Know your customer. It’s a mantra that seems absurdly simplistic, yet it’s all too easily forgotten amid the turmoil of the rapidly shifting oil and gas marketplace. For Tom O’Brien, however, customer focus remains the key determinant of growth. Even as global prices have taken a downturn, the CEO of United Petroleum remains unflappable, probably because its vertically integrated supply chain and focus on shifting merchandise have distanced the business from relying on unpredictable income from fuel alone.
United’s business model is unorthodox, but so far it seems to be working. Founded in 1993 as an independent chain of service stations and convenience stores in South Australia, it now operates right across the country. Crucially, it also owns fuel import terminals which allow it to control the majority of its oil supply chain and sell fuel to rivals.
But United – which has been valued by analysts at about AUS$1 billion (US$775m) – is no longer alone. 7-Eleven and Woolworth’s are gaining traction in the same space, and Australia’s subdued economic growth is causing concern for some. Price, O’Brien tells ConsumerCurrents, will become the key battleground. Four times a day each of United Petroleum’s stations, all of which are franchises, sends someone to check prices at local competitors. These are entered into a central management system, which applies an algorithm and sends guidance back to the station. Will it be enough to help United win the price wars?
It has been a turbulent period, both for Australia and for the oil industry. What matters most in your business at the moment?
GDP growth and retail sales growth are important, but our business is slightly skewed because we deal in a commodity. Revenue is very much dictated by the value of that commodity, which is fluctuating quite dramatically on the international market, and has an impact in Australia, too.
Over the past 12 months, for example, the value of that commodity has fallen by more than 50% at times. United Petroleum’s revenue is somewhat misleading: 25% of our business is more or less merchandise. The products that we sell in our stores are very much a revenue-driven business. Generally speaking, increased growth in sales is good for the bottom line – and in terms of the fuel, which is 75% of my business, this is a volume issue.
I’m constantly looking at trying to grow our volumes and I’m looking at around 10% growth per annum. But our business is still far from mature. We’re getting growth not just through like-for-like sales, but through organically growing the size and scale of the business, too.
You’ve picked up numerous awards from your customers. How do you keep them satisfied?
We know our customer base, and we’re at the price-conscious end of the market. Outside a service station, we are obliged, as are our competitors, to inform the public of what price we’re selling each grade of our fuel for. This is what entices our customers into the store.
We are generally very aggressive on price. We have a very lean operating model. All our stores are on a franchise basis, and we have about 250 employees nationwide, which is pretty lean for a national network. We obtain most of our fuel, at least two-thirds, from some of the most competitively priced refineries in the Asia Pacific. Hopefully, soon it will be closer to four-fifths.
What drives customers into the stores?
We’re appealing to the price-conscious consumer who compares local prices. If you drive in any neighborhood here and you compare the prices at the various sites, you will find that we are typically equal to the lowest – or we are the lowest – in terms of fuel prices.
We don’t necessarily have a better range inside the store, but we are trying to compete on the merchandise front too. We’re always trying to improve our offering. 7-Eleven is an expert convenience store operator. We aspire to its convenience offering. But in terms of the fuel, and in terms of pricing, we absolutely nail it. That’s what our customers like.
How would you describe your pricing strategies?
We pride ourselves on our model of monitoring competitor prices, which we do on a very localized basis. Every single one of our store operators literally goes out to check the prices in their neighborhood. We give them a specific set of service stations to monitor.
We have certain protocols for changing the prices accordingly. Nationally, we’re monitoring the price at all of our competitor sites four times a day and reacting to it accordingly. This is different to the system that our competitors use.
The other national networks have come into some trouble with the market regulator, the ACCC (Australian Competition and Consumer Commission), because a company conducting its own national monitoring has been feeding those prices to our competitors, who are all using this central system. The ACCC says this could be potentially described as price collusion.
From our inception, we have used our own mechanism because we want to compete not just on a regional or a state basis, or even on a national basis. We want to compete literally in the local neighborhood where our customers have a choice between a specific set of service stations.
In many ways, our business is old school. We could allude to electric cars and hybrids but until they work out a way to deliver fuel on the internet, we’re in good shape.
How do you see the outlook for the market in the longer term?
Certainly on the fuel side, there’s not much escape from it, as people use it either domestically for social or recreational, or for commercial purposes. There really isn’t a lot of alternative at this stage, and especially in a country such as Australia, where people are more or less tied to their vehicles.
We’ve just been through a price cycle where the fuel price was very high last year and has now come down quite significantly, and we don’t see a major impact on fuel volumes as a consequence. But we find that discretionary spending power – this means our merchandise in the convenience store – increases when the price of fuel is lower.
What are the challenges on your horizon as an organization?
We’re looking at the general economic conditions, just as every other retailer is. There are inputs into consumer spending that do impact our sales revenue. Although there’s a bit of doom and gloom, the economy here is still growing. Our fuel station business is still relatively young and not a mature business. Equally, the country is not a mature country yet. It’s still growing. There’s population growth, there’s infrastructure growth and there’s a huge commodity base.
The media, in particular, are very heavily focused on commodity prices and iron ore, which is one of the biggest exports from this country. The relative value of the Australian dollar versus the US dollar is a key metric the media uses to decide the status of the economy. I’m not sure if it’s absolutely correct, because commodities only contribute approximately 10 or 12% of the economy.
The tax space is a concern, certainly. Australia is a relatively heavy tax space and compared to some of the problems the European economies are having, the deficit here is very modest – I believe it’s 15% of GDP.
What sort of changes are you planning to your own business model?
One is the restructuring of the fuel business itself. We have, in the past five years, followed what has happened in Europe and to a certain extent in the US, whereby the marketer and distributor of fuel is being replaced by specialist retailers. Traditionally, major integrated oil companies had control of the entire supply chain right from exploration, digging it out of the ground, refining it, delivering it, distributing it and then retailing it in service stations.
When Mobil exited [Australia], it was replaced by 7-Eleven. And that’s probably a great example, as it is a specialist convenience retailer. Shell recently left the country, so BP is the one major oil company left here following the old integrated model. Over the past decade, it’s lost market share from 20% to 13%. Frankly, there’s a big question mark over how long BP will remain in this marketplace.
Once they depart – and my prediction is that they will – the whole industry will have been transformed from a major oil company model to so-called specialist retailers. This is a fundamental change that will be positive for us because we do put ourselves in a lean, specialist, consumer-focused retail model.
The other fundamental change is the retail changes that are happening. The marketplace is becoming more consolidated into three major categories.
One is your ‘big box’ multi-outlet that has every retailer you can imagine in one single location. A consumer might go there to meet a whole variety of their shopping needs. This is very big in the US and in Europe. Increasingly,
supermarket groups like Coles and Woolworth’s are playing in our marketplace and following that model. Then there’s internet shopping, which is growing here significantly, and that will continue. I don’t see any reason why that would change.
The third major one is the convenience element. This is increasingly where fuel retailing is moving to, where consumers can shop to supplement with convenience items. For example, we have a line at the moment of pet food and pet accessories. It’s amazing how many people will buy that in a convenience environment. Because we have the fuel which people are tied to, we have an immediate magnet to attract a potential convenience shopper.
7-Eleven is getting adept at digital and mobile marketing and using that to drive people into their stores. Where do you stand on that?
Currently, I think we feel deficient in that area but we’re rapidly learning and playing catch up. It’s something that we haven’t focused on previously but now it’s becoming our biggest challenge and part of our major strategy.
We can really enhance our revenue stream by upping our performance in that merchandise category. I think electronic media, for example, or connectivity with your consumer is a critical part of that. Currently we have an initiative where a consumer can log on to our website from a mobile device and can find out where the nearest United station is, just by pressing a button. That type of information is one of the first ways to get consumers to our stores.
How do you see the regulatory landscape?
This country is really tightly regulated. Health and safety and food safety issues are industry-wide, heavily monitored and are front and center to every retailer’s strategy. Environmental safety is very much an issue for us. Indeed, since we are handling dangerous goods, we need to pay particular attention to it, but we have an excellent track record in that respect. We have every single site audited on a monthly basis and scored. Health and safety is very important. This is a business control mechanism, especially since we are having these stores operated by non-company employees.
In terms of sustainability, we are the only fuel retailer in Australia that owns and operates an ethanol refinery. There are only three ethanol refineries in the country and in two of these, the ethanol is produced as a byproduct of other processes.
We retail fuel with a 10% ethanol component, and all of that is produced from grains that are grown in Queensland, in the area around the refinery itself. So, we believe that that is a step in the right direction from a sustainability perspective. New South Wales Government does have an ethanol mandate in place so all retailers have to abide by that. It’s an economic strategy, but it’s also an environmental strategy and I’m surprised that it’s not more heavily part of the political agenda here, as it is in Europe.