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Head Office: 371 Thompson Road P: (03) 5278 6988 North Geelong VIC 3215 F: (03) 5278 6768

28th September 2017

Executive Officer Economic, Education, Jobs & Skills Committee Parliament House Spring Street EAST MELBOURNE VIC 3002

Re: INQUIRY INTO FUEL PRICES IN REGIONAL VICTORIA

Thank you for the opportunity for APCO Service Stations Pty Ltd (APCO) to make a submission to the Victorian Parliament’s Economic, Education, Jobs & Skills inquiry into fuel prices in regional Victoria.

The retail petroleum sector is an increasingly complex and dynamic business which has seen substantial change in competition, legislation and compliance over the past 15 years which has influenced retail operations and therefore pricing behavior.

BACKGROUND

APCO Service Stations Pty Ltd (“APCO”) is an independent petrol & convenience store retailer based in Geelong operating 25 franchised service stations throughout Melbourne and regional Victoria. The service stations are situated in Geelong (8), Lara, Barwon Heads, Bacchus Marsh, Ballarat (2), Bendigo (2), Melbourne (4), Hoppers Crossing, Bairnsdale, Shepparton, Mildura, Albury, Wodonga, Wangaratta and Warrnambool.

Each service station has a large convenience store facility (240-750 Sq.mts) and mostly operated under a Franchise licence that provides entitlement to a 10-year Franchise Agreement with APCO. The Franchisee is paid a set monthly commission (cents per litre) on all fuel sales and pays APCO Service Stations Pty Ltd a sales % royalty on shop sales. APCO fully owns the property, premises and all facilities including equipment on the service stations and in the store; the Franchisee owns/purchases the dry goods stock in the store and is responsible to manage their employee’s and the outlet under the franchise obligations. All APCO stores operate 24 hours and open 7 days / week.

APCO Service Stations was one of the first independent petrol retailers to introduce price discounting in Victoria in the early 1980’s. The company adopted the policy to always try and match the lowest price in the market area and we have acquired a reputation as a petrol discounter and our first and foremost principle is to commit to fair and competitive prices wherever we are represented.

EEJSC Submission No. 37Received 3 October 2017

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What this means however is that our prices will vary from region to region. In larger metropolitan markets we operate under a competitive price cycle. But in most regional Victorian areas, where there is no price cycle movement as such, we tend to remain at a steady middle of the road price. In metropolitan markets the cycle by its nature causes excessive highs and extreme lows in the retail price. If as a customer you were to average out your actual price paid over the cycle it would vary little to the regional areas where the price remains steady. Naturally consumers do get upset when the price cycle ends with a sudden price rise to say $1.39.9 high, and our price is at say $1.21.9 in a regional city. Fair to say that the regional customer does not get to buy fuel at the low cycle price which could be say $1.08.9; however, they do generally have the advantage at a fair middle range price all the time. APCO’s common policy when there is an active price cycle evident within the market is by being the first to reduce and the last to increase its price during each petrol price cycle, which is generally the practice of Independents. Independent petrol retailers can be classified as discounters or margin retailers. Discounters seek fuel volume through having the lowest price and to make a profit because of greater volume and through increased customer count and turnover in their convenience stores. Margin retailers prefer to keep their price up as long as possible or raise their prices first to preserve their margins on lower volume of sales. These margin retailer sites are often not located in prominent positions or typically ‘owned and operated’ by larger retail organisations. Petrol retailing is an example of competition in its purest form as competitors declare their price not only to their customers but also to their competitors by posting it on large display boards for everyone to see. There is no better example of true competition in the market place and the Independents ability to compete depends on their ability to move boards up and down, with ease and urgency as required. If you remove an Independent discounter’s flexibility to react with price fluctuations (as they choose & need to chase fuel sales) then you are removing their ability to compete and gain more customers which bring more shop sales. So, any regulation or restriction on being able to change board prices as required, reacting to market conditions, will diminish competition and increase fuel prices. The petrol and convenience market today is increasingly competitive, complex and dynamic and in-order to survive, businesses like APCO have had to diversify and invest heavily in our retail formats. Many Independents have not survived and have exited the industry (closed or purchased by larger companies) because they did not evolve their retail formats and offers and depended purely on discounted fuel. The irony of all this is the ACCC as the regulator actually introduced the anti-competitive market (with predatory & discriminatory Supermarket Shopper docket schemes) we have today and continue to endorse this unfair advantage that dis-incentivises retailers such as APCO to drop our retail prices (to extreme low levels) as there is no point chasing the discount customers that the supermarkets hold with their 4cpl and higher dockets. No matter what our board price is, the supermarkets are always 4cpl cheaper than us in their customers eyes. The Supermarket petrol discount docket schemes has undoubtedly led to the petrol Giant Duopoly (Coles & Woolies) which in turn has wiped-out most of the Independent petrol discounters that were prevalent 10 to 15 years ago (see enclosed list of Companies in Vic that we know of – hundreds of independent operators gone!). These Independents could not sustain the onslaught of the Supermarket cross subsidisation discount docket war. The Discount Docket system has resulted in a minimum of 65% of the retail petrol market controlled by Shell/Coles and Caltex/Woolworths alliances. The effect of the Discount docket has placed control of the fuel market (and board prices) into the hands of the two giant supermarket chains. The simple fact being we are

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unable to match their discount docket scheme. The Supermarkets have achieved what the Oil companies could not; the demise of the Independent. Without doubt the Docket system has destroyed what was a strong and competitive market. It is a system designed overseas to destroy small businesses in all sectors and once the competition is removed petrol will be a very lucrative profit centre for the majors, which is what we are starting to see. The supermarkets monopoly of the industry has destroyed true ‘open and transparent’ competition by creating a battle ground of cross subsidisation discount dockets between both Coles and Woolies chains, as opposed to a battle for the best board/pump price. Blurring the boundary of what is a fair deal has trained the price savvy consumers to seek the best discount docket price as opposed to chasing the best board price. So, from an Independents’ perspective, there’s no point chasing a consumer that you will never get because Coles & Woolies discount docket is always 4cents or more less. By removing the incentive of an Independent to drop their board price, then you are removing competition. Whilst it is true that the supermarket cross subsidised grocery/petrol discounts have been capped, it is fair to say, that the harmful effects continue and these changes have arrived far too late to save most of the Independent Discounters. And as mentioned earlier, the Supermarket docket remains predatory with the customer getting 4 cents per litre (for $30 spend at Coles/Woolies) and then an additional further 4 cpl or more at the Coles or Woolies service stations for $5 or more purchase in-store. So, the harmful predatory tactics still exist today and APCO cannot possibly attract any of the Coles &/or Woolies service station customers because they have their discount dockets in hand with the perceived value that they are saving money. No matter what APCO’s price is on our board, no matter how low we drop our pump prices, we will never get the Coles/Woolies discount docket customer back, we can never win. So why would we reduce prices unnecessarily for no gain in volume to offset the lower retail margins; what business that wants to stay in business would want to do that? The Supermarket giants now, with their monopoly and control of the petrol market, have built their 4 cpl discount into the price cycle (in other words inflated the price cycle and increased the margin gap between the peak and the trough of the petrol price cycle), that is very clear and obvious, but of course the ACCC will never admit that publicly because the ACCC is responsible for bringing this predatory tactic to the market, leading to the demise of hundreds of Independent service stations across the country. The ACCC’s data, information and price reports will always try to influence the public and Government otherwise by pointing to other factors why margins are higher, preferring to blame the Retailers and make Retailers appear like the bad guys. The Supermarket discount docket is also discriminatory in nature, denying thousands of Australians the supermarket discounts; pensioners (those that don’t drive a vehicle) can’t receive the benefit of cross subsidisation discount dockets and therefore they pay more for their grocery’s. It is well recognised and no secret that Australians have paid dearly more for their groceries off the supermarket shelf to subsidise and pay for the petrol discount dockets they offer at the pump. It is not just the pensioners that miss out, what about the disabled or disadvantaged that aren’t or can’t afford to drive vehicles or single people living alone (or couples) that don’t need to purchase over $30 or $50 at one transaction; they are all paying more for their groceries, subsidising the consumers for their discount docket fuel. The Supermarket discount docket schemes favour the rich and wealthier and once again, the lower income, pensioners, disadvantaged and underprivileged miss out on the savings and pay more which is discrimination at its’ best. To survive the duopoly market tactics of predatory and discriminatory supermarket discount dockets APCO has had to make a larger investment in new facilities, properties and services. If a retailer isn’t being innovative and adapting all the time then growth will not happen and there will be no future for petrol retailer’s; you cannot survive on fuel and fuel alone. Change, innovation, new services and facilities that are required for our future direction cost more through additional resource, personnel and investment. That’s the stark reality of any company in any industry today

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and Petrol retailers are no different and cannot be expected to operate on the same (or similar) margins as 5 years prior, 10 years prior or 15 years ago as the ACCC continually like to refer to in their media reports. There is no practical sense in the ACCC always referring to 2002 retail margins as this period, has no relevance to our market conditions today or what retail margins should be. In fact, during that era, the market conditions were unique and erratic with the Unleaded (ULP) product less regulated with substantial blending of ULP occurring. Many unscrupulous petrol Retail operators were exposed for blending ‘excise’ free products in their ULP, avoiding the excise tax (illegally lowering the cost of their ULP) and obviously being able to sell fuel much cheaper than honest retailers such as APCO and quite frankly almost sent many retailers to the wall because of extended periods selling fuel under cost. Thankfully, the Government at the time, after substantial lobbying, finally woke up and listened to our plight for assistance and stopped this loophole in the system by adding excise to all imported products that could be blended with fuel. The ACCC should be aware of this issue and therefore stop pointing to this early 2000 period and using this against retailers, but once again it does not suit their ‘public’ persecution upon retailers if they did. Their narrow, single minded attitude just exposes how little they understand and how biased the ACCC are to realities of this industry. Unfortunately, selective and incomplete media reporting which is fueled by the ACCC generates a level of community outrage and the falsehood of some claims and information seems to be used as opportunistic media attacks on our industry for personal political gain. To start with, the ACCC’s petrol price monitoring is flawed as it does not reflect the true case of average petrol prices that consumers are actually paying at the pump. Their petrol price monitoring data do not record most of the Independent retailer prices (certainly do not record ours), just a selection of Major and large retailer’s that most likely represent the more expensive within the market. Hence when the ACCC report average petrol board prices for the month, they are reporting inflated average retail prices (only the board price, nor what customers actually pay) and therefore misleading the market and consumers about the facts. The ACCC choose to mislead the public with selected ‘inflated’ retail price monitoring information because it suits their position and justifies the ‘noise’ that it feels it needs to make for media attention and the public ear. Unbelievable and incomprehensible that the ACCC doesn’t understand the fact that there is quite a ‘big gap’ between the Average Board Price (what the ACCC reports and stands by in their media taunts) and what the Actual Price paid by customers. The enclosed table, Appendix A illustrate the average ‘Actual Paid’ ULP prices by APCO customers on our forecourts at all our locations for the past 9 months, January to September 2017. This table identifies;

1. On average Regional Prices paid by our customers are mostly below average Metropolitan Board prices (between 1-3 cents LESS in most cases)

2. Only area that is an exception to this is Warrnambool; within 3-5 cents different, however yearly average is 1.274cpl, so not that different to average Melbourne Board prices

3. Average Retail Board Prices reported by the ACCC are vastly higher than the average price ‘Actually Paid’ by customers

4. ACCC average Board prices is NOT indicative of what customers are actually paying No doubt there are some regional areas that may be paying higher prices than they should but there is a perfectly simple explanation for this; there is little or no competition in those markets because Independent discount chains have been wiped out (by the Duopoly) and no longer represented in these markets or have been stripped of any incentive to reduce fuel prices to chase more market share because they can never be cheaper than the supermarket discount dockets. They gave up trying to get the Supermarket discount docket customers back many years ago. However, from an APCO’s perspective and considering the challenging market conditions we have, what our data proves is that regional markets, where APCO is represented, are getting a fair and reasonable deal over the long-term pricing trend,

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Unfortunately, expensive inquiries such as these are the direct result of the ACCC’s ignorance of the true facts and not being prepared to be balanced in their industry reports. The ACCC should not be deliberately misleading the public and making falsehood statements (that retailers are gauging) based on their current flawed average Price Board information when our data shows that there is a ‘big difference’ between their board price surveillance data and what the motorist actually pays. The ACCC have been presented this information from APCO before and invited to share this information but of course they have not ever taken this offer up, no doubt because the facts don’t support their position. Additionally, the ACCC’s Board price data does not take into account the Supermarket dockets, so once again when they make public statements about inflated Board prices and customers are paying too much, then they should consider the fact that some 50% of customers are probably using the discount dockets and NOT paying the Board prices stated. Obviously, consumers are paying far less than reported by the ACCC. True Facts on Retail Margins and Cost of doing business APCO has made representations to the ACCC on several occasions to share some insight to the factors affecting our ability to compete and cost of doing business today but disappointingly we have been continually ignored. So, the information we share in this submission is like what has been presented and explained to the ACCC in the past. Appendix B illustrates actual retail margin against cost of doing business dating back to 2002. Before making any conclusions about the gap between margin and cost, one must consider also, that the cost of doing business (operational expenses in the graph) is purely operational and network costs; the chart does not include or reflect capital investment &/or borrowing costs (new property, new development builds and other refurbishment costs), which is excessive and in the $millions. The APCO return on investment is still less than 4% and arguably our overall return on investment has not changed that much since 2002. The facts are, due to the upward pressures on operational expenses APCO’s return on investment is relatively the same today as it was years prior, so we absolutely dispute the ACCC’s criticism that retailer’s today is making more margin than they should be and It is our view that the ACCC is misleading in their media reports that retailers today are price gauging. We attach some operational expenses, Appendix C, to demonstrate some of the rising costs of doing business today. Appendix C table illustrates that our main costs have more than doubled (many tripled) in the past 10 years, yet we sell on average the same litres of fuel per month per site. Fuel litres on forecourts are not growing, yet we must continue to update and extend sites with more pumps, hoses and products to compete. Most of our growth comes from new sites, extensions and redevelopments. Cost of doing business such as power, rates, labour, transport, storage, marketing, repairs & maintenance, updating equipment, tax, regulation & compliance consultation and implementation is non-relenting and increasing every day. Since 2002, most cost centres have increased 2 to 3 times what they were. APCO is not denying that the recent profit margins being captured by fuel retailer businesses are better than the long-term average, but it needs to be remembered that the margins over the past decade (or 15 years) have been wafer thin and have not been sufficient to support necessary capital investment in equipment and facility upgrades – nor the increasing compliance and regulation costs associated with ever changing State Government regulations. One must ask why is it that Shell and Mobil (and half Caltex sites) exited retail many years ago, along with hundreds of other retailers. These companies did not exit the retail market because they were earning big

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profits, they exited because their retail margins @ 7-9 cents or less were unsustainable and they saw an option to get out, which they did. The lower margins of a decade ago would not sustain a business like APCO’s today and allow our business to equip ourselves with the facilities required to meet competition and customer needs. APCO has a responsibility to our Franchise owners that are small family businesses supporting hundreds of employees (up to 500) across our network. Those Franchise owners need to be profitable and depend on APCO investing in improved shop and equipment facilities to ensure Shop sales growth and their financial viability of the business long term. APCO’s business model would not survive without our convenience store sales and growth. Franchisee’s operational costs have also increased because of these more complex services and facilities so they have had to be compensated and supported by APCO with subsidies/rebates over $750K per annum to help achieve sales growth (Appendix C). Much of the moderate increase in net retail margin profit is being captured for future investment and growth in our Franchisee’s viability, in our store facilities, with new equipment, potential new properties (the cost of land has trebled in regional Vic) for growth and preparing the business for more change and challenges that will lay ahead. The in-store convenience offer has become more important to create a destination for the customer as opposed to just attracting the customer with the price of fuel. APCO has differentiated our convenience offer as best we can; invested in our facilities, equipment and services to provide customers another reason to visit APCO, but this of course comes at a great cost of doing business; it costs far more to develop bigger and better stores with innovative convenience store and foodservice offers. So, the combination of ‘differentiation & diversity’ of our locations with the higher cost of doing business make it necessary to make minimum retail fuel margins of 11-12 cents or more. We should arguably be entitled to more considering our substantial investment and ROI, otherwise APCO will not survive in the market and continue to be able to support and service our Franchise group of family enterprise businesses. That’s the fact and reality of the situation, unless costs dramatically start to fall which we know they will not. APCO had to decide to either stay and invest in our facilities (which costs much more), new equipment and extend store formats to introduce new product services such as foodservice and coffee or take the $ offers to exit the industry. The investment over the years by APCO has been substantial (in the $millions) and is demonstrated through cost of development which has increased at least 3-fold over the past decade. The cost of building a new ‘average standard’ site today is over $3.5 million compared to $1.2 million (10 years prior) and this does not include the cost of land or rents. Over and above the land cost and building cost we recently had to include $500,000 water containment storage under our new site in Shepparton. This is just one such example of additional cost involved in building and developing service stations today to meet compliance and local council permits and requirements. There is a huge barrier to entry for this industry because of the high cost of investment, in land and property and in building new facilities or refurbishing current locations. New entrants to the market are scarce unless they are large business or companies such as APCO that have survived the test of competition over several decades, but they remain nervous about the future and understand how quickly things can change in the market, margins can disappear overnight. The current petrol duopoly and the ACCC’s continued support and endorsement of the harmful and discriminatory practice of predatory supermarket dockets has resulted in an unfair playing field and is not an attractive market for new Companies and business to invest. The uncertainty of long term supply arrangements for Independents is also a major barrier to entry in this market and concern to APCO ourselves. It is a volatile market with Oil Companies struggling with their own demand/ supply logistics.

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Fuel pricing discrepancies between service stations in regional locations and those in Melbourne or other regional areas The APCO retail sales data provided in this submission (Appendix A) demonstrate strong evidence to dispute what the media, ACCC and sometimes Government wrongly like to report, that regional Victoria pays too much for their fuel, in fact, our actual data shows that consumers in our regions are getting a very fair deal overall. Most regional Victorian towns where APCO is represented is paying LESS than metropolitan average Board prices reported by the ACCC, with a few exceptions however, those towns are still within a few cents of metropolitan prices. Interstate Mandatory Fuel Price Reporting Schemes or other Interstate best practice initiatives to reduce fuel prices NSW mandatory price monitoring APCO can only comment on behalf of our experience in Albury NSW and note that Albury is one of our most expensive regional retail sites. (See Appendix A – APCO average retail prices Jan-Aug 2017) with a yearly average of $1.25 per litre. NSW introduced a compulsory Fuel Price Check Scheme more than 12 months ago and it is interesting to note that average prices are above most of our other Victorian towns except for Warrnambool. These approved schemes to force retailers to post their price changes on a web site for all other retailers to see (and customers) provide an ‘easier’ environment for retailers to check each other’s prices; in fact, they are alerted instantly to any price fluctuations and therefore can react immediately. The only agenda to drop a fuel price is to gain a competitive advantage to chase more market share. If APCO cannot gain a competitive advantage by dropping prices (as our competitors will immediately know) then we have lost the best advantage we have. So, such schemes and ‘technology tools’ forcing us to ‘tell our competitors’ what we have just done in the market is a MAJOR disincentive for us to even bother dropping prices. Hence, what this leads to is, we tend to change prices least often and stick to a steadier retail price. We gather over a longer period the tendency for us not to move prices down (because there is no price advantage) has resulted in an overall ‘higher’ average price in this market. We are aware of the WA Fuelwatch scheme The pricing model in WA is anti-competitive. The 24-hour price change rule removes the competitive and proactive right for APCO (&/or any petrol seller) to match or drop below their direct competitors. APCO as a ‘True Independent’ has established a strong reputation as a leader in discount fuel in all our markets. It is no coincidence that all the regional towns that APCO operate in happen to have the cheapest and most competitive fuel prices within regional Victoria. Removing the Independents’ flexibility to match or drop the price of fuel below their nearest competitor will further harm the Independents’ ability to survive against the major Oil Company and Supermarket Retail giants. It is fact that the “independent petrol seller” reduces fuel prices at the pump which creates downward pressure on price resulting in true competition. The Major (Oil company) retail chains increase petrol prices and the Independents decrease them; hence, it would be foolish to remove the independents flexibility to drop fuel prices.

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Introducing an anti-competitive Fuelwatch pricing model will only transfer more retail market control and market share to the Supermarket duopoly. Independent market share will further decrease resulting in a lessoning of competition and higher fuel prices in the future. “NO INCENTIVE OR REWARD TO REDUCE PRICES – DISCOUNTING AT THE PUMP WILL BE REDUCED” The Fuelwatch scheme removes any incentive for the “Independent Retailer” such as APCO to drop fuel prices and therefore offers no reward to the company who might create further competition by dropping fuel prices below their competitors. Because of the 24-hour price set rule, the discount petrol seller is adversely impacted if they get the price wrong and spend the day (24 hours) uncompetitive in their local market, which would be devastating for an Independent. As a result of the 24-hour price rule under Fuelwatch APCO (and any discount retailer) when setting retail prices would do so less aggressively and “play it safe” which, would result in a levelling of prices at the pump. Hence, the motorist will pay more for their fuel. There would be no reward for APCO as a fuel discounter to drop prices under Fuelwatch if we do not have the choice to always have the flexibility to either match or drop below our competitors – and not be “caught’ out to be uncompetitive for 24 hours. Fuelwatch will potentially destroy APCO’s goodwill and reputation for discount fuel because we could no longer ‘guarantee’ our customers the most competitive fuel prices in town. Our reputation as a fuel discounter will be savaged and the APCO customers would leave us in droves resulting in major losses in fuel sales and market share. With little or no reward to lower prices under Fuelwatch APCO would be influenced to amend its pricing policy from ‘Discount fuel retailer’ to a ‘Margin retailer’ – which would be bad news for the motorist in regional Victoria. Inevitably all discount retailers would likely adapt a similar path as the incentive to drive prices down is removed and loss of sales would have to be offset by an increase in retail margin. REGIONAL VICTORIAN PETROL PRICES WILL INCREASE – WITH MORE GOVERNMENT TAMPERING, INTERVENTION AND REGULATION APCO’s pricing policy in regional Victorian markets has always been to set a fair and competitive price. In many or most instances, Apco has significantly lowered retail board prices in these markets on our entry and where there was never any competition on the boards, there is now. Unfortunately, under schemes such as in WA and in NSW, there is no doubt in regional Victoria (particularly where a regular competitive price cycle does not already exist) fuel prices would remain very stable and would most likely increase over a period due to a lack of competitive ‘spirit’ amongst retailers because no retailer could establish a long term competitive advantage or discount reputation by dropping their board prices. Retailers will err on the side of caution when considering their option of dropping fuel prices. The WA scheme would also make it difficult to compete against the Supermarket docket discount scheme. Currently APCO can choose to drop the price to close the gap between our Board price and the Supermarket discount docket price (4 cents off). This can be a key competitive advantage APCO has over the Supermarket docket system; i.e., the ABILITY to drop the price to ‘narrow’ the retail price gap between the supermarket 4cpl discount docket and APCO’s board price. The independent retailer cannot afford to match the 4cpl discount docket, however one mechanism we can effectively use is to reduce board prices to narrow the gap of the ‘perceived docket value’ from 4 cents to 3 cents or 2.5 cents, etc. Under a Fuelwatch scheme no longer will the Supermarkets need to do their own

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market ‘scouting’ to check what our fuel prices are as they are directly fed our price information instantly through the price check portal on the web site. So, the Supermarket can more easily manipulate their boards to restrict and minimise our competitive edge to close the ‘gap’ between our board price and their discount docket offer. If new price regulatory schemes are introduced, then the Supermarket discount docket powers would have to be reigned-in otherwise the Independent retailer would have little prospect of long term survival. Mandatory Price monitoring schemes ‘suitably fit’ the larger ‘company operated’ chains (larger Oil Companies and Supermarket chains) because it creates a price levelling effect with more control over their networks providing higher margins. The Company controlled networks of the Major Oil Company and Supermarket Alliance groups will embrace this system as it “REMOVES” the need for them to have to continually monitor APCO and other Independent discount fuel retailer prices. Currently the Major Oil Company & Supermarket Alliances must track APCO’s prices almost hourly in some cases to know what our prices are on. A mandatory price check scheme hands our prices (all Independents prices!) over to the Big Oil and Supermarket Alliances ON A SILVER PLATTER! Currently the larger companies obtain each other’s’ retail pump prices on a minute by minute basis by subscribing to a third-party company such as Informed Sources or Motormouth. Informed Sources is not provided with ‘Independent retailers’ price information (certainly not APCO’s) therefore the larger chains DO NOT KNOW what fuel prices the Independents are on without conducting their own price surveillance by physically scouting the markets. This provides the Independents with a considerable competitive opportunity being able to gain small price advantages for periods of time (hours to days) presenting the incentive to continually drop prices to chase fuel sales from the Majors. Independents can’t afford to lose this competitive edge! The Independent will ‘suffer’ as we’ll lose our competitive advantage of being able to frequently drop the price to gain a competitive price edge on Major Retailers. Such schemes will result in loss of fuel sales to the Independent, less foot traffic in the stores and lower shop sales which will ultimately destroy what little Independent branded business (like APCO) remains within regional Victoria. No longer will the larger company owned Big Oil & Supermarket chains be required to employ and/or engage personnel and resources to monitor and watch the “independent’ retailer.

Just by sitting in front of a computer in their central corporate Head Offices the Retail Giant monopolies will know APCO’s price’s in every town across Victoria at every minute.

How does that help the Independent operator survive against the Majors? The Big Oil and Supermarket alliances will no longer have to be concerned about ‘annoying’ Independent operators continually dropping prices. PLAYING WITH SUCH SCHEMES RISKS THE LIVILIHOOD OF APCO FRANCHISEE GOODWILL & PROFITABILITY Of further significance and concern to APCO is that tampering with regulatory Petrol Price Schemes will potentially cut our franchisee’s income and reduce their potential business goodwill, consequently impacting on APCO’s long term viability.

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APCO operates our sites under a Franchise arrangement structure with 10-year agreement terms. In the past few years we have had 5 of our franchisee’s sell their business to new incoming franchisees all of whom have paid substantial goodwill to purchase these businesses; collectively millions of dollars of investment. We have had three other Franchisees’ renew their Franchise Agreements with us for a further 10-year term. Our franchise model and Agreement allows our franchisees to match competitor’s petrol prices immediately to remain competitive within the market. It provides our Franchisee’s the opportunity to remain competitive within a market should competitors’ fuel prices drop below theirs and ensures they maintain larger fuel volumes. Our Franchisee’s operate as commission agents, hence an incentive for them to sell more fuel and chase the lowest prices within the market. High fuel volumes equate to larger commission payment to our Franchisee, so the revenue incentive for the Franchisee also result in a net benefit to the motorist through lower discounted fuel prices. Our Franchisee also heavily depends on their fuel sales to increase customer foot traffic into their stores which results in increased shop sales and gross profit in the convenience store. Shop sales within the Convenience store are essential to the Franchisee’s livelihood and profitability. The goodwill paid by our franchisees will be severely damaged with potential new pricing instruments that will impact our competitiveness because a ‘free’ and unregulated market is removed. There would have to be consideration given by the Government to compensate these businesses for this intervention and potential damage to their business. The shop sales not only support our Franchisee’s business but the shops sales royalties that APCO receives from our franchisee’s also heavily support APCO’s business. APCO use shop royalty income from our franchise stores to help reduce petrol prices at the pump in regional Victoria. If APCO’s customer foot traffic is reduced due to our inability to remain competitive on the board price then shop sales revenue (& profits) will be reduced which heavily support our retail board prices. The impact on our Franchisee’s could potentially render them unprofitable and it will most certainly impact on APCO’s ability to post and maintain lower competitive fuel board prices throughout regional Victoria. NEW SCHEMES ARE EXPENSIVE TO IMPLEMENT & MAINTAIN AND WILL IMPOSE AN ADMINISTRATIVE BURDEN ON THE INDEPENDENT RETAILER Currently Independent retailers monitor and change fuel prices ‘on the trot’ by receiving price information from Franchisee’s and licensee’s 7 days a week, all hours of the day. APCO receives price information hourly through the week and regularly on weekends via phone calls from our Franchisee’s in all our market places throughout Victoria which is a major competitive advantage when the Oil Company offices are closed late Friday to Monday morning. Should new price check schemes be introduced APCO would have to employ additional resources 7 days a week to attend to the price surveillance and monitoring compliance issues associated with assessing different markets around Victoria of all fuel products. Obviously, we would have to keep a check on our own Franchisee’s compliance as well to these schemes. This compliance cost will be another difficult and cumbersome task for small retailers, particularly with additional workloads over weekend and holiday periods. Substantial workload to APCO’s business will add further operating cost which will have to be passed on to the consumer and again will only favour the larger ‘company operated’ Major Oil and Supermarket alliance chains that can more easily absorb these costs into their networks and most likely already have these systems in place.

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The additional workload and administration may influence APCO (& other Independents) to set board prices and leave them particularly over weekends and holiday periods. Less time spent discounting fuel (and keeping the Major’s honest) and more focus placed on obtaining higher fuel margins, as opposed to higher volumes (at lower prices) to increase in-store foot traffic. COST CONSCIOUS CONSUMER WILL BE DISADVANTAGED Competitive Price Cycles that exist in many markets do offer consumers the opportunity to regularly purchase fuel at lower prices and often heavily discounted levels. Victorian motorists could be denied the opportunity to purchase heavily discounted fuel on a weekly or monthly basis if a similar WA scheme was introduced into Victoria. The ACCC released a paper in August 2005 (Understanding Petrol Prices in Australia) which conclusively stated that “consumers are generally better off with variable prices than they are with a fixed price.” When the price is variable, consumers can buy at the lower price – and they will tend to buy more at the lower price and restrict their purchases when the price is high.” This is exactly what is occurring in today’s petrol price cycle environment so why change a system that is not broken? Data analysis over the petrol price cycle obtained by the ACCC in this Petrol report also concluded that on average, around 60 percent of petrol is sold at prices below the average price of the price cycle, and around 40 percent is sold above. APCO’s retail price data demonstrate that where there is a regular price cycle over 65% of customers purchase their fuel at the mid to low (trough) range. Interestingly, we find this is to be the case in both a weekly price cycle and a 5-6-week price cycle, which is currently the case in Melbourne and Geelong markets. In other words, over 65% of our customers purchase fuel at the lower half of the price cycle and this would most likely be the same for all Independent Discount Retailers. This data is represented in Appendix D which represents the Geelong price cycle from January to August 2017; indicating an average 5-6-week price cycle over this time and over 65% of fuel is sold in the mid to low range of the cycle. (40.27% mid-range, $1.20 to $1.28 and 35.65% low range, $1.12 to $1.19) These price conscious savvy customers are purchasing far below the average monthly Board prices which we have already identified in the Appendix A data. Every market behaves differently with unique variables at play. – it is foolish to believe that you can lower fuel prices with a computer software program! The ACCC does not focus on ‘WHEN’ motorists purchase and at ‘WHAT’ price most motorists are actually purchasing their fuel at. Their price monitoring is only focussed on the average board prices for the month; instead of what the Australian motorist is ‘actually paying at the pump. If over 65% of APCO customers purchase their fuel on the ‘lower half’ of the discounted price cycle then the motorist is receiving substantial savings. APCO would certainly like to be provided with significant evidence for any scheme that be introduced to help support increasing competition and reduced retail prices for consumers. Our concern is the livelihood of our Franchise owners and the long-term sustainability of our business if the Government or ACCC are going to tamper and intervene with competition as they have in the past and look where that has got us now.