How the rise of petrol discount schemes left motorists paying more for fuel

Tuesday, 20 August 2019

Taxes account for more than half the price we pay at the pump. (Video first published in May 2019)

Rising petrol discount schemes could be 'a symptom of high margins', the Commerce Commission said.

'In the past there have been periods of strong competition on board prices. However, in more recent years resellers have increasingly competed using discount and loyalty programmes and by offering different levels of service.'

But the commission, which released its report into competition in the petrol market, found the rise of 'discounting' was closely linked to rises in importer margins on fuel, had the effect of sorting consumers into more and less price sensitive groups, and made it harder for people to compare the actual prices.

The rise in petrol discount schemes is associated with a rise in margins for fuel retailers, the Commerce Commission found.

'Discounts appear to have increased alongside increases in the margins on board prices and the average margin across all sales,' the commission said. 'If board prices were cost-reflective, as we would expect in a workably competitive market, we currently consider that there would be less scope for discounting.'

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It appeared to the commission that discount schemes were a means of petrol service station brands building customer loyalty, and focusing motorists on the apparent generosity of discounts as opposed to comparing real fuel prices.

Z Energy said fuel discounts were confusing, but insisted they were a sign of healthy price competition.

Discounting could, the commission said, provide a way for fuel companies to avoid price competition.

Waitomo opened its first central Wellington petrol station on Hutt Rd on Tuesday.

'Discount and loyalty programmes may move the focus of consumers away from board prices and make it harder for consumers to compare prices. The programmes are costly for the fuel firms to provide and for consumers to take advantage of. It is unclear whether this approach to competing is efficient or whether consumers might prefer, and be better off with, less discounting and lower board prices,' the commission said.

The fuel companies reject the commission's view on discounting.

'The increase in the prevalence of loyalty programmes is also indicative of strong competition to retain customers and is of substantial benefit directly to customers,' BP told the commission.

Z Energy said: 'Competitors' strategies are continuing to evolve over time in a manner that suggests competitive retail markets and include: (a) Greater focus on 'off price board' discounting strategies through loyalty programmes, such as AA Smartfuel and Mobil Smiles.'

Fuel discount schemes also allowed petrol retailers to charge some motorists a high price for fuel, the commission concluded.

Gull and Waitomo have been having an impact on fuel prices when they open new service stations. The Commerce Commission found, however, that when that happened, the big guel companies lifted petrol prices in low competition areas to compensate.

'We currently consider that board prices rising alongside discounts is consistent with loyalty programmes and discount vouchers serving as a form of price discrimination – where higher prices are charged to less price sensitive customers that do not use discounts or participate in loyalty schemes.'

'Larger discounts benefit customers who are motivated to shop around for the lowest prices (more price sensitive). Customers that are not focused on seeking out the lowest price (less price sensitive) do not benefit from these discounts. Customers paying board prices would be better off if discounts were not present and retailers charged a lower, uniform price to all consumers.'

This effect would intensify, the commission believed, with price sensitive customers, and big buyers of fuel, getting personalised deals that other customers aren't offered.

'Retailers are increasingly looking to use data and information obtained from discount and loyalty programme participants to make personalised offers to consumers based on behavioural insights rather than offering across the board discounts to programme participants,' the commission said.

'We have viewed documents from a range of fuel firms identifying potential opportunities to build customer loyalty by using customer data to develop more targeted offerings and engaging with consumers on a more individualised basis.'

'As discounts become more personalised, the potential for the gap between those that pay a discounted price and those that do not, may grow. Personalised offers could make price discrimination strategies more effective. Personalised pricing can also be perceived as unfair.'

Other findings of the report were that petrol retailers internal communications indicated that budget fuel chains Gull and Waitomo moved prices where they opened, but that the big service station chains recouped margin lost in high competition areas like Auckland, by lifting margins in low competition areas in places like the South Island.

'Evidence … suggests that regional price increases are used to restore margins and offset volumes lost in other (more price competitive) regions,' the commission said.

Consumer NZ told the commission: 'Usually the discounted price isn't the cheapest – it's an illusion of 'getting a discount' rather than getting the best price … We think it'd be fairer for all consumers without fuel discounts and loyalty programmes. Pricing would be transparent and we could fill up as and when needed, at our choice of cheaper or convenient service station, without jumping through hoops to eke out a few more cents of savings.'

A research report commissioned for one major also stated its loyalty offering was complex and identified it as potentially being difficult to understand even though it offered good value.'

And, Z Energy said to the commission: 'There's an element of cost and complexity in the market that was not there eight years ago that causes confusion for customers, and leaves some customers feeling like they are in the have or have-nots.'

Many motorists ended up with stuffed wallets, carrying cards for multiple fuel loyalty schemes.

Simplicity is emerging however, with the rise of automated self-service petrol stations from the likes of Waitomo, which offer lower prices and do not have retail stores in which many motorists increase the cost of filling up by buying things like coffee, confectionary and fast food.