pretty much has.

          Based on my (admittedly limited) understanding, the artificial intelligence required to make fully autonomous cars work in all situations, with no errors, with no accidents, is way beyond anything we have now, or are likely to have for years if not decades. Or maybe ever.

        2. “with no errors, with no accidents” Conceptually it would only need to be better than a human driver, to make logical sense to allow them on the roads.

          Look at the DARPA Urban Grand Challenge for a guide as to what was possible way back in 2007. I’m not an expert, but my understanding is machine learning has come on heaps since then.

          Take a look at the google program, they have logged heaps of distance (with human supervisor), and minimal incidents.

          It will take time for them to filter into the fleet, But I would bet we will see the first comply unmanned car on the road within a decade.

          In regards to flying cars, the physics problem is only solvable by throwing massive amounts of energy at it, to the point that they are not feasible.

  4. It’s Gull that sets the bottom line prices in NZ. You can always tell that you are near one when the other fuel retailers prices are lower then elsewhere. So as long as they stay we are protected to some extent from the remaining 3 major companies doing what they feel like!

    1. Be careful with the Gull fuel. Lots of enthanol in it so it is very bad for your mower or any other small petrol engine.

      1. Their 91 grade is ethanol free. Their 98 grade is a well advertised 10% ethanol blend. Most modern cars are E10 compatible, but it is not recommended for marine use, and is incomparable with some smaller engines, and some very old cars.

    2. Bollocks.

      Mobil is clearly cheaper. I am also never certain if Gull’s prices are before or after the 4c off from whatever supermarket or in shop offer is in the order of the day because some years ago one we went to had this fairly deceptive after price advertised.

      That being said, fuel is clearly a lot cheaper (10 to 20 cents I reckon) between Papakura and, maybe, Manakau than it is north or south of this zone.

  5. Interesting post – was aware of the decrease but not the magnitude of it which has been quite substantial.

    Quick note for those interpreting the graph: The x-axis is not time (the spacing is all over the show). e.g. the decrease from 85 to 86 is dramatic considering it’s just 1 year.

  6. Competition only happens assuming if the franchised owners is allowed to set any price without any pressure from the franchisees and supplier.

    Also supplier could have a big role to play. If there is only one or two supplier, it is easy for them to control the margin.

  7. Good aspect is I think I received not long back a Z Energy marketing email saying that they are rolling out electric car charging stations throughout their existing fuel stations.

  8. Part of the reason for the decrease in petrol stations is of course down to the fact that cars get much better fuel economy than they used to. So most modern petrol cars can get around 600-700km out of tank compared to 500km previously. Diesels get anywhere from 700-1000km out of tank so less need to stop for fuel.

      1. Had a look at that. Firstly the US figures don’t really relate to NZ. The NZ figures were mostly for cars manufactured in the 90’s and 00’s whereas now a few years down the track most cars are manufactured in the late 90’s/00’s/10’s (so basically all more modern fuel injected systems rather than older carburetors etc along with other improvements). Manufacturers have had to aggressively reduce fuel consumption in cars over the past decade as fuel prices went up a lot so the fleet average consumption is now lower than it would have been in that data. But yes cars have gotten bigger so use more fuel in that regard.

  9. Gidday John, Jonathan from Z here. One of your correspondents is right, Z will follow a dual brand model. The Caltex branded service stations are all independently owned and operated and set their own prices. Z will simply wholesale fuel to them, so no increase at all in retail market share. Very different business models which is one reason for two distinct brands. Thanks

    1. Thanks for that confirmation, Jonathan – I hope it means that the Caltex AA discounts will continue!

  10. Jonathan – Please advise where ‘Challenge’ service stations are in all this re ownership and branding?

  11. Before my time as a retail rep for Mobil (in the early 1990s) service stations were allowed to sell gasoline only as a side business – their primary business was mostly (always?) a workshop. And oil companies could not own sites (I think perhaps more than a certain number). Then deregulation hit, and the workshop tie-in was removed and oil companies were allowed to own service stations. That led to a land grab for the best sites, and a massive build and upgrade program for all four companies. It was fun times.

    Meanwhile those old small stations were not just getting out-competed by the newer larger ones, but also had small steel fuel tanks that were eventually going to corrode and leak, and were inefficient to fill as they needed smaller tank-trucks and more frequent deliveries. So at Mobil (for example) they replaced the small tanks with larger fibreglass ones, or just removed them and remediated the soil (I wish they would cough up for the damage to Wynyard).

    Those smaller sites were often open for shorter hours anyway as they were run by one or two (a couple) of owners, and they closed up when they went home. As a rep we had to help the stations grow into big ones – e.g. by nudging them towards 24/7 operation and helping to upgrade the site, or to hand them off to a distributor or to close them. Today the distributors, like NPD, have a range of rural stations and a loyal following, while the larger companies focus on the bigger stations closer to the depots.

  12. I think the shift towards 24/7 everything, and increased compliance costs has a lot to do with declining service station numbers.

    For example I often drive between Auckland & Tauranga or Rotorua via matamata. There is fuel available between auckland and matamata, but it is a small station(s), and I can’t be bothered checking the hours the station operates, so I never leave Bombay or Matamata with less than 1/4 of a tank. As such I never need to refill in the middle.

    Compliance costs (i.e. replacing tanks with double skinned ones, regular out of service inspections, etc) mean low volume petrol stations are largely unprofitable.

    Also notable:

    Some people prefer larger petrol stations:
    – Fuel turnover is high, hence chance of getting stale or contaminated fuel is reduced.
    – Better security – Generally well lit with security cameras and lots of people around
    – Better range of Sandwiches, Pies etc
    – Generally have the most high profile sites.

    Between bigger car fuel tanks, and better fuel economy, drivers need to buy fuel less often. I hate buying petrol, I have a corolla with 45L tank (good for about 600km on the open road). For me a 1000km range would definitely be a salable vehicle feature. Of course being able to plug in at home and never go to a petrol station would be better still.

    Internationally petrol stations are being squeezed out by higher value uses of their often prime sites. The last gas station in SOHO (lower Manhattan, new york) closed two months ago.

  13. Consolidation in NZ is interesting. While I can understand that this merger was approved, the supermarket mergers approval were equal to highway robbery…
    One should also remember that petrolstations have, in Europe, been asked to vacate residential areas due to environmental rules. Having plenty of cars line up to fill up petrol in residential areas doesn’t work anymore. I hope such environmental regulations will arrive in NZ too. After all it will only affect a handful of cities and with our winter air being of very poor quality we need all improvements we can get.

    The small stations, just a few pumps, who for some reason manage to discount their fuel more than any other station of the same brand, for example the one in Three Kings are examples of stations that decent legislation would make unprofitable.

    Talking fuel, our love for the money those cruiseships brings comes at a cost. A pretty steep such…

    Does anyone know what Auckland Harbour regulations are. I know sensitive marine areas like the Baltic and the North sea doesnt allow heavy crude and have strict sulphur legislation in place. I also know most ports in Europe have strict rules, something that has forced the cruiseships to have tanks with the dirty stuff and tanks with the clean stuff and shift to the clean stuff when they approach the port area.
    I know we in NZ tend to get a tad older ships so I was wondering if anyone had ideas about the oil used here?
    Does Auckland Harbour / hauraki gulf etc have special rules on what oil ships must use or are we, as we way to often are, late to realise whats happening.

    1. I’m pretty sure we don’t require ships to switch over to cleaner burning fuels in our waters, so they just keep cheapest fuel they can. For most ships it is heavy fuel oil, but some can directly burn crude oil.

      We don’t require cold ironing either. (where ships must plug in when in port and shut down their generators), So ships will run generators 24/7 while in our ports.

  14. Z’s new BioDiesel Plant and distribution infrastructure is very nearly complete. They have spent around $30m on this so it will be interesting to see how many Eco-Warriors support this product when it gets to the retail stage. As an aside, the HS&E regime at the Refinery & Wiri Terminal has increasing cost implications for retail fuel prices.

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