Are fuel loyalty and discount schemes being used as a substitute for competitive prices?

Commerce Commission report looking into the retail fuel sector heavily questions the relationship between discount and loyalty schemes and fuel prices. Photo / Getty Images

A Commerce Commission report canvassing retail fuel prices has highlighted the possibility of discounting in the sector being used to "avoid direct price competition".

The commission found discount and loyalty programmes had become increasingly common within the fuel market, and were "closely linked" to rises in margins on fuel.

"We are continuing to consider whether the relationship we observe between discounting and margins is best seen as a means to avoid direct price competition," the commission said in its 424-page report into competition in the market.

"Discounts appear to have increased alongside increases in the margins on board prices and the average margin across all sales," the consumer watchdog 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."

Fuel companies BP and Z Energy disagreed on the commission's view on discounting in the sector.

"The increase in the prevalence of loyalty programmes is indicative of strong competition to retain customers and is of substantial benefit directly to customers," BP said.

Z Energy said competitors' strategies were 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."

Consumer NZ, quoted in the report, said the discounted price usually was not the cheapest.

"It's an illusion of 'getting a discount' rather than getting the best price," it said.

"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."

The report outlined that discount and loyalty programmes did not always drive loyalty, and that consumer choices of fuel retailers was often "habitual" and often based on station locations and visibilty.

"Fuel firms try to use discount and loyalty programmes to generate loyalty to their
brand," the commission said. "According to some documents we have viewed, petrol is a "grudge" purchase for many consumers and some consumers are not motivated to seek out new suppliers."

Retail analyst Chris Wilkinson said fuel disruptors such as local operator Waitomo often offered a regular price that was advertised as a discount or special price at other fuel retailers.

The likes of Waitomo offered cheaper fuel prices generally as their service stations were usually unmanned, without a retail store, which meant they had lower overheads.

"It's been really interesting to see how people have orientated to those retailers - people will often travel to them for those better prices," Wilkinson told the Herald.

"The reality is, without the likes of these category challengers, fuel retailers have been able to benefit from [non-competitive prices].

"The 'Waitomo factor', we call it, is making a significant difference in areas they are putting their sites," he said.

Unmanned fuel stations enabled simple operations and greater transaparecny for the consumer. Wilkinson said automated sites were "the way forward" and would bring cheaper for consumers.

Gull and Waitomo with their unmanned stations were already bringing the price of fuel down in areas they operated in, Wilkinson said.