Coles has inked a new deal with the petroleum supplier Viva Energy that promises to finally address the high-end prices of its 700-plus Coles Express outlets.
Under the new 10-year agreement, the Australian Securities Exchange on Wednesday, Coles has handed over responsibility for setting oil prices to Viva Energy and overhauled the financial arrangement.
Viva, which has the license to the Shell brand and owns the physical sites. The new deal means Coles will effectively sell the fuel on behalf of Viva and collect a commission.
Viva will make a one-off payment of $ 137 million to Coles "in consideration of the changed commercial terms and margin foregone". The company will also take a bigger cut of convenience sales, a key profit driver.
"It's better to align the benefits of both businesses," said Coles Express chief executive Alister Jordan.
"We believe that as a result of this new alliance agreement we will be able to provide a more competitive customer offer going forward. They set the price and take the margin. We as Coles Express run the sites and the convenience offering. "
Coles had predicted earnings from its convenience stores plunge 60 per cent this year as a result of declining fuel volumes, which were tracking 11.7 million liters per week lower in the first half of the 2019 financial year compared with the same time a year ago.
Mr Jordan said the two companies had been trialling new fuel strategies for the past two years. "As time has gone on, the alliance structure has been increasingly unsustainable as there has been no clear alignment and incentives for both parties," he said.
"It's taken us time to land this new agreement. I believe this is good for both parties because we will ultimately have a more competitive offer for our convenience stores and through our forecourts. "
Viva said it would reinvest the margin into lower fuel prices with a goal of growing 75 million liters per week, up from around 60 million currently.
Existing loyalty benefits will continue to be offered to customers including the 4-liter per liter fuel discount and the ability to earn Flybuys points.
The service station peak body, the Australasian Convenience and Petroleum Marketers Association, welcomed the news.
"This is a very positive move that recognizes that Viva and Coles are working in a proposition that better suits the growing petroleum convenience market," said ACAPMA chief executive Mark McKenzie.
"As a result of this, we expect to increase the competition in the sector and provide the flowthrough benefits to motorists."
The Australian Competition and Consumer Commission has recently noted that the Coles Express was the most expensive fuel retailer in the five major capitals.
In 2013, the watchdog forced Coles and Woolworths to limit shopper docket discounts, which could reach as high as 45 cents per liter, citing concerns about their long-term anti-competitive effect.