Source: Information about the postcode districts (for example AB10, BT6) firms report they are willing to supply, collated from sources including price comparison and firms' websites, the FPS and CCNI. Numbers in brackets count the number of postcode districts in each category
(including some very small postcode districts).
4.29 Those areas with fewest suppliers are in outlying and rural locations, and are generally distant from terminals and refineries.
• The Isle of Wight has two suppliers of heating oil to domestic
consumers. The acquisition by GB Oils of Pace Fuelcare would have reduced this to one supplier132 so the OFT has accepted divestments on the Isle of Wight to restore pre-merger levels of competition.133
• In June 2010, the OFT accepted divestments in the Western Isles as part of the acquisition by GB Oils of Brogan Holdings, to restore pre-merger levels of competition.
4.30 The evidence suggests that most localities have good levels of choice – based on our coverage data, the median134 is eight – but some areas do have only low levels of choice, which in turn raises questions.
4.31 High levels of market concentration might be expected to lead to higher prices in those areas. However, we would not expect these to persist if rival suppliers can easily enter the market (for example a local
entrepreneur or a rival supplier in an adjacent locality who may see an opportunity to undercut the incumbent supplier). We have therefore examined how easy it is to enter the industry, barriers to entry and expansion, and whether firms do enter and grow over time.
Entry and expansion
4.32 In a market with low barriers to entry, we would expect any excessive profits to attract new entrants or expansion of existing suppliers. Entry costs depend on the scale of entry, but we have seen evidence both of small firms entering and surviving in the market, and of expansion at a larger scale.
132 ME/4924/11: www.oft.gov.uk/OFTwork/mergers/decisions/2011/gb-oils
133 www.oft.gov.uk/news-and-updates/press/2011/104-11
134 That is, the mid point of the number of suppliers serving the off-grid population, when ranked by number of suppliers.
4.33 Although the overall number of firms has declined slightly over time, around 10 per cent of the top 50 are new entrants since 2004, and between 2005 and 2010, 18 of the top 50 distributors increased their market shares year on year. At the same time, in 2010 firms with market shares of less than 0.5 per cent numbered more than 300 in GB and over 100 in NI – this is evidence of past entries into the market.135
Figure 4.9: Cumulative market shares over time (domestic heating oil)
2004 2005 2006 2007 2008 2009 2010
0%
All who sold more than 1m litres Top 50
Top 25 Top 10 Top 5 Top 3 Around 400 firms in total in 2004 Around 360 firms in total in 2010
Source: RDCO data from HMRC, share of domestic sales below the de minimus of 3,500 litres individually or 10,000 litres in total in a year
4.34 This evidence that it is possible for small firms to survive, and for firms to expand over time, is consistent with what we heard about the costs of entry and expansion.
135 RDCO data from HMRC, domestic below de minimus, firms that sold more than one million litres.
4.35 The key costs of entry are:
• Tankers: a new tanker costs around £140,000, or can be hired at an annual cost.
• Attracting customers: some firms described themselves as operating in a declining market over the medium to long term, which makes entry an unattractive proposition. However, consumption of heating oil has not declined in the last 10 years.136 Limited expansion of the GB gas network (and slow uptake even in NI despite its recent transition from coal and its expanding gas network) along with high costs of switching to alternative fuels mean a sizable market will remain in the medium term. Customers new to heating oil are few, but the relatively high rates of switching between suppliers that we have seen in the consumer research (see the SPA Report) means new or expanding suppliers can compete for existing customers.
• Access to supply: A small number of firms reported that during winter 2010, those who had pre-purchased heating oil had their orders ring-fenced at some terminals and were therefore at an advantage when supply was constrained.137 Pre-ordering oil is more expensive and risky, so is generally more accessible to the larger or more established firms, which could pose a barrier to new entrants.
However, we also heard some evidence that the difficulties of getting access to wholesale supply have declined over time, as branding agreements (where distributors carry the majors' brands), are becoming less important in the industry, although some
companies still operate under this model.
• Credit: Most firms need to buy their oil on credit from their supplier(s), since a large majority of customers do not provide payment authorisation at order and can take up to 30 days to pay
136 DECC, monthly volumes data.
137 Firms' responses to the OFT's data request.
after delivery.138 A one-truck business might collect 25,000 litres of oil from its supplier each day – costing perhaps £13,000 at recent prices. Industry has told us that credit arrangements have recently become tighter because of rising oil prices (which require higher supporting levels of credit) and the recession (where suppliers or banks offering working credit or guarantees impose more demanding conditions due to higher lending risks). Data139 provided by a
wholesaler also showed that the average credit limit of its customers reduced between 2009 and 2011.
• Depots: It is challenging to obtain consents for new depots, and the capital outlay is high. For example, a new storage tank can cost approximately £250,000 to £500,000.140 A small number of
respondents also told us that it is more difficult for a new entrant or expanding firm to get planning permission for storage facilities today than it was for incumbent firms to acquire the relevant permissions in the past. Similarly, since environmental and safety standards have been raised over time (sometimes with arrangements allowing
existing facilities time to comply), it is more difficult and costly for new firms to set up facilities that meet regulatory standards than was the case for earlier entrants.
4.36 Access to depots is therefore perhaps the greatest barrier to entry (and especially expansion) in the market. In areas close to terminals it may not be necessary to have storage space at a depot, since it is possible to deliver direct from the terminal. Firms responding to our data request told us their domestic deliveries made direct from terminals ranged from less than one per cent to 50 per cent.141 However, depots are
138 Meetings with firms.
139 OFT information request.
140 OFT information request and discussion with firm.
141 Data request responses from firms.
particularly important in areas more distant from supply points.
Counteracting this concern, in some areas at least, is the possibility for small firms to start by renting space at another firm's depot. More
importantly, we have heard several examples of expanding firms opening new depots in recent years,142 and in contrast to concerns about the entry barrier created by higher environmental and safety standards, we heard examples of more modern equipment (such as bunded tanks) that are easier to set up and less costly than earlier technologies.
4.37 The responses to our information request suggest that most distributors expected to be able to maintain or expand their businesses.143 Customer service and pricing were the most important ways to attract and retain customers, with two distributors commenting that they aimed to win disgruntled customers from 'poorly run businesses'. Some firms have invested in new infrastructure, including tankers and computer systems.
Reasons for not expanding included the strength of local competition, customers' bad debts and low profitability.
4.38 Even without growth, small firms can provide important competition, since individual domestic consumers do not need to make use of an extensive network. Some firms144 argued that small businesses benefit from local knowledge and loyal customers. Indeed one of the primary reasons for retaining brand names following an acquisition is because of this loyalty. Some also suggested that small firms were better able to deal with difficulties last winter, because their close relationships with customers allowed them to more accurately prioritise urgent deliveries.
In NI, we heard that the very smallest businesses can compete strongly in winter because they can reduce operations and avoid the fixed costs
142 For example by Carrs Billington, Stevenage Oil, Oil 4 Wales and Rix Petroleum. Source: OFT desk research and Fuel Oil News.
143 Half of the 18 firms that responded to our request expected to grow, the majority of the remainder to maintain their business.
144 Discussions with firms and responses to our data request.
associated with maintaining business through the summer. The parties in the GB Oils/Pace Fuelcare acquisition145 also argued that there should not be a distinction made between the constraints posed by smaller or larger distributors.
4.39 On balance, the costs of entry are likely to be particularly low in areas that are close to supply points. The number of firms in the market, and in most localities, suggests that barriers are low in most places, but they are likely to be more significant (though generally not insurmountable, judging by recent expansions) in areas where depots are essential. For the most remote areas, this might be in addition to other barriers – for example, we have previously heard from distributors that were reluctant to supply the Western Isles because it is more expensive and logistically difficult than supplying the mainland. 146 Entry into this type of market may therefore be less common.
4.40 That barriers to entry are low in most places is reflected in the earlier analysis (see paragraphs 4.27 – 4.31) showing that most areas do have a relatively wide choice of suppliers. The following section considers whether consumers in the small number of areas with few suppliers are paying more as a result.
Pricing by geography
4.41 Although firms compete on both price and service, 47 per cent of consumers said price was one of their top three most important considerations when buying oil.147 Several firms agreed that price is
145 OFT's merger decision on the completed acquisition by GB Oils Limited of Pace Fuelcare, ME/4924/11: www.oft.gov.uk/OFTwork/mergers/decisions/2011/gb-oils
146 OFT's merger decision on the completed acquisition by GB Oils Limited of Brogan Holdings Limited
147 See the SPA Report.
considered most important, but others felt brand/ reputation and customer service were more important.148
4.42 The data we have seen suggest there are price variations across and within regions. Retail and wholesale prices in recent years have been lower in NI than elsewhere,149 perhaps in part because of the larger volumes sold there.150
4.43 Elsewhere, variations of perhaps five to 10 pence per litre are seen across (and in some cases within) postcodes.151 Note that prices described in this report are inclusive of VAT unless otherwise stated.
4.44 Although variations of five to 10 pence sound high in the context of average retail margins of around six pence (see paragraph 4.111), the data that firms provided to us on their costs of purchasing oil showed within-month averages that varied by 10 to 20 pence between the firms with lowest and highest costs.152 Travel time per drop may also vary significantly by area.
4.45 Short term variations in local supply or demand will ordinarily lead to price variation across geographies. We would be more concerned by long
148 OFT information requests.
149 Seen, for example, in the Price Totem published each month by Fuel Oil News, in wholesale and retail pricing data we received from firms, and in Sutherland Tables data.
150 Other prices are also lower in NI, perhaps reflecting costs such as land/rent and labour – see ONS UK Relative Regional Consumer Price levels for Goods and Services for 2010
www.ons.gov.uk/ons/.../consumer-price...consumer-price.../uk-relative-regional-consumer-price-levels-for-goods-and-services-2010.pdf
151 In the mystery shop carried out by SPA in July 2011, variations were generally less than five pence per litre. Data from CCNI show an average variation across NI towns of eight pence per litre.
152 Based on data from 13 firms. Part of this variation will be driven by the times of the month that firms sold their volumes, and the prevailing wholesale purchase price at the time. Only some will be due to contemporaneous variations in purchase prices across firms.
term variations that could not be explained by variations in the costs of supply. In particular if customers in certain areas were paying more because they have little choice over which supplier to use.
4.46 Although there are some persistent variations in price across
postcodes,153 our limited data do not allow us to quantify precisely the relationship between competitive conditions and price. This is primarily because the number of suppliers in a particular area is likely to be linked to factors affecting the cost of supply, such as distance from the nearest terminal or refinery. For example, although travel time per drop may vary significantly by area, the data we have do not allow us to assess what proportion of price variations are explained by variations in cost factors such as this.
4.47 Figure 4.10 shows the small sample of local pricing data we have for GB (there are no postcodes in NI with fewer than 10 suppliers). On the face of it prices seem to be higher in some of the small number of areas with the very fewest suppliers.
153 For example, in the data collected by CCNI, heating oil in the most expensive area in NI costs on average five pence per litre more than the cheapest area on a given day.