Why Coles is getting out of the servo game
Welcome to a Friday edition of Unmade for those few people who remain at their desks on this unofficial (except for Victoria) long weekend.
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In case you missed it during an otherwise slow week on the ASX, Coles dropped a big announcement on Tuesday.
The company is getting out of the fuel game, and the Coles Express brand will eventually disappear from the nation’s servos. In terms of scale, it’s one of the biggest shakeups of the retail sector that we’ve seen recently.
Viva Energy, which operates the Shell and Liberty fuel brands and was already a partner, is the $300m buyer. The move sees Coles switch from being the fuel sales agent for Viva, to a wholesale provider of convenience store products eventually sold under an entirely different brand, owned by Viva. It remains to be seen whether this will be Shell, Liberty or something new.
It was an unexpected move on Coles’ part. In a brand in head-to-head competition with Woolworths, the decision to walk away from the convenience segment is counter intuitive. It leaves the company with the main Coles brand and the Coles Local brand for midsize stores.
It goes against a major trend in other markets. In the UK, for instance, the major retailers have all expanded their brands into fuel forecourts. Thanks to decades of brand equity, British people will be far more likely to buy a Waitrose or Marks & Spencer sandwich at the bowser than they would from a fuel brand. And the customer experience is much more akin to being in a small version of those brands than in an old school petrol station. Buying habits have changed. Customers have enough choice on the shelves to pick up their dinner with their fuel.
Arguably, Coles Express never got to that point. In the main, it was still a petrol station experience. Often the outlets were so close to the main store that they carried only a limited range.
However, the Coles brand halo did rub off. When one walks into a Coles Express, customer expectations about price and quality are set by the main brand. Not that the brand promise was kept. Four bucks for a packet of chips? (Bass) Highway robbery.
That will be the biggest challenge for Viva. How to build a valuable convenience brand, and gradually expand its retail offering, eventually in competition with its partner’s stores down the road.
That’s also an opportunity for Viva. In time it will be able to bring its fuel and convenience network together under a single brand. And that’s a good place to be in an expanding sector.
It comes at a time when retail media is becoming really interesting. While the Viva offering will be small in comparison to the likes of Coles Media and Woolworths’ Cartology, there’s a growing movement among the second tier retailers to monetise themselves as media players. (More on that in my recent podcast with Zitcha.)
The announcement was clear that Coles and Viva will remain aligned on loyalty marketing. Viva will be a part of Flybuys, and Coles customers will still get fuel discounts. However there was no word on a future place in the Coles Media network.
Other than the cash (and some balance sheet engineering around leases), what does Coles get out of this? The answer may well lie in another update that Coles gave to the ASX two days later - its 2022 sustainability report.
In a time when CSG (corporate social responsibility) has given way to ESG (environmental, social and governance) and actually made its way onto board agendas, getting out of the fuel game removes a future headwind for Coles.
The move is reminiscent of Woolworths’ similar decision to spin off its booze and pokies arm Endeavour Group last year.
It’s hard to fight for the slot of Australia’s most loved big brand when you’re helping turn people into alcoholics, send them broke or pollute the environment. Why not outsource that?
Unmade Index: Going down
Although the ASX was closed for yesterday’s public holiday, it dropped on Wednesday, and it’s likely to fall some more on today’s opening, after scary numbers out of the US and UK.
The Unmade Index of listed local media and marketing companies, followed the ASX down on Wednesday, falling by 1.5%, to 685.2 points. That marks a 31% fall on the index’s value at the start of the year.
Wednesday’s biggest faller was real estate site Domain, which dropped below a $2bn market cap and also dragged down the valuation of its parent company Nine.
The biggest gain came from The Market Herald, up 4.26%. Its newly issued shares, sold to raise funds to buy Gumtree, Carsguide and Autotrader, should start trading next week.
Time to let you get on with your Friday, whether at work or otherwise.
I’ll be back tomorrow with Best of the Week.