Supermarket Petrol and Competition

Readers Question: What are the consequences of competition between supermarket affiliated petrol stations and independent petrol retailers?

Before the supermarkets entered the market for selling petrol, there was much less competition in the market for petrol. Therefore, independent retailers were able to set higher prices and gain higher profit margins.

I believe prior to the entry of supermarkets, petrol retail was dominated by the big 5 oil companies like Shell and Esso. The average profit margin on the retail of petrol was higher. This enabled independent retailers to be competitive and in some cases undercut the big petrol companies.

Economies of Scale. The big supermarkets can take advantage of economies of scale in the distribution and selling of petrol because they already have a national distribution network. This enables them to undercut the costs of independent retailers

Supermarkets have the incentive to sell cheap petrol as a loss leader. Independent retailers make all their profit from petrol (except selling food in small shops). However, supermarkets have an incentive to offer cheap petrol to encourage people to go to Tesco or Sainsbury’s. People often do both petrol buying and a big supermarket shop. Therefore, even if the profit margin on petrol is very low, it doesn’t matter because they will make a profit from selling more groceries. This has been another factor in lowering prices.

The effect of supermarkets is to increase consumer and reduce the profit margin on the retail of petrol. (I emphasise retail because, although it may be hard to believe there is a small profit margin on selling petrol at forecourts.

The effect is that many independent retailers have been forced out of business. One anecdotal piece of evidence – independent retailers said they no longer accepted cheques for petrol payments because it would mean they make a loss on selling petrol.

Market share of petrol retailers in the UK