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Chapters

Non Fuel Business in allowances with the Fuel Business

4/29/2010

Divyanshu

INTRODUCTION

1) RETAILING

The traditional utility today finds itself facing the most challenging market

conditions that it has ever experienced. Deregulation is bringing in new competition, not

only from other utilities but potentially from competitors with very different

backgrounds. These new market entrants can apply a variety of different strengths to

threaten the traditional business model. They may leverage an existing customer base or

use technology in general, and the Internet in particular, to leapfrog into the traditional

utilities’ market space and to steal business from them.

Retailing is defined as “A business that sells products and/or services to

consumers for their personal/family use”.

This definition includes the interface of retailers with both vendors and consumers, as

well as other processes like supply chain management that impact retailers. Retailers

have to do the following tasks:

Analyze their customers

Develop strategies

Choose markets and channels in which to compete

Make location decisions

Find, design, purchase, price and promote merchandise and services

Organize their operations and manage their employees and stores

Create an atmosphere that is inviting to customer and conductive for buying.

With growing competition and deregulation, the rules of the game in the petroleum

retailing industry in India will undergo some changes in the next few years. The

revolution in the Indian telecom sector is a recent example of the effect of free market

dynamics on the structure of the industry and the strategies of various players.

Deregulation of the petroleum retailing sector in India will certainly lead to a similar

battle for market share, with new players attempting to gain share from current officials.

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This will exert a downward pressure on profit margins and force industry players to adapt

their organizations and strategy. To succeed in this environment, the two key questions

are: How can the industry prepare for the change? What will be the most effective

strategies for petroleum retailers in India in the medium term?

1.1) WHEEL OF RETAILING

Emergence of new retailing forms and decline of old retailing forms could be

explained by “Wheel of Retailing”. According to this, many new types of retailing

institutions begin as low-status, low-margin and low-price operations. They become

effective competitors of more conventional outlets, which have grown fat over the years.

Their success gradually leads them to upgrade their services and proffer additional

services. This increases their costs and forces price increases until they finally resemble

the conventional outlets that they displaced. They, in turn, become vulnerable to still

newer types of low-cost, low-margin operations.

Innovation Retailer Low statusLow priceMinimal servicePoor facilitiesLimited product offerings

Traditional RetailerElaborate facilitiesExpected, essential and exotic serviceHigher-rent locationsFashion orientationHigher pricesExtended product offerings

Vulnerability Phase

Mature retailerTop heavinessConservatismDeclining ROI

Trading up phase

Entry Phase

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1.2) BRAND BUILDING METHODOLOGY

From what seems at the face, there is opportunity for petroleum retailers in India

to develop differentiated value propositions that will boost their revenues and improve

competitiveness and profitability in the new market economy. Some important points to

consider are:

Strong brands drive revenue growth

In times of increased competition, firms often adopt strategies aimed

either at improving cost effectiveness or at growing revenues. In growth markets,

the major imperative should be revenue enhancement through profitable share and

market growth.

To drive revenue growth, petroleum retailers may have to either attract new

consumers or increase their share of the existing consumer’s wallet.

Creating strong brand equity will be a key to achieving these objectives,

consistently and profitably. Empirical evidence shows that strong brands add

perceived value which can command a price and/or volume premium by

differentiating from commodity products.

Identify the Opportunity

Know yourConsumer

Build The Offer

Build the BrandIdentity

Execute the BrandStrategy

Aligntheorganisation

Monitor and Review Performance

Fig 1: Brand Building Methodology

Source: A.T.Kearney

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The following study is conducted to explore the strategic options for petroleum

retailers in India. It is very important to assess the value to be gained by adopting a

consumer-centric approach and in building a strong brand identity. Among consumers in

India today, brand recognition and differentiation of existing petroleum retailers is

currently low. This presents a potential opportunity to new players as well as existing

companies to adopt a differentiated consumer-focused strategy centered on building a

strong petroleum retail brand.

1.3) RETAIL POSITIONING MAP

By combining different service levels of retailing namely Self service, Self

selection, Limited service, and Full service, and different assortment breadths, we can

distinguish four broad positioning strategies available to retailers:

P1

P2

Strong Brand

V1 V2Volume

VolumePremium

PricePremiumPrice

Commodity

Fig 2: Shift in the demand curve leads to increased revenues

Source: A.T. Kearney

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1.3.1) Bloomingdale’s :

Stores that feature a broad product assortment and high value added. Stores in

this quadrant pay close attention to store design, product quality, service and image. Their

profit margin is high, and if they are fortunate enough to have high volume, they will be

very profitable.

1.3.2) Tiffany :

Stores that feature in a narrow product assortment and high value added. Such

stores cultivate an exclusive image and tend to operate on a high margin and low volume.

1.3.3) Sunglass Hut :

Stores that feature a narrow line and low value added. Such stores keep their costs

and prices low by centralizing buying, merchandising, advertising, and distribution.

1.3.4) Wal-Mart :

Stores that feature a broad line and low value added. They focus on keeping

prices low so that they have an image of being a place for good buys. They make up for

low margin by high volume.

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Fig 3: Retail Positioning MapSource: Marketing Management, Philip Kotler

1.4) KNOWING YOUR CONSUMER

To develop a strong brand and product proposition, a key imperative is to

understand your target consumer’s psyche, behavior and needs. Segmentation is a

powerful tool to help marketers identify the most profitable consumer segments and to

develop an offer which fulfils their needs better than competitors. Many successful global

petroleum brands have used detailed psychographic segmentation as the foundation of

building strong brands.

For example: Mobil split the U.S. petroleum consumer population into five

psychographic segments – Price Shoppers, Homebodies, Road Warriors, True Blues and

Generation F3. The latter three segments had high purchase frequency and low price

sensitivity and were therefore identified as the most profitable target segments. Mobil’s

marketing strategy was then built around these consumer segments.

Mobil's U.S. Petroleum Consumer's Segmentation

Generation F3, 25%

Homebodies, 21%Price

Shoppers, 20%

Road Warriors, 18%

True Blues, 16%

Fig 4: Mobil’s U.S. Petroleum Consumers’ Segmentation

Generation F3: Fuel, Food, fast; M/F <25 years

Homebodies: Females w/children; Local station

Price Shoppers: All demographics; Regular

Road Warriors: Middle Aged Men; High mileage; Premium

True Blues: M/F; Station Loyal; Cash

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Source : A.T. Kearney

Similarly the Petroleum shopper in India has been segmented as follows:

Routine Chore Doer

Main driver is to minimize the hassle at the petrol station; petroleum

purchasing is seen as drudgery.

Seeks additional vehicle repair and maintenance services.

Likely to be a person engaged in monotonous routine jobs.

Time Poor

Strong need for locational convenience and other non-fuel related services.

Characterized by his need of quick service and convenience.

Likely to be a professional, 24*7 worker.

Trust Seeker

Probably unique to emerging markets such as India

Driven by a strong desire for integrity and by strong relationships with the

retailer.

A typical late adopter, akin to the Indian middle class.

The ‘quality guarantee’ is the primary driver for purchase decisions.

Prestige Seeker

Higher level emotional needs for reinforcement of self esteem

Relatively more brand conscious

May often be stereotypes as a ‘Self made man’

Potential target for international or premium brands.

As the consumers in India have not been exposed to differential pricing in

petroleum, the price sensitive consumer is not as well defined as in other markets.

Comparing the drivers of petrol station choice with more developed markets such as US,

there are some stark differences which may give some pointers as to how consumers may

evolve in India. In the U.S., while location (71%) is the primary parameter, price (56%) is

also a very important factor. Product performance or quality (24%) is the third most

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important factor. However, there is a big difference in consumer’s interpretation of

quality. In India, quality is interpreted as “no adulteration”, but in the U.S., it means

impact on fuel efficiency and engine performance. Quantity (interpreted in India as

getting the right amount of fuel, i.e. integrity) is not a parameter for consideration in a

market such as U.S.

As the Indian market evolves, parameters such as integrity of fuel quantity and

purity are likely to become hygiene factors, and not bases for differentiation. Marketers

would be able to evolve their brand offering in line with the development of consumer

needs- from purity to higher order needs such as performance, fuel efficiency or even the

quality of the buying experience.

1.5) BUILDING THE OFFER

The choice of the target consumer segment drives the development of the brand

offer and impacts many aspects of the organizational strategy such as location, pricing

and human resource policies. The target consumer should determine the value proposition

for example a company which is targeting the Prestige seeker would design its offerings

very differently from a competitor targeting the Time poor consumer type.

Let’s take a company A which is targeting the “Prestige Seeker” consumer type.

Its main strategy would be:

Brand positioning: A superior product for a discerning customer.

Product service offerings could include differentiated fuel products- premium

grade petrol, additives and services such as automated car wash.

The look of the petrol stations would be ‘international’ with technology

enabled services.

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Then there is another company B which is targeting the “Time Poor” consumer

segment. Its strategy would be very different from Company A:

Brand Positioning : Build entirely on a “Time is value” proposition

Focus on offering rapid transaction times, swipe-at-the-pump facilities, smart

cards, medicine shops, etc. to ensure that the “Time Poor” consumer gets the

quickest service possible.

Petroleum retailers in India will have to become more consumer-focused as

competitive pressures increase and new players enter the market. Retailers can no longer

treat all consumers alike and offer an undifferentiated set of products and services. There

is ample opportunity for petroleum retailers in India today to build revenues and enhance

profitability by building strong and differentiated brand propositions based on in-depth

consumer understanding. This report is an attempt to look into these opportunities

available and the challenges the petroleum retailers in India are facing or will be facing in

the near future.

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2) THE INDIAN PETROLEUM SECTOR – AN OVERVIEW

2.1) OIL AND NATURAL GAS SECTOR - INTRODUCTION

VALUE CHAIN

The oil industry can be divided into three major components: upstream,

midstream and downstream. The upstream industry includes exploration and production

activities, hence is also referred as the exploration and production (E&P) sector. The

midstream industry processes, stores, markets and transports commodities including

crude oil, natural gas, natural gas liquids (NGLs) like ethane propane and butane and

sulphur. The downstream industry includes oil refineries, petrochemical plants, petroleum

products distributors, retail outlets and natural gas distribution companies. The

downstream industry provides consumers thousands of products such as gasoline, diesel,

jet fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics, fertilizers, antifreeze,

pesticides, pharmaceuticals, natural gas and propane. Both internationally and within

India the oil and gas sector is characterized by existence of "integrated" companies,

which are present in all these three sectors.

The flow chart below shows oil value chain depicting the entire process under

which both upstream and downstream segments are covered (Figure 5). To start with,

crude oil is explored and produced (Upstream) and then transformed into various

petroleum products with different end uses in refineries and finally marketed to retail

customers (Downstream). Except Aviation Turbine Fuel (ATF) and Liquefied Petroleum

gas (LPG), all the end products are sent to intermediate storage plants through

terminal/depots and finally to retail customers. As regards ATF it is distributed directly to

the Airfields or Air stations and refined LPG is dispatched to LPG storage/bottling plants

for liquefaction and marketing to retail customers. Pipelines are mostly used to transfer

the petroleum products and by products. For onshore fields, coastal tankers are used.

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2.2) INDIAN ENERGY SCENARIO

The structure of primary energy consumption in India shows that coal (51%)

dominates as the major energy source. Hydrocarbon (oil 36% and Gas 9%) is the next

available energy provider of the nation. Natural gas is fast emerging as an alternative; it

meets around 8% of the primary energy needs. Considering the global trend of shift in

energy axis from oil to gas, the share of gas in consumption pattern, in the Indian context,

is also likely to increase gradually in the days to come.

Fig 6: India’s Energy Basket

Source:Planning Commission,GOI

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Fig 5 : Oil Value Chain

Source: India Energy Portal

India's Energy Basket

51%

36%

9%

2%2%

Coal

Oil

Natural Gas

Hydro

Nuclear

Currently, India's consumption (111.6 MMT in 2004-05) of petroleum products is only

about 1/5 of world's average per capita consumption. In the current 5-year plan, the

growth in consumption is expected to be around 3.5% to 4% dependin/g upon GDP

Growth. The medium and long term outlook for oil and gas consumption in the country is

expected to show robust growth. As per the Hydrocarbon Vision 2025 document, the oil

demand will rise to 195 MMT by 2011-12 and thereafter reach a level of 368 MMT by

2025.

In respect of natural gas, the consumption is expected to reach 313 million

standard cubic meters per day by 2011-12 and thereafter climb to 391 million standard

cubic meters per day by 2025. Accordingly. The share of Natural Gas in the basket is

expected to increase from the current 8% to 20% by 2025. Therefore, India is expected to

emerge as a big importer of oil and gas considering that the indigenous production of oil

and gas is not expected to keep pace with demand.

2.3) INDUSTRY SECTOR

The Indian petroleum sector is under the purview of the Ministry of Petroleum and Natural Gas (MoP&NG).

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Contrary to common perception, India’s retail prices for petrol and diesel are

relatively high despite subsidies. In fact, the total Government (central and states) taxes

and surcharges on petrol products exceed by far the annual budget subsidies for these

products. There is thus a certain rationale for the Government to maintain the current

system though it does have negative implications on the financial health of public oil

companies and acts as a deterrent to private investments in the sector. In addition, the

policy rationale of providing subsidies to allow poorer segments of society access to

commercial fuels, cannot be proven conclusively and irrational choices among different

fuels are being made due to distorted retail prices. The Indian energy market and the

economy as a whole would be better off if the Government would implement a

consistent, transparent and rational fuel pricing system but with a view to political

imperatives, this is unlikely to happen in the short-term.

From the Oil-Pool Account to Government Bonds

First, there was the APM.On 1 April 20023, the Administered Pricing Mechanism

(APM) for petroleum products was abolished as part of the continuing reform of the

petroleum sector towards a sector based on market mechanism. In theory, India.s public

UpstreamExploration & Production

Ministry of Petroleum & Natural Gas Gas

DownstreamRefining & Marketing

Industry Bodies

ONGC

Oil India Limited

OVL

Private E&P Cos.

IBP, CPCL, BRPL KRL, NRL

Hindustan Petroleum

GAILGas Transportation & Petrochemicals

Reliance Industries Ltd.

Petroleum Planning & Analysis Cell

Centre for High Technology

PCRAPetroFedOil Industry Safety

DirectoratePetroleum India

InternationalEngineers India

LimitedDirector General of

Hydrocarbon

Other Private Cos.Oil & Gas Marketing

Indian Oil Bharat Petroleum

MRPL

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downstream oil companies would now be free to set retail prices of all petroleum

products based on an international parity pricing formula under the supervision of a

petroleum sector regulator. The Government would abstain from influencing petroleum

product pricing. Up to then, prices were controlled (or .administered.) for two transport

fuels, petrol and high speed diesel, and two cooking fuels, kerosene and LPG.

The subsidy for the four products was not part of the Government budget but

came out of the so-called oil pool account. The oil pool account was funded by

surcharges on petroleum products to be dispensed in times of rapidly increasing

international prices and re-filled during times of lower prices. With the beginning of the

new FY on 1 April 2002, the APM and with it the oil pool account was abolished.

Subsidies for the two cooking fuels are considered an important social instrument

to help poorer households shift from biomass to modern fuels.4 following the

abolishment of the APM, the Government would thus provide subsidies for kerosene and

LPG ex-ante in its annual budget. Subsidies would not exceed 15% of the LPG and 33%

of the kerosene import parity price respectively. Within 3 to a maximum of 5 years all

budget subsidies on LPG and kerosene would be abolished and market prices would be in

place for all petroleum products in India. Petrol, diesel, LPG and kerosene account for

about 60% of India’s total petroleum product consumption. Diesel is India’s single most

important fuel as most of its vehicles, commercial and private, have diesel engines. Over

75% of India’s crude requirement is imported.

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Proportions of Consumption of Major Petroleum Products in India (2004/2005)

Petrol,, 7%Diesel,, 36%

Kerosene,, 8%

LPG,, 9%All other Products, 40%

Fig 7: Consumption of major petroleum products in India

Source: Ministry of Petroleum Basic Statistics

….then market based retail pricing (partially, at least)

The practice of retail price setting was different from the theory right from the

beginning of the post-APM period. The so-called public downstream .Oil Marketing

Companies. (OMC), implemented regular retail price adjustments for petrol and diesel

during the first two FYs following the abolishment of the APM. Despite these regular

price increases the OMC incurred minor shortfalls for the sale of petroleum and diesel.

However, those shortfalls were mitigated through the refining margins which now

benefited from the import-parity pricing formula.

2.4) CURRENT SCENARIO

The demand for petroleum products has been constantly and steadily increasing in

India. It has grown at a CAGR of ~2.8% over last five years. The industry is expected to

grow faster in the future on account of increased economic activity. In terms of demand

mix, HSD and naphtha constitute more than 50% of the total demand (by volume). Going

forward, LPG, MS, and HSD are expected to be the major demand drivers.

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Refining capacity depends on the technology used in refineries, capable of

processing crude production into clean fuels. In the recent age of decreasing oil

production refining capacity have to have well supportive technology, which meet

increasingly more stringent environmental Standards. With the increase in global oil

demand and stagnant reserve, refining capacity deserves new capacity addition to meet

demand. But the graph shows slightly increasing trend of refining capacity till date in last

decade. Refinery throuput, as opposed to designed capacity, is computed by dividing the

number of refined barrels of oil processed by the actual number of days the refinery was

in operation. Refined capacity is lower than refined throuput in the graph below implying

under-utilization of capability of processing crude in the existing refineries and lack of

up-gradation. There are 18 refineries operating in the country, 17 in the Public Sector and

one in the Private Sector, with a total installed capacity of 127.37 million metric tonnes

per annum (MMTPA).

The Indian Oil and Gas sector is one of the six core industries in India and has

very significant forward linkages with the entire economy. The oil & gas sector meets

more than two third of the total primary energy needs in the country. The sector has been

instrumental in putting India on the world map. At present India is the sixth largest crude

oil consumer in the world and the ninth largest crude oil importer. The country is also

increasing its share in the global refining market. At present Indian refining sector is the

sixth largest in the world. This position is expected to be strengthened with plans of

Reliance Petroleum Limited to commission another refinery with a capacity of 29 MTPA

next to its 33 MTPA refinery at Jamanagar, Gujarat. As a result of this the Reliance

refinery would be world’s largest single place refinery.

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3) FUEL RETAILING SECTOR

Call it the beginning of the end or the end of the beginning. Four years after

retailing was thrown open in the petroleum sector, oil companies are grappling to get a

grip over the changing dynamics of the sector. The spike in global crude oil prices has

come at a most inopportune time because this has deterred several new retail marketing

companies from going ahead with their plans. It is even worse for those oil companies

who are pure retailers without a refinery base. For them, it is time to shut shop even

before they have actually begun.

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Globally, the petroleum retailing landscape has transformed from only petro-

products to multi-product and services. The world over and in India, a lot of shift has

taken place to hawk fuel in malls, supermarkets and hypermarkets and non-fuels in fuel

pumps. People are looking for convenience and oil companies have sites that can lend

themselves to convenience stores.

3.1) PASSING ON THE PRICE INCREASE

Developed and emerging economies have passed on price increases to varying

levels as is evident by the following data :

EmergingEconomies

RetailFuel Prices

Price volatility absorbed by Explanation/ Remarks

Government Oil Company

Consumer

USA Deregulated

Motor fuels retail price directly correlated with world crude oil price (fiscal component lowest in developed world). Govt. watches fuel marketers closely to prevent price cartels

UK Deregulated

Motor fuels most expensive (source of fiscal income for the Govt.) and distribution margins among lowest in Europe

China Regulated Retail prices indexed to international spot prices plus taxes and a fixed margin. Govt has no right to intervene in price setting.

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India RegulatedPartially

Proportion of price hike passed to consumer with a lsg. Govt and oil companies absorb significant portions of price hikes.

Malaysia Regulated Some cost passed to consumer, while balance absorbed by govt through reduced taxes.

Brazil Deregulated

Brazilian consumer benefits from availability of local fuel substitute Ethanol and may switch to either fuel depending on the market price.

Russia Deregulated Margins have also increased as Oil companies have passed on additional cost along with price increase.

Thailand Deregulated

Increased competition leading to margin pressure to oil companies. Reintroduction of ‘oil fund’ for petrol/diesel due to volatile international prices.

As companies expand into non traditional markets, the barriers between retailers

are blurring, creating and exploiting new market dynamics. In the UK, the supermarket

chains have managed to attain around, six percent of the fuel market since they moved

into this sector a few years ago. This has lead the fuel retailers to address their sales of

non fuel products. Sales of these products have increased over the recent years, and since

they offer a higher profit potential than fuel, it is better to maximize these sales.

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Now we will be taking a deeper insight into the developments occurring in the

petroleum fuel sector, prospects available to the oil companies, and the challenges these

companies are and will be facing in the near future.

3.2) RETAIL SBU

Every oil marketing company has its Retail function as the biggest business line.

There first task therefore is to refurbish the retail strategy. A retail business unit has to

devise its strategy around certain key issues which could be identified as:

Ensuring Quality and quantity which occupies highest priority in the minds of

the customers.

To provide a total customer experience through courteous service, basic

convenience facilities and cleanliness at retail outlets.

To create a pull, through offerings such as branded fuels and loyalty cards.

Allied retail activities

To enhance retail visual identity and focus on profitability of retail outlets

High volume flagship outlets to network all major highways.

3.3) FUEL RETAIL MILESTONES IN INDIA

1972 – SERVO, the first indigenous lubricant was launched by IOCL.

1975 – Multipurpose Distribution centers introduced at 132 retail outlets of IOCL

pioneering rural convenience.

1994 – Vision 2000, the Retail Visual identity programme was launched by IOCL

to upgrade facilities at retail outlets.

1995 – BPCL & Bank of Baroda signed an MOU to launch the first co-branded credit

card in the country which enables customers to buy petrol, diesel, lubricants and

other regular commodities.

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1996 – BPCL launched Apollo Air Stations at its petrol pumps in Mumbai.

1998 – BPCL planned to open new, state-of-the-art, self servicing and automatic cut-off

nozzle facility petrol and diesel bunks.

1998 – BPCL launched its Mak lubricants in Calcutta.

1999 – BPCL introduced “Smart Card” technology under name Petro Card at retail

outlets in Chennai.

1999 – ICICI Bank Ltd. Tied up with BPCL to install off-site ATMs at the company’s

outlets.

2000 – IOCL signed retail agreement with Domino’s Pizza India Ltd. For setting a fast

food chain through IOC outlets in India.

2000 – Dishnet DSL tied up with IOCL to open internet hubs in all petrol bunks across

the country

2000 – HPCL signed a business initiative with ISP (Internet Service Provider) Satyam

Infoway Ltd. to set up more than 200 cyber cafes at its Retail outlets across the

Country.

2000 – Burger Giant Mc Donald’s tied up with BPCL to open and run restaurants at

select outlets across the country.

2000 – BPCL in association with Iftex Petrochemicals ltd. launched ‘Bharat Iftex’, a

co-branded multifunctional additive (MFA).

2000 – BPCL launched another card product, ‘Smart Fleet’, aimed at fleet owners and

corporates.

2001 – HPCL introduced its Smart Card in Bangalore for the first time in country.

2001 – BPCL launched its convenience stores chain christened as ‘In & Out Stores’

at select outlets.

2002 – New generation Auto fuels IOC Premium and Super Diesel launched by IOCL

later known as (XtraPremium and XtraMile respectively).

2002 – Tata Engg., BPCL tie up to market co-branded fuels.

2002 – BPCL launched premium grade petrol ‘Speed’ in Mumbai.

2002 – BPCL tied up with Café Coffee Day to open CCD outlets in select In & Out BPCL

petrol pumps.

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2002 – HPCL tied up with Lubrizol for its own high performance petrol,branded

‘Power’.

2002 – HPCL unveiled branded petrol and diesel (Power, Turbojet respectively)

2002 – HPCL unveiled new retail brand ‘Club HP’ through which it intended to offer

quality personalized vehicle and consumer care through select outlets.

2002 – FedEx entered into one-year agreement with HPCL to set up transportation

services at HPCL’s 100 Club HP outlets in eight cities in the country.

2003 – Concept of XTRA, covering retail outlets and customer service, lauched by

IOCL.

2003 – BPCL launched ‘Speed93’

2003 – HPCL unveiled a high octane petrol brand in the market named ‘Power93’

2003 – HPCL unveiled ‘Smart Card’ branded as ClubHP Smart1 card to pay for petrol

or diesel bought at HPCL outlet.

2004 – Reliance Industries Ltd. entered into fuel retailing segment by opening its first

retail outlets for selling fuels.

2004 – BPCL launched ‘Hi-Speed Diesel’

2004 – HPCL signed agreement with US Pizza to open over 500 delivery units at HPCL’s

outlets around the country.

2005 – BPCL launched Speed97,its new brand of high octane petrol mixed with lubricant

additive meant to improve vehicle performance.

2005 – BPCL launched a new concept of ‘Vehicle Care Centres’ at its retail outlets.

2005 – HPCL roped in Sania Mirza to endorse retail brands.

2005 – Amex,HPCL unveiled co-branded credit card.

2006 – HPCL,MYTVS unveiled MYTVS Club HP Smart1 cards.

2006 - Kamat group joined hands with HPCL for food joints at HPCL’s outlets.

4) RESEARCH METHODOLOGY

Rationale for the study

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Retailing is defined as a business that sells products and/or services to consumers

for their personal or family use. In the era of customer retention and customer

delightment and the thin margin of profitability due to cut throat competition, every

downstream company has to provide its best. The company which identifies its customers

and its needs will emerge as the leader.

Descriptive Title of the study

The descriptive title of the study was the emerging trends, options and challenges

in Non-fuel retailing, allowances with the Fuel Business and changing industry and

political scenarios and ever increasing customer expectations.

Objectives of the study

Main objectives are:

1) Viewed the changing trends in the petroleum sector as in price changes, surging

demands, retail infrastructure, increasing customer aspirations, etc.

2) Discussed the options available to the Oil marketing companies and to try and

develop a strategic framework for achieving differentiation among competitors.

3) Studied the challenges these companies do and may face in the near future

example being decreasing ppt (per pump throughput).

Type of research: The study was descriptive and conclusive as it was being done with

aim of reaching a definite conclusion.

Contribution from study:

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Petro retailing is the major revenue generator for the downstream companies.

With so many private players coming into petro retail marketing, the company which

provides better customer services and Quality and Quantity assurance will be the major

gainer in terms of both market share and revenue. A customer chooses a firm over others

because it offers the greatest positive combination of end-result benefits and price (i.e.

the greatest value) in the perception of that customer. This study showed what are the

existing difficulties and shortcomings in this sector and what the companies should do

about it from the point of view of the people who are in direct contact with the customers.

5) EMERGING TRENDS IN THE FUEL RETAILING SECTOR

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A lot of changes are coming to Indian petrol marketing, stepping into broader

retail liberalization. Along with PSUs (IOCL, IBP, BPCL and HPCL), although Reliance

is India's biggest homegrown private-sector player, this incipient retail revolution extends

to foreign multinationals, which will get to sell directly to Indians for the first time. The

wheel has turned full circle since India nationalized subsidiaries of Shell (now Bharat

Petroleum) and US Esso (now Hindustan Petroleum) in 1974, turning petroleum into a

state affair. Shell, Reliance and another private domestic concern, Essar Oil, are

concentrating on highways where 330,000 truckers guzzle $10 billion worth of diesel

every year as the cities are crowded by the State oil companies.

The new entrants are offering choices to Indian motorists. Most pumps have been

isolated entities, selling a cocktail of kerosene, a highly subsidized product, and gasoline.

Today there are pumps every few kilometers. Tired truckers, who earlier curled up in

their vehicles for a nap and urinated by the roadside, now use motels, restrooms and

telephones offered by Reliance's new pumps. And urban Indians, who until recently

drove outdated cars and relied on word of mouth to find a clean pump, now drive large

Fords and Hondas and demand better fuel and service.

Competition is forcing Indian Oil, Bharat Petroleum and Hindustan Petroleum,

which together run more than 20,000 outlets nationwide, to clean up their acts with

various anti adulteration steps. The highway-building program should induce big

increases in Indian oil consumption, currently only a tenth that of the U.S. Only 7 in

every 1,000 Indians owns a car, as compared with 12 in neighboring Pakistan. Surely

$50-a-barrel oil will slow things in a largely poor country like India, but under normal

circumstances the gap with the West will close.

India requires an investment of at least $450 million in the petroleum sector to

gain retail rights. And it is tough to make your board understand why a bureaucrat or a

minister sitting in New Delhi should fix the price of your gasoline and diesel when you

have put that kind of money into the country. India deregulated the oil sector in 2002,

but, as with many things in this country, the gesture was purely symbolic. India's foray

25

into freer petroleum retail is a teaser to throwing open an estimated $200 billion broader

retail market (just under Wal-Mart's total sales) to foreign direct investment.

Supermarkets and department stores make up only 2% of this market, with the rest

coming from 12 million mom-and-pop stores, according to a Jardine Matheson report.

India badly lags its modern benchmark, China, in this aspect of consumerism--although it

is just ahead of China in opening gasoline retailing.

Name of the company Number of retail outlets

IOCL (with IBP) 16000

BPCL 7332

HPCL 7313

RELIANCE 1300

ESSAR 511

SHELL 40

ONGC 2

Some of the factors leading to the current changes in the petro-retail scenario in

India are as follows:

5.1) DEREGULATION OF THE PETROLEUM SECTOR

During the last 25 years, functioning of the oil industry was governed by the

Administered Pricing Mechanism. The APM served to achieve the following primary

goals:

Ensure availability of certain products at subsidized rates to the economically

weaker sections of the society and for priority sectors like Fertilizers through a

system of cross subsidization of products,

Ensure stable prices, so that the domestic market is insulated from the volatility of

prices in the international market,

26

Regulate returns to the Oil companies at reasonable levels, consistent with

efficiency of operations, to generate sufficient resources for encouraging growth

of infrastructure facilities,

Minimize the cross haulage of products by making available products at a uniform

price ex-all refineries, and

Achieve social objectives such as demand management.

During this period, the oil industry approached every need of the consumers in a

coordinated way. The supply plan mechanism, under which the product was made

available to all the players irrespective of the original ownership of the product, provided

for coordinated logistics movements. The coastal, pipeline and rail movements were

planned on industry basis. As a result, the infrastructure was also developed on industry

basis, with one of the companies acting as lead giving hospitality to the companies which

were not represented.

However, the APM also had certain major problems. The need to bring domestic

prices in line with the international prices, the new environment regulation requiring

considerable investment in the oil sector forced the Government to have a look at the

regulated regime. 

To start with Government deregulated the Lubricants marketing in 1993. This

sector immediately witnessed entry of new players and number of competitors increased

multifold. The new players brought in new Unique Selling Propositions (USPs) including

international brands like Shell, Caltex, Mobil, Elf, Total etc., improved products and the

market became very active. On the other hand, a lot of companies also offered cheaper

alternatives, not always meeting the minimum specifications. The Government

deregulated refining sector and Industrial fuels marketing in 1998. This gave rise to

import parity pricing of the industrial fuels. Furnace oil and Naphtha prices, which

remained fixed over long periods like an year or so -started moving in line with the

international prices. The periodicity was initially one month. However, it was observed

that even this period could result in price distortions -resulting in imports from the nearby

27

markets. Eventually the prices started changing every 15 days and the cycle got settled.

Today, a major portion of direct fuels marketing is being done by the refineries directly

'in their own economical zone with certain product exchanges matching quantities on a

ton -to - ton basis. The next step was in 2001, wherein the ATF prices were deregulated,

which prices started reflecting international trends.

Finally effective 1st April 2002, domestic and transportation fuels were also

deregulated. This has led to fluctuating MS and HSD prices -changing every 15 days. The

domestic fuels viz. SKO and LPG are still subsidized and oil companies have retained the

selling prices of these products despite of increase in international prices. The retail fuels

followed the ATF model and the major change, which took place as a result of

deregulation, but was not felt by the common man, was the change in distribution system

and pattern. The deregulation also brought in customer focus in the working of the oil

companies. Petro-products, which were a commodity till then, were being seen

differently. The companies desired to establish their "Brand Image" in the market. They

realized that only the customers could make them grow and proper attention was given to

their needs.

The international format of a New Generation Outlet was introduced by BPCL to

the Indian customers. These outlets, in addition to being attractive and sleek, are very

efficient in customer handling and services. They included additional services like

ATMs, In and Out stores, Car Wash, etc. The companies introduced loyalty program me

and ease of payments through 'Petro Card' for urban consumers and through 'Smart Fleet

card' for major fleet operators. Both these programmes are based on Smartcard

technology. Deregulation opened avenues for marketing improved branded products.

IOCL came up with Xtra Premium,and Xtra Mile, BPCL came up with Speed93, Speed

97,Hi-Speed Diesel, and HPCL introduced Power petrol and Turbojet Diesel.

APM dismantled in 2002, but government still involved in fuel pricing; pricing

decisions based on social considerations. Private companies allowed marketing MS &

HSD - imports also decanalized in 2003. Public sector oil marketing companies are

technically allowed to sell petrol and diesel at market prices, although they end by selling

28

these at below market price, since their largest shareholder, the government of India,

regulates product pricing, in the hope that ruling party politicians win elections. After all,

diesel is a mass consumption product. The same logic applies to LPG and kerosene

pricing. Taxes make a good part of the price paid for petrol and diesel, which account for

50% of the petro-products consumed in the country. In the four big metros, tax as a

proportion of the final price is as high as 57% in the case of petrol, 37% for diesel, 23%

for kerosene and 22% for LPG. Reliance on the petroleum sector for garnering taxes is as

high as 20% for the central government. In the case of states, it is around 50%.

The oil companies are not allowed to raise prices by that level, because of the

existence of the price control system that exists as part of the Indian planning. Oil policy

in India requires to shift away from the interests of socialists, the interests of oil PSUs

and the interests of oil companies like Reliance. Instead, we need to apply the first

principles of a market economy. Better health of oil companies requires the sector must

be exposed to competition. At present, a host of barriers make it difficult for the private

sector to import and sell petroleum products in the country. In the 1990s, India found its

way out of a mess in the industrial sector - where there were thousands of incompetent

companies - by cutting customs duties and opening up to imports. The same story applies

in the petroleum sector. We should focus on opening up the Indian market for petroleum

products to global competition. Anyone should be allowed to open petrol pumps, buy

petrol from anywhere in the world and sell to customers. Each of these steps should be

jealously protected from the meddling of the ministry of oil and it’s cronies in the oil

sector. This will help destroy the monopoly of oil companies and force them to work in a

competitive framework.

The oil industry is on a threshold of change. It is changing its character from a

Government controlled - faceless - bureaucratic in nature to a vibrant, customer oriented

industry. The battlefield of competition would be the market place -where the customer

would be the king. He would decide based on his experience, choice, preferences,

preferred brand, services offered etc. The retail market would be witnessing entry of new

players like RIL, Essar and some multinationals. The oil companies would also require

29

coordinating amongst themselves to ensure that the costs are maintained at least possible

level. Both the competition and coordination in the oil industry would result in a better

market for the consumers.

5.2) INCREASING VEHICLE SALES

The sales of vehicles including 2-wheelers,3-wheelers, 4-wheeler LCVs and

HCVs have been increasing in the recent years. This puts an extra pressure of increasing

demand of petrol products on the oil companies to cater to. For meeting this surging

demand, they look towards improving their entire supply chain to cater to most of the

customers. Thus opening up of new retail outlets and improving the current ones comes

under solving the whole problem. People go for branded fuels to make their vehicles fuel

efficient.

The chart below shows the trend of increasing vehicle sales in India in the recent

years:

Fig 8: A graph showing increasing vehicle sales in India

5.3) CHANGING INFRASTRUCTURE

New generation retail outlets provide all sorts of benefits to the consumers along

with filling of fuel. With the emergence of organized retailing in the country and a

growing demand from consumers for a superior shopping experience, Convenience

30

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

NU

MB

ER

OF

V

EH

ICL

ES

2002-2003 2003-2004 2004-2005 2005-2006

YEAR

VEHICLE SALES IN INDIA

Commercial Cars 3 w heelers 2 w heelers

Retailing has emerged as a key business area for petroleum companies given their wide

retail presence, existing customer base and strategically located sites. Convenience need

gaps have been felt in various fields and research has shown that the urban consumer

today seeks convenience in shopping for their basic requirements so that their precious

time is reserved for more fruitful pursuits. Petrol retail outlets provide the right

framework for setting up convenience retail chains where the consumer has the

opportunity of combining shopping with the fuelling occasion.

Petroretail Outlets nowadays are equipped with state-of-the-art infrastructure,

including Multi-Product Dispensers to pre-set price and quantity of fuel and Electronic

Air Gauges facilitating precise inflation of tyres. Attractive Canopies are suitably

designed to provide shelter and adequate lighting of the forecourt at most Retail Outlets.

On the non-fuel front also, oil marketing companies have introduced various

services including convenience stores, food services, and Ancillary services. For eg.

BPCL has introduced 'In & Out’, these malls offer the customer a broad range of

facilities and brands to choose from. ATM's, Cybercafé, Courier services, Laundry, Photo

Studio, Music, Fast Food, Greeting Cards, Courier Services, Bill Payments, Movies /

Entertainment Tickets, etc. have made Bharat Petroleum's Retail Outlets a happening

place and indeed an rewarding experience for consumers. Similarly other companies

have their own convenience stores and other services like free air, free vehicle servicing

etc. which they provide to their consumers to attract and retain them.

5.4) UPGRADING TECHNOLOGIES

The companies are also going in for various innovative technologies especially

using Information Technology for various E-Retail solutions at their ROs. Some of these

include high quality dispensing units, intensive use of RFID (Remote frequency

identification device), etc.

Drivers for “Emerging Technology” in Petroleum Retail are :

Efficient Customer Service & Enhanced Level of Customer Assurance.

31

Compliance to stringent Environment, Health & Safety (EHS) standards.

Need to fuel vehicles using “alternate fuels”

Miscellaneous.

≈ Cost Reduction

≈ Ease of Construction / Maintenance.

≈ Better Control over Site Operation

Emerging Trends in the “Fuel Forecourt” include dispensing units, Robotic Fuelling,

Card Payment System, Intensive Use of RFID technology etc. Also for Customer

assurance to quality and quantity, there are methods to check higher reliability in

measurement and delivery with Temperature compensation.

Fig 9: Smart

Merchandising

Using

dispensers

32

Internet Ready and Wifi Capable Fuel Dispensers-Docking Station for Vehicle.–

Dispensers equipped with Touch screen and Speaker.–Transfer of “Media content” from

Dispensers to another wifi enable device (e.g. Mobile Phone or other entertaining system

like Car Stereo) using Bluetooth technology.–Dispenser’s Media enterprise will enable

the “Real Time” News Headlines, Traffic information and weather report on its screen.–

Full motion Video can be telecast.

Additive Injection System integrated with Dispensers for flexible “Dosing” of Additive

in any grade of fuel. There is no need to maintain separate tanks for different grades of

fuel. This system can be integrated with “Point of Sale System”

33

Fig 10: Additive injection system integrated with dispensers

Autonomous Robotic Fueling Station

Customer drives in the Retail Outlet. He then inserts Payment card into the Pump

control interface. Selects the Product required. The transponder on the Windshield of

vehicle transmits the information about make and model of vehicle. By receiving the

car’s information, Robotic Arm knows the precise location of Fuel Cap and does the

following operations–Moving down to the exact location of fuel cap.–Opening of fuel

cap.–Nozzle insertion and beginning of fueling.

Increasing Use Of RFID

The vehicle is identified automatically at the entry to fuelling island.When nozzle

is inserted into the fuel tank, the vehicle usage data is transmitted automatically to the

Vehicle Scanning Unit (VSU) and Point of Sale (POS) or dispenser. The dispenser then

authorizes after validation of data.

34

Fig 11: Automatic fuelling system

Benefits to consumers include:

☺ Assurance of fuel quality and the amount being dispensed

☺ The ability to use a variety of payment methods, such as cash, debit or credit card, or

loyalty card, at the pump

☺ Cashless transactions and self-service operations

☺ An extension of the automation system that could also control operations of

convenience stores located at retail outlets, car washes and other value-added services

they provide.

Benefits to oil companies include:

☺ Improved customer retention and an increase in market share as a result of greater

customer loyalty

☺ The ability to offer various loyalty programs to fleet owners

☺ Improvement in retail station operational efficiency and asset utilization

35

☺ The ability to study demand of products and loads at various outlets to make tactical

and strategic marketing decisions regarding petroleum retailing

☺ Greater visibility into the outlet operations

☺ Access to online data that will help monitor and prevent fraudulent practices

5.5) BRANDED FUELS

Branded petrol, such as Bharat Petroleum's Speed, Indian Oil's XtraPremium and

Hindustan Petroleum’s Power , are either (as in the case of the former brand) regular

unleaded petrol that have been treated with multifunctional additives or high-octane

petrol (as is the case with the latter) that has been treated with additives to boost the

performance and power characteristics of engines. Most new generation cars launched in

the country after 1990s need better quality fuel to be able to offer their best in terms of

smooth, knock-free performance and peak power output. The cost of maintaining the car

and the cost of spares that need frequent replacement will also be reduced with the use of

better quality fuel. Similarly, we have branded diesel like BPCL’s Hi-Speed, HPCL’s

Turbojet and IOC’s Xtra- Mile.

Further, the important point that tends to be always ignored is the longevity of

equipment and components in the car that go on to reduce exhaust emissions such as the

catalytic converter. Over the first two years of the car's usage, components, such as the

fuel injectors, fuel intake valves and ports, carburettor and the combustion chamber, tend

to slowly accumulate carbon deposits that affect the engine's performance. This

accumulation of deposits and their effect on performance is even more pronounced in the

new generation, Euro II compliant passenger car gasoline engines that feature multi-point

fuel injection; the effect of deposit accumulation and its effect on optimum fuel injection

will be felt even in carburetted engines.

Bharat Petroleum's Speed is a blend of petrol and multi-functional additives,

sourced from Chevron Oronite Company LLC, a ChevronTexaco company. The additives

comply with EPA 97 (Environment Protection Agency, US) requirements. Speed is said

to contain unique deposit control additives that effectively remove harmful deposits from

36

all fuel metering systems and components resulting in a better overall engine

performance, including easy starting and smooth idling, maximizes power and

acceleration, reduced emission and elimination of engine knocking. Overall, the benefits

of using Speed are said to be improved mileage and reduced maintenance costs in the

long run for all petrol engines, including those of two wheelers.

Indian Oil's XtraPremium is also unleaded petrol that comes pre-mixed with

additives. However, only in this case, the base fuel, in addition, comes with a higher 91

Octane content. Indian Oil XtraPremium's high-octane level and additives are said to give

the engine better anti-knocking and engine-cleansing qualities. Similar to Speed,

XtraPremium will also improve mileage and reduce emissions in the long run. Complete

combustion of the high-octane petrol will of course improve the engine's responsiveness,

acceleration and build up mileage in the long run.

These branded fuels are preferred by consumers even though they are a bit more

expensive than the ordinary petrol and diesel. Most of the time, these play a big role in

retaining customers and making them brand loyal to the particular company.

37

Fig 12: Some facts after market research on branded fuels

Source: BPCL

The customer has the demanding expectation of excellent engine design and fuel quality,

to meet the emission regulations, with high fuel efficiency, drivability,power and

comfort. Clearly, while customers have a close association with the brand, the association

with the parent company is poor. Selling a quality product is tough enough — increasing

customer awareness is trickier.

38

Fig 13: Showing Product life cycle for different fuels and markets

5.6) NON- FUEL INITIATIVES

One of the more visible transformations in the retail business of auto fuels is the

recognition by the oil companies that non-fuel activities could be an important source of

revenue at their retail outlets. So we have convenience stores, fast food centers and other

such amenities finding a place at petrol stations. This is a very welcome change.

However, the possibilities are immense and efforts in this direction too slow and limited.

The guidelines issued by the Ministry of Road Transport and Highways stipulate that the

petrol stations should be a composite rest area for the highway users and provide all the

products and services that a highway user may require under one roof. These could range

from convenient stores, restaurants, cyber cafes etc. for the car users to dhabas,

dormitories, dhobi services etc. for the truckers.

Realising the importance of a greater understanding of consumers’ needs and

consistent with its core objective of continuously adding value to it’s customers through

39

Embryonic MaturityGrowth Decline

MS RuralMarkets

HSD RuralMarkets

MS + HSD Urban Markets

Branded fuels

innovative means, Bharat Petroleum has launched its convenience retailing initiative

under the “In&Out” brand. Bharat Petroleum is the 2nd largest oil marketing company

in the country with over 6000 retail outlets spread across the length and breadth of the

country. The In&Out chain of convenience stores is being set up in the urban markets at

strategically located retail outlet sites with high customer footfalls.

The “In & Out” store at Bharat Petroleum petrol pumps, which was launched in

2001, offers a convenience proposition where a number of typical household errands are

aggregated under one roof for the benefit of the customers. Today there are more than

240 In&Out stores across India, which bring in unmatched convenience at the petrol

station. Strategic alliances have been formed with major brand owners and retailers in the

country to further strengthen the convenience proposition.

Fig 14: Pictorial view of The In & Out store of BPCL

Similarly to power up its growth strategy, IOCL is looking into getting into

altogether new areas, non-fuel retailing being one of them. It plans to start fuel services at

shopping malls. For this, it has already had discussions with the Ansals and Kishore

Biyani’s Future Group. That should be up and running soon. IOC’s retail initiative is to

beef up the Convenio stores (they sell a wide range of packaged foods, and hot and cold

40

drinks) that it had set up at select petrol pumps a few years ago. It has hired retail

consultancy Technopak to help formulate a strategy to redo the outlets.

Forecourt activities by Indian Oil Companies : Indian Oil Corporation Limited :

Entered into tie-ups with Akbarally’s for convenience stores, Apollo Hospitals for

pharmacies, Dominos Pizza for pizza outlets and ICICI Bank, Centurion Bank and

Bank of Punjab for ATMs.

Formed an alliance with MTNL to enable its customers to make their payments at

select outlets in Delhi and Mumbai.

Introduced the first Jubilee retail outlet along Highways with numerous services

such as first aid area, mini mall with post office and banking facilities and spare

part retail shops.

Introduced the ‘Top Gear’ outlets featuring fast food restaurants, pharmacies and

auto car wash facilities.

Hindustan Petroleum Corporation Limited :

Entered into tie-ups with Cafe Coffee Day, Baskin Robbins, Subway, Crossword,

Gitanjali Gems Limited and McDonalds to set up outlets at select locations.

Introduced several convenience facilities at their outlets such as

HP Speed Mart (Convenience Store)

ATM’s

Automatic Car Wash

Commissioned India’s first public access Internet kiosk

41

Bharat Petroleum Corporation Limited :

Launched convenience retail initiative under ‘In&Out’ brand offering a wide range

of services.

Entered into tie-ups with McDonalds, Cafe Coffee Day, Planet M and Music World

to set up outlets at select locations.

Tied up with Cross Roads (Car helpline) to offer customers value added services

such as discounts on lubricants and engine oil and free petro cards.

Fig 15: The sorry figure of profits from non fuel business in India

5.7) CHANGING CONSUMER EXPECTATIONS

The consumers nowadays are the ultimate drivers forcing a company to make its

operations more efficient and effective. In this era of cut throat competition, the

companies are doing their best to attract new and retain old customers. But the

expectations of the consumers have been witnessing a never stopping scenario. The next

42

generation petro-retailer will adopt a consumer centric organizational model aligned to

a distinct value proposition.

Q & Q still are the major forces to influence a customer’s choice of a fuel retail

outlet. The companies should thus build on strategies to ensure them of the Q & Q of its

fuel. The consumer also demands a higher level of product delivery and customer service.

That’s why companies have come up with various technology driven solutions to make

the customer stay at the retail outlet fast and satisfying. The companies have come up

various ideas like automated dispensing units, Smart cards, etc. Quality is again

ascertained by the company in terms of branded fuels assuring the consumer of improved

and efficient vehicle performance.

Oil companies are working towards optimizing their entire supply chain eg.

FedEx’s agreement with HPCL mentioned in the previous chapter. The customer has

been becoming more and more conscious of fuel efficiency and engine performance. In

this respect, the oil cos. convince the customers to buy branded/premium fuels which are

meant for better engine performance and other benefits to the consumers. Also cos. Have

come up with other recreational facilities especially for outlets at the highways like

dhabas, onestop trucker shops (BPCL), etc.

To better service the customers, the oil cos. also give them other facilities like

clean & Hygienic place to eat & wash, rest & recreation for highway travel, allied

facilities like ATMs, Cyber cafes, courier services, convenience stores etc. Thus we see

that the companies are now changing their outlook and strategy just to please the

customer.

5.8) GOVERNMENT INITIATIVES

The biggest initiative taken by the Government includes allowing the entry

of the private player like Reliance,Essar, Shell,etc. in the downstream retail sector. A

level playing field is an absolutely essential requirement for players to survive in any

43

competitive market. A competitive market makes the industry efficient and effective. The

expert committee report on the integrated energy policy makes the following

recommendation for a competitive environment across the energy sectors:

“Apart from pricing policies, an environment that allows multiple players in each

element of the energy value chain to compete under transparent and level terms is

essential in realizing efficiency gain within the energy sector”.

The Indian petroleum industry pursued the policy of liberalization in the year 2002 and

subsequently private players made huge investments along all segments of the petroleum

value chain. Private sector investment in retail marketing amounted to over Rs 7000

crores (appx. $ 1.56 billion), including investment by dealers and transporters. Private

sector presence in retail marketing has led to multifarious benefits to stakeholders. It has

created direct and indirect employment opportunities for more than 70,000 people.

Private players have introduced better technology, aimed at enhancing customer

satisfaction by delivering unadulterated fuel and better service quality.

These efforts were severely affected after the announcement of oil bonds to PSUs.

The Govt. is extending a subsidy of Rs. 3.39/ litre on MS and Rs 5.77/ litre on HSD to

PSUs. As a result, private players have shut down assets which delivered substantial

value to customers. Common carrier infrastructure and product sharing may be actively

considered by the regulator. Market based pricing is under consideration as well.

44

THE PAST………. AND THE PRESENT (A Pictorial View)

45

Fig 16: The past and the present (pictorial view)

6) OPTIONS AVAILABLE TO OIL MARKETING COMPANIES

The retail operations of any company have to be planned accordingly keeping in

mind both its top-line and bottom-line operations. The top-line issues would include

Corporate branding, pricing, category management, and customer retention. These are the

key issues which a petroleum retailer has to look into to make the product visible,

accessible and attractive to the customer, especially in the petroleum sector as it is mostly

generic i.e. non-differentiated. The bottom-line issues include distribution cost

optimization and other direct-indirect cost management.

Traditional approaches towards marketing would only give incremental results. The key

for any marketer in today’s marketplace would be to differentiate, differentiate & further

differentiate. Meaningful differentiation can only come through a holistic understanding

of the customer.

Fig 17: Aligning metrics for profitable operations

RetailPlan

Corporate Branding

Top-lineoriented

Customer retention

Other direct-indirect cost management

Distribution cost optimization

Category management

Pricing

Bottom-lineoriented

46

Source: AT Kearney

It’s just good business sense to take what you already have, such as a good

convenience-store location with a loyal customer base, and find ways to generate more

income and profit. The concept of forecourt retailing at petrol stations is not new. It

began in the 1980s when British Petroleum launched its first convenience store. In India,

where consumer interface was recognised as a key factor, the concept was taken up in the

late 1990s by Indian Oil Corporation, which started its multi-purpose distribution centres

at petrol pumps in semi-urban and rural areas. The concept has been in vogue ever since.

But recently it shot into limelight with oil companies trying to milk this revenue stream

for more value.

6.1) FUEL BASED DIFFERENTIATION

In markets such as the U.S., petroleum retailers sell multiple grades of fuel based

on their octane ratings, additives added and/or process differences. Multiple grades cater

to an evolved consumer segment who seek enhanced fuel performance and can support

the premium price/margin business model. For example, in USA, a leading petroleum

brand has built a strong equity around ‘good performance’, enabling it to capture a

greater share of the ‘performance’ motivated consumer segment.The impact of this has

been the relatively high contribution of premium grades to the brand’s product mix,

translating into correspondingly higher revenues and profitability. Premium grade

petroleum consumers have been found to be less price sensitive and more brand loyal.

In India, the growth in the number of cars in the large car segment, adoption of

multi-point fuel injection engines and the introduction of stringent pollution emission

norms suggests that there maybe an opportunity for fuel-based differentiation targeting

the ‘Prestige Seeker’ and ‘Trust Seeker’ consumer segments.

Different companies have different brands which have been popular owing to the

advertising and positioning done by these companies.

IOCL : Xtra Premium Petrol, Xtra Mile Diesel, Servo Lubericant, Xtra Care outlets

47

BPCL : Speed, Speed97, Hi-Speed Diesel, In & Out Stores, Mak Lubericants

HPCL : Power Petrol, Turbojet Diesel, Club HP outlets

48

Fig 18: A pictorial view of retail initiatives taken by different Indian oil marketing cos

6.2) VALUE ADDED PRODUCTS & SERVICE BASED

DIFFERENTIATION

Apart from being used as a basis for differentiation, non-fuel products and

services can contribute significantly to revenue and profit enhancement. Non-fuel

revenues of Petroleum retailers contribute as much as 38.6% in the U.S. and 28% in

France, and their significantly higher profitability makes them particularly attractive;

average profit contribution non-fuel products and services is 65.8% in the U.S. and 40%

in France.

There are a number of products and services which petroleum retail stations can

offer, but they can all be broadly grouped into three categories –

Convenience stores,

Food service outlets, and

Ancillary services.

CONVENIENCE STORES:

The concept of convenience stores has not as yet taken off in India. Most

consumers in India today are unwilling to pay the price premiums required to support the

organized convenience store business model; the ‘MRP’ regime also restricts the c-store

operators’ ability to charge a premium for the higher service levels that it may provide.

Coupled with this are the difficulties in operating a profitable convenience store business

model in India where the supply chain for most products remains highly fragmented and

in-efficient.

The critical issue is to develop a product assortment that would drive both traffic

and consumer purchases; this being a function of the consumer group which the brand

targets. For example, for the ‘Routine Chore Doer’, the product offer could hinge on

fresh fruits and vegetables, e.g. a ‘Mother Dairy’ vegetable stall at every petrol pump.

Operating a c-store requires an entirely different set of capabilities from petroleum

49

retailing---- sourcing and supply chain management are critical skills for a c-store

operator and may need to be outsourced by Indian petroleum marketers as they build

other consumer facing skills. A reduced risk model could be an alliance with an

established retail chain e.g. Foodworld or Subhiksha which would provide the required

skill synergies and also ensure immediate consumer credibility and trials. This model has

worked well in more mature markets where consumers require greater choice and

assortment mix. It is also important that the petroleum c-store operator develop a strategy

that differentiates its convenience store from other similar stores as well as the traditional

retailer. There are multiple opportunities for differentiation in the convenience store

market; the key is to make a consumer-based choice.

For an international brand entering the market in India, targeting the ‘Prestige

seeker’ consumer segment, the ‘smart shop’ ---- clean, well-lit, wide aisles----may offer

a differentiated value proposition. A convenience store operator can select from eight

levers which provide a basis for differentiation depending on the needs of the target

consumer segments.

Fig 19: Petro-retailers in India will need to adapt global business models to suit the local environment

Source: AT Kearney

Breadth of offerings

Store Appearance

ServiceConvenience

Image

Price

Basis of Differentiation

Food

Distribution

orOR

ororOR

50

FOOD SERVICE :

This is an emerging sector in the non-petroleum range of products from

sandwiches to full branded fast food operations. The critical issues are: what services

should be offered, and how should they be provided? In the U.S., food prepared on-site

for take-away is a significant category of foodservice sales and caters to the habit of

grazing i.e. eating ‘on-the-move’. In India, eating-out is more of a social event, and thus

the platform of ‘food on the go’ maybe less relevant.

Convenience stores are likely to be ‘destinations’ and not ‘traffic interceptors’ in

India. Therefore, full- fledged fast food operations could offer greater appeal at

petroleum stations. The exact nature of food service provided is a function of the target

consumer; a Barista coffee pub appeals to a very different consumer type from a

‘Chinese van’ consumer, but a Haldirams and a McDonalds may be complementary.

An interesting option could be to capitalise on the growth of organised Indian fast

food retailing, using relatively well located and spacious real estate (petrol stations) to

establish ‘chaat’ corners jointly with brands such as Haldirams, particularly in the smaller

towns. Petroleum marketers can adopt a number of operating models for food service.

From an alliance with an established brand such as McDonald’s to the retailer's own

brand/label. Factors to be considered in deciding which food service model to adopt:

1. Space available (including parking)

2. Labour implications

3. Skills/ resource requirements

4. Consumer demographics/psychographics

5. Competitive environment.

Branded food service offers the benefit of immediate brand recognition by

consumers. It also provides assurance of quality, freshness and consistency. In India,

51

where the concept of food service at petroleum stations itself is new, an alliance or joint

venture is likely to be the most suitable operating model.

ANCILLARY SERVICES:

Ancillary services complement regular convenience stores and food service by

providing additional reasons for consumers to visit the non-fuel area of the stations while

increasing the retailers’ share of the consumers’ wallet on each visit. The range of

ancillary services that can be sold through petroleum stations is large, and includes

ATMs, insurance sales agents, courier services, pre-paid card sales, laundry services, car

wash, newspaper and magazine stand, and even lotteries. The key question is how much

would consumers be willing to pay for these services? Car wash services are currently

available through the unorganized sector for as little as Rs.150 per month at one’s

doorstep; can a petrol service station compete profitably with this? There may be a latent

demand for laundry services among taxi, truck and auto drivers but not among urban

private car owners.

Key success factors in value added product/services based differentiation strategies

:

Manage barriers to trial and usage, such as consumer’ perceptions of

differentials in price, selection and service.

Customize the assortment and offering to local market conditions.

Maintain low operating costs and tight inventory control.

Manage suppliers and optimize sourcing.

Build consumer loyalty through CRM, loyalty programs and incentives.

52

Fig 20: Generic Differentiation Strategies

Source: Mc Kinsey

6.3) PRICE BASED DIFFERENTIATION

This is an obvious differentiator for any product or service, and in markets such as

the USA where as many as 56% of petroleum buyers cite price as a reason for selecting

their brand. It is a powerful platform for differentiation. In India, where there are a large

number of ‘bargain hunters’, a price-based strategy could be potentially very powerful.

The challenge of such a strategy however, is to maintain uniqueness and sustainability.

When a number of petroleum retailers adopt a low price positioning, other factors such

as the associated offerings to ensure customer retention become critical.

Internationally, there are 2 broad categories of petroretailers which differentiate

themselves based on price– the grocery retailers selling petroleum and the high volume,

low margin convenience store retailer.

GROCERY RETAILING:

Hypermarket retailers are rapidly gaining share of the fuel market in the West. In

the USA, hypermarkets have 3.3% of the market value, and in Europe, 5.2% of the

number of petroleum retailing locations. Hypermarkets discount petroleum by as much as

6-12% and are projected to account for over 16% of the U.S. market by 2005. These

DiversificationNone Extreme

C Store Only C Store Only

Fast Food/Ready to Eat

C Store Only

Fast Food/Ready to Eat

Check Cashing

C Store Only

Fast Food/Ready to Eat

Check Cashing

ATMUS

Latin AmericaAsia

C Store Only

Fast Food/Ready to Eat

Check Cashing

ATM

Others

53

retailers use fuel sales as a loss leader to attract consumer traffic to their stores”. In India,

hypermarket operations are still nascent and unlikely to be a near term threat to petroleum

marketers. However the likely success of the hypermarket retail model in India will pose

a longer term threat to petroretailers here.

HIGH VOLUME, LOW MARGIN OPERATING MODEL:

Exemplified by companies such as QuikTrip and RaceTrac in the U.S., these

retailers have developed operating models building on the high price elasticity in

petroleum retailing. Selling petroleum at prices that are typically 5% less than the average

market price, companies such as QuikTrip are able to achieve as much as 75% higher

sales throughputs through their stations. Although their margins are as much as 40%

lower than the majors, their overall profitability is high. As in the hypermarket model,

they use the higher traffic through their stations to drive sales in their convenience stores,

which also typically sell at discounts to the market. The challenge to such a strategy in

the Indian context is that non-fuel sales are currently so low that the discount retailers

would be unable to boost overall profitability of their petrol stations sufficiently through

this route. Like QuikTrip, discount petroleum marketers in India would also need to

develop other consumer hooks such as ‘consumer experience’ to build consumer loyalty.

Key success factors for price based differentiation strategies:

Ability to self more profitable products/services to subsidize lower margin

'loss leader' petroleum sales.

High degree of consumer price elasticity which ensures that lower margins are

compensated through greater volumes

Supply chain optimization and sourcing efficiencies to deliver lower priced

fuel consistently

Non-price based strategies to build consumer loyalty. For example, service

experience.

54

6.4) CONSUMER EXPERIENCE BASED DIFFERENTIATION

Petroleum marketing has a strong service element which can be used as a

powerful lever for differentiation, especially in a commodity market environment. The

consumer experience, or ‘Moment of Truth’, as it is also called, has been very

successfully used by petroleum brands internationally to protect market share and to

garner loyalty. A leading Oil and Gas company in Canada has clearly differentiated its

consumer experience by ensuring warm and caring attitude towards its consumers. It

builds “environmental consciousness” and “community orientation” in its overall image

through sponsorships and theme creation. The company also continuously improves and

up-dates the retail ambience through systematic renovation at their premises.

In USA, Quiktrip also uses consumer experience to reinforce its price based

strategy. Surveys of Quiktrip consumers show extremely high value attached to their

overall experience at the pump premises. While Quiktrip ensures a warm and congenial

experience for its consumers by recruiting and grooming highly motivated individuals, it

also strikes the right chord with its consumers by storing their favourite drinks and

snacks. Quiktrip management believes in reflecting an image of “we do everything right”

in all its direct and indirect consumer interaction. Technology can also be used to greatly

enhance the consumer experience. Many petroleum majors have adopted latest

technology to ensure that consumers have a fast and hassle free service. These are mainly

in terms of the “swipe at pump” facilities, “at pump ordering” of non-fuel items through

wireless microphones, customized electronic reports for corporate fleet programs etc.

Mobil Speedpass is a good example of successful differentiation through technology-

enabled services. (Mobil Speedpass Automatic miniature radio transponders attached to

key chain or affixed to vehicles’ rear window. Transponder automatically transmits

unique, secure ten digits that are recognized by an electronic system located at the pump.

These electronic devices enable automatic charging of fuel purchases to a designate credit

or check card. All these are at no direct or indirect cost to consumers).

55

In India, where many shoppers are highly relationship oriented, personalization of

the consumer experience could offer potential for differentiation and maintaining loyalty.

Consumers attach significant importance to the “experience” within the premises in terms

of quick service, attendant disposition and overall ambience in choosing their petrol

pumps. Most have a stronger loyalty to the specific station than the petroleum brand.

Developing a brand offering for the ‘trust seeker’ with a promise of “We make you feel

special” could be a powerful strategy as long as the retailer is able to ensure consistency

of delivery across locations and over time. An experience based differentiation strategy

could be particularly relevant to existing petroleum retailers in India, who would benefit

from strengthening of their bond with the existing consumer franchise, thereby increasing

the barriers to entry for new players.

Key success factors in service based differentiation strategies:

Ensure quality of the human interface through people selection, training

and development.

Ensure consistency of service delivery across locations and over time.

Systemize the consumer experience delivery process.

Establish service recovery procedures.

Use technology to enable better consumer experience.

Personalize the experience.

56

Fig 21: Successful brand-building strategies will evolve from “product” related features to “service” related features

Source: AT Kearney

6.5) QUALITY & QUANTITY BASED DIFFERENTIATION

Customer are still cynical about Q&Q, however they would like to take it for

granted that the fuel provided to them is of utmost quality and perfect quantity. A large

base of ‘trust seeker’ segment exists who would be loyal to a company for a long time if

they are satisfied with the Quality and quantity provided to them. Challenges are

organization wide implementation of checks & balances and communication of the same

to customers. Companies are coming out with various anti-adulteration measures to give

the customers the best quality of fuel.

Product related features

Quality ?Quantity ?Location

Service related features

Personalized Consumer experience

Speed of serviceAttendant

dispositionStation Ambience

Brand building linked to customer maturity

Brand building linked to customer maturity

57

Fig 22 : Q & Q – A systems Approach

One recent example of how seriously companies are working in this matter is the

‘Revolutionary Marker System to eliminate adulteration of motor fuels’. The new

generation marker system will also ensure quality to customers of diesel and petrol. The

adulteration of diesel and petrol with marker-blended kerosene would immediately show-

up when tested using a simple kit through a simple visual check. The oil industry has now

become vigilant against the unscrupulous-habitual adulterators so that best products and

services are provided to the consumers.

The new marker system being introduced for the first time by the Oil Industry in

alignment with the international practices is expected to curb to a large extent auto fuel

adulteration using kerosene. Adulteration in auto fuels is essentially driven by the huge

price difference between auto fuels like petrol & diesel and potential adulterants like

kerosene, Naphtha and other industrial aromatic solvents. In the first phase, the marker

will be introduced in the entire quantity of kerosene that is supplied by Oil Marketing

Companies (OMCs). Based on examination by Petroleum Planning & Analysis Cell

along with Oil Marketing Companies, the marker system developed by M/s Authentix

was found to meet the various characteristics and requirements identified by the Oil

Industry. The dosing of markers in kerosene will now be carried out at Oil

Terminals/Depots of OMCs.

Replenishment system linked to stock monitoring at RO

Product filling by bulk meters and automated process

Comprehensive sealing mechanism

Vehicle monitoring and tracking system (telematics)

Automated system for tank gauging and wet-stock reconciliation

Exception reports for online monitoring of stocks

Remote diagnostics of key components in dispensing units

Accurate preset premix deliveries to 2/3 wheelers

Electronic calibration and tracking of metering assembly of dispensing unit

Terminals Transportation Retail outlet Consumer

58

The revolutionary marker will provide a new thrust to the oil companies, which

have been facing the scourge of adulteration for a long time now. Field trials using the

marker were initially conducted successfully by the oil industry, after which it is now

slated for an all-India launch. All kerosene supplied by OMCs will now be marked at the

Terminals/Depots of the oil companies. In the first instance, test kits will be provided to

the field officers of OMCs to enable them to check for adulteration of auto fuels during

their inspections. The tests are simple and it is possible to visually detect even small

traces of kerosene e.g. 1% in auto fuels using a simple but highly accurate and effective

test kit.

Speaking about other measures to check adulteration Shri Murli Deora informed

that the Petroleum Ministry has been taking several steps to check adulteration of auto

fuels. Periodic monitoring undertaken by the OMCs in conjunction with the State

Government authorities and the tracking of Tank Trucks through Global Positioning

System are some of the recent initiatives. The Oil Marketing Companies have also

launched automated facilities in their retail outlets with tank level sensors and digital

dispensers connected to a server that monitors that quantity of the product stored and

dispensed through the nozzles. With the help of cutting edge technology, the oil

companies now control the entire supply chain from Oil Terminals to Retail Outlets. The

various IT-enabled initiatives are therefore aimed at securing product transfer between

the supply locations and petrol stations. It covers the entire retail outlet forecourt & back

office operations, including monitoring through electronic gauges, temperature and

density measurement through sensors, besides dispenser unit controls that are linked to an

automatic bill printing facility. The nefarious elements, which indulge in adulteration,

need to be tackled by efficient coordination with the policing authorities at both the

Centre and state Government levels.

6.6) NETWORK PLANNING

59

An optimized network is needed with enhanced capital productivity, high

throughput per RO & high market effectiveness. Network planning is required to

maximize the returns from the existing retail infrastructure and to plan future investments

and other changes that maintain or improve that return." By:

Implementation of Strategic Plans

Acquisition/rationalisation/rebuild/conversion

Improved decision making

Improving competitive advantage

Managing change

Fig 23: Different retailing models to set up network across different markets

Source: AT Kearney

The journey of network planning starts with site classification, competition

assessment (no.of competitors in a particular area), individual site strategy depending on

the kind of consumers coming in, proposal evaluation working on financial, technical,

marketing and economic feasibility of a proposed plan, network optimization

(COCO,CODO,DODO,DOCO,etc. procurement, etc.), performance measurement with

regular and sudden audits. The strategy for each location, ranging from investment to

disposal is driven by this analysis.

DOCODOCOCOCOCOCO

DODODODOCODOCODO

OwnershipOwnership

HighwaysHighways

RuralRural

Semi-UrbanSemi-Urban

MetroMetro

DODODODODOCODOCOCODOCODOCOCOCOCOMarket typesMarket types

Prevent poachingPrevent poachingReduce entry barriers for Reduce entry barriers for

small dealers in semi-small dealers in semi-urban/ highwaysurban/ highways

Reduce operating costs in Reduce operating costs in semi-urban/ highwayssemi-urban/ highways

Evolution of Evolution of petroleum retailing petroleum retailing through through Supermarkets in Supermarkets in metrosmetros

Independent dealers in Independent dealers in semi-urban, Rural semi-urban, Rural areas with areas with relationship sellingrelationship selling

Impeccable quality Impeccable quality controlcontrol

Prevent poaching in Prevent poaching in highly competitive highly competitive environmentenvironment

Price controlPrice control

CompanyCompany

When dealer not When dealer not ready to sell outletready to sell outlet

Advantages of Advantages of Company Company operations like operations like standardization of standardization of customer customer experienceexperience

DealerDealer

Co

Co

mp

mp

any

any

De

De

ale

ale rr

Op

erat

ion

sO

per

atio

ns

60

The retail strategy must govern the entire network planning process. The main

issues to be considered include maximizing volume, profitability, control, non-fuel

activities, optimization - (operational improvements), and investment required. Network

planning tools involve people, information, communication techniques, benchmarking

techniques, performance potential of the employees and the site selected, economic

evaluation of the proposal, implementation of the plan, audit and evaluation. To sum it

up, continual development and integration is the key.

Various locations have different effects on the volume of fuel sold at a petro retail

outlet. Some of them are encapsulated below:

LOCATION ATTRIBUTE INFLUENCE ON VOLUME

Carriageway barrier none Negative

Depth of plot of land Positive

Number of gensets and tractors in trade area Low Negative

Number of gensets and tractors in trade area None Negative

Households in trade area Medium or better Positive

Income Profile in trade area High Positive

Internet Competition Medium or better Positive

Relative competition Positive

Nearby_market Positive

Percentage of Traffic 3 Wheelers Negative

QSR Competition High Negative

Shop Competition Medium or better Positive

Speed_60_to 90km Negative

Speed_under_30km Positive

State_Border nearby Positive

Tax_Disadvantage Negative

Truck Hours Restricted pm Negative

61

Truck_Restriction (yes/no) Positive

Work Based Cars in trade area Medium Negative

Work Based Cars in trade area Medium or better Positive

6.7) SUPPLY CHAIN OPTIMIZATION

The main focus here is the least cost of placement with no stock outs. For this the

companies use various supply chain tools like, complex demand forecasting models,

automated inventory monitoring, scheduling tools, tanker capacity utilization tools .

vehicle tracking system/Telematics, integrated supply chain solutions, end to end Q&Q

implementation, etc.

Supply chain starts before physical distribution. It involves procuring the right

inputs (raw materials, components and capital equipment), converting them efficiently

into finished products, and dispatching them to final destinations. The supply chain view

sees markets as destination points, and amounts to a linear view of the flow. A broader

view sees a company at the center of a value network that includes its suppliers and its

suppliers’ suppliers and its immediate customers and their end customers. The company

should first think of the target market and then design the supply chain backward from

that point.

The following strategic and competitive areas can be used to their full advantage

if a supply chain management system is properly implemented :

Fulfillment – “ Ensuring the right quantity of parts for production or products for sale

arrive at the right time.” This is enabled through efficient communication, ensuring

that orders be placed with the appropriate time available to be filled.

Logistics – “Keeping the cost of transporting materials as low as possible consistent

with safe and reliable delivery.” Here the supply chain enables a company to have

constant contact with its distribution team. Efficient vehicle tracking systems have

been developed by companies in this respect.

Production – “Ensuring production lines function smoothly because high-quality

62

parts are available when needed.” Production can run smoothly as a result of

fulfillment and logistics being implemented correctly.

Revenue and Profit – “Ensuring no sales are lost because shelves are empty.”

Managing the supply chain improves a company’s flexibility to respond to unforeseen

changes in demand and supply.

Costs - “Keeping the cost of purchased parts and products at acceptable levels.”

Supply chain management reduces costs by increasing inventory turnover on the shop

floor and in the warehouse.

Cooperation – “Cooperation among supply chain partners ensures mutual success.”

Collaborative planning, forecasting and replenishment (CPFR) is a longer-term

commitment, joint work on quality, and support by the buyer of the supplier’s

managerial, technological and capacity development. This relationship allows a

company to have access to current, reliable information, obtain lower inventory

levels, cut lead times, enhance product quality, improve forecasting accuracy, and

ultimately improve customer service and overall profits.

Fig 24: Determining optimal order quantity Source: “Marketing Management” by Philip Kotler

63

Fig 25: Operational efficiencies initiatives

Source: AT Kearney

6.8) USING INFORMATION TECHNOLOGY AS KEY ENABLER

Oil and gas is a global, cost-competitive business. Technology investment

priorities in the industry have been to improve exploration, oil field recovery and refinery

operations. Due to increased system complexity and demands, threats of terrorism and

security breaches — not to risks.

Information management is a crucial issue for oil and gas companies. For

instance, seismic data of a 20 square-mile survey for an exploration company can easily

generate 800 GB of data. The amount of data that is being stored and the duration it is

kept online are growing rapidly, but the resources to manage it are not. This presents a

considerable challenge to companies striving to exploit information for competitive

advantage and storage professionals tasked with storing, managing, and protecting that

data.

Implement SCM Solution

IncreasePipeline Transport

Automated Fuel Dispensing

Cheapest and most efficient Transportation mechanism

Improves cost and operational Efficiencies at the retail outletsIntegrated supply chain

Management solution from crude buying to product procurement.

ImprovedOperationalefficiencies

64

Fig 26: Using IT in different areas of the petroretail sector

Source: AT Kearney

One recent example of how IT has helped the oil companies to service the

customers better is “Cashless Transactions for Convenience Retailing”. These provide

convenient payment methods using smart card/magstripe technology. These provide

improved efficiency, effectiveness and better control. This is a stepping stone in market

initiatives towards better market share with loyalty marketing. The companies are trying

to take advantage of innovative technologies like sms,etc.

Fig 27: Dual card concept

Source: Cardtrend Petrol payment marketing solution.

Monitoring & control Logistics Dynamic pricing Improving RO effy. CRM on forecourt System driven No Dry-outs

Assurance of Q & QConfidence of

transactionSpeed of transaction.Loyalty discounts /

rewardsExtended servicesEasy payment mode

optionsQuality time at RO

Automatic reconciliation Smooth shift change Automatic reporting Automatic billing and

accounting Improving RO staff

efficiency Audit trail Remote viewing of RO

transactions

Oil company

Retail outlet

Customer

DRIVER CARD

VEHICLE CARD

Pool Drivers Corporate Cars

Both Cards Used For Each Transaction

Signature Or PIN No.

Security / Reduce Abuse

65

Fig 28: Single Cards Concept

Source: Cardtrend Petrol payment marketing solution.

HOW A PETROCARD OR A FLEET CARD WORKS:

FLEET

7002841 310009 000033JABATAN PERDANA MENTERI

Awg Osman Kassim

Driver

FLEET

7002841 310009 000033JABATAN PERDANA MENTERI

Awg Osman Kassim

Driver

FLEET

7002841 310009 000033JABATAN PERDANA MENTERI

Awg Osman Kassim

Driver

Petrol StationCard Management System Host

66

Steps:

Customer fuels vehicle and wishes to pay

Cashier enters sale details

Fleet/Cash card presented to card reader terminal.

Fleet/Cash card swiped for transaction authorization (Vehicle Card swiped for

verification, if applicable)

Cardholder signs charge slip (or PIN based)

Card Terminal stores details of transaction

Transaction details upload to backend for posting

Other emerging trends in forecourt retailing enabled with the help of IT include

Automated dispending units, Smart dispensing unit offering merchandise, promoting

store sales,etc., additive Injection System integrated with Dispensers, Autonomous

Robotic fueling Station, Payment by Touch –“Bio Pay” (The technology enables the

payment for transaction by the “touch of finger”.), Aggregation of Payment options -

Magnetic Stripe card, Smart Card or RFID Card can be accepted by single terminal

which may be fitted in Dispenser or as a standalone unit (OPT), Paying from Home

–“iFuel” Kiosk, Internet based Payment system, RFID Tags–Radio Frequency

Identification Tags, used for communication between Dispenser and Customer. (Hand-

Held Key Fobs-The tag provides customer’s validation by waiving it near Dispenser’s

bezel, Vehicle Mounted Tags–These Tags are mounted on the vehicle. The vehicle

information Box, when arrives in the vicinity of Dispenser’s Tag, downloads relevant

information to Dispenser Vehicle), Wireless automatic fuelling, Increased Flexibility

of Payment -Cash Acceptor integrated with Dispenser,etc.

Fig 29: Cash acceptor integrated

With dispenser

67

7) CHALLENGES FACED BY OIL MARKETING COMPANIES

The last few years have seen several developments in India’s petroleum sector

that continues to make a transition from a fully controlled industry to one that is driven

entirely by market forces. However, the highly sensitive nature of the industry and the

potential impact of a fully decontrolled price regime on the various stakeholders have

resulted in a situation where the industry is buffeted by a host of conflicting forces. For

instance, while refining margins remain buoyant, fetching large profits for the stand-

alone refineries, spiralling crude prices and the inability of OMCs to increase retail prices

in proportion to the rise in crude prices imply that the marketing sides of the business

have started incurring large losses. The GoI has been taking several steps, albeit piece-

meal, to ensure that such losses are shared among the various stakeholders, but this in its

turn points to a high degree of policy or regulatory risks for the industry. Simultaneously,

the industry also has to contend with emerging challenges like exposure to volatility in

international refining margins, increase in competitive pressures from new entrants,

surplus in petroleum products in the domestic market, and risk of substitution for certain

petroleum products.

7.1) PROFITABILITY OF RETAIL OUTLETS

Growing competition in the retail market has prompted the OMCs to aggressively

expand their retail networks. While this strategy has acted as a protective factor against

competitive pressures, it has also resulted in a sharp decline in the per pump throughput.

The latter is a key factor determining the viability of any retail outlet, given the low

margins (gross margin of around 1.75%) in the automobile fuel dispensing business.

Lower pump throughput and consequently lower profitability, along with higher working

capital requirements (because of the sharp rise in fuel prices), have adversely affected the

viability of the retail business, especially for new entrants. Low profitability seriously

affects Fuel quality as well as various service parameters. Decreasing throughput per retail

outlet puts immense pressure on cost per KL – hitting profitability.

68

Fig 30: Station opening and closing margins: Classical Theory

Revenue Expense + Cap charge Station Opening

M A R G I N S Revenue Expenditure Station Closing

2002 2004 2006

Fig 31: Station Opening and Closing Margins: India Story

Time

Pre Deregulation Post Deregulation

Operating Exp + Cap charge

Operating Expenses

Station Closing

Station Opening

Margi

n

69

Pre Deregulation Post Deregulation

Fig 32: Reality of Petroleum Retail in India

The reason behind rapid increase in retail outlets:

One company adds new outlets and gains market share.

Others respond by opening new outlets to regain market share.

Net result, overall volumes remain almost the same.

Volume per outlet (PPT –Per pump throughput) drastically falls.

Fig 33: Projected decrease in the volume per retail outlet.

Growth in no. of ROs

Throughput

201 192 189

166149

128

0

50

100

150

200

250

FY01 FY02 FY03 FY04 FY05 FY06

KL

Throughput

No. of ROs

18239 18848 19809

2294027150

31643

0

5000

10000

15000

20000

25000

30000

35000

FY01 FY02 FY03 FY04 FY05 FY06

70

Projected Throughput

201

149

192 189166

128 124

0

50

100

150

200

250

FY01 FY02 FY03 FY04 FY05 FY06 FY07

KL

Throughput of ROs

50%

20%

15%

8%5%

2%

0%

10%

20%

30%

40%

50%

60%

50 100 150 250 350 >350Volume in KL

% o

f R

Os

Even if 60% of retail outlets sell at sustainable level (100-300 KL pm range) with an average of 200 KL pm approx. The rest 40% will be clearly unsustainable (20-60 KL pm range) with an average volume of 40 KL pm.

Fig 34: Throughput of ROs

To offset the pressure on margins, some of these outlets have gone in for non-

merchandise sales, the profits from which have however not been on the expected lines.

Besides, the increasing availability of CNG in major cities is also having an impact on the

automobile fuel retail business. Margin level at which one set of RO s cannot even meet

their revenue costs, another set of RO s will not only survive but in fact thrive and

prosper. Since Margins are a result of many factors – most of them beyond the control of

an individual company, key to survival, growth and prosperity of the company and its

channel partners, is to have high volume retail outlets, which are robust enough to survive

low margin. OMCs may have to revise dealer margins upwards, which could again

impact the marketing margins given the constraints in revising consumer prices.

7.2) REGULATORY ENVIRONMENT

Consumer price has been linked to import parity. Oil marketing companies are

doing everything possible for improving their retail margins. Regulatory Body has been

set up. Companies are looking for accelerated Network Expansion and aggressive Brand

71

Unprofitable

Borderline Profitable

building by existing Players. Restructuring of Oil PSUs is going on. It has become

especially difficult for new players to enter the market because of various factors like:

Proliferation of Network by Oil PSUs.

High Land Cost in cities.

Statutory approvals

National Highways – New Guidelines.

Technology up gradations.

Competing Fuels – CNG/LPG.

Other challenges or in other words scope for growth for the oil companies include

transition from commodity to brand, increasing customer service expectations,

introducing new branding initiatives like Club HP, In & Out, Pure for Sure, Xtra

Care,etc., promoting more and more of branded fuels like BPCl’s Speed ,Hi-Speed

Diesel, HPCL’s Power and Turbojet, IOCL’s Xtra-Premium and Xtra Mile,etc.,

aggressive loyalty programs like petrocards, fleetcards, co-branded cards,etc., and

competitive pricing of branded fuels as normal fuel is till now priced by the government.

The companies are facing various problems like Price distortion which leads to

adulteration of petrol and diesel, Network planning dilemmas like Limiting pricing

discovery in spite of deregulation and non-uniform tax structure across states. The current

scenario also fails to provide a level playing field for the new entrants in the petrol retail

business.

Fig 35: Impact of new entrants on existing oil companies (others include pvt cos. like Ril, Shell,Essar,etc. )Source: Ficci

72

0

10

20

30

40

50

60

2001-02 2002-03 2003-04 2004-05 2005-06 Ap-Dec'06

IOC includes AOD, IBP & IOC

% M

ark

et

Sh

are

IOC Grp BPC HPC Others Linear (IOC Grp)

Reasons for decline in retail sales growth:

Increasing fuel efficiency of vehicles

Improved road conditions

Introduction of alternate fuels like CNG

Reduced average running of personal vehicles due to multiple vehicles ownership

per family

Improved public transport – introduction of Metro in Delhi

Increasing use of higher capacity trucks for carrying goods reducing per km/per

litre fuel consumption

7.3) MANAGING TECHNOLOGY

One main challenge for these oil companies is managing the technology which

they have employed at their retail outlets. Especially it is a challenge in India because of

the pathetic power arrangements in most states here. As the quality of power supply is so

poor, so the oil companies have to put in extra investments for the DG sets that have to be

maintained by them throughout to cater to the customer as well as manage their own

automated systems.

Then network expansion is an opportunity as well as a threat for these companies

as a lot of factors come into play while expanding their network. The companies have to

think about the feasibility and viability of setting up a retail outlet in a particular area

depending on the demand-supply situation in that area and various other issues like

governmental interventions, policies, taxes and tariff structure, and the competitors acting

in the area. This also becomes a problem because of the skewed centers of consumption

in India where in two areas normally don’t have the same demand-supply scenario.

The above and many factors thus hamper in the companies’ journey towards

enhancing their capabilities and their commitment towards their customers, their

employees, government and to the country as a whole. It is again difficult to motivate the

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employees with respect to award of performance based compensation because of the

volatile margins of these companies themselves which acts in constraining compensation.

The training costs are also increased which adds to the extra investment. The training is

essential for the staff to manage and efficiently and effectively operate the automated

systems at the retail outlets. This requires a high turnover of staff who can handle

automation.

Although it is important to manage the entire supply chain, it is a difficult task.

Nowadays automated systems and technologies have helped the companies a lot in

maintaining efficient and effective communication but still managing these systems is

another challenge and requires additional investment and skilled manpower.

7.4) THREAT OF THE SUPERMARKETS

This is not that important from the Indian point of view but is a challenge faced

by oil companies in other countries. In countries like US, UK,etc., supermarkets also sell

fuel along with other merchandise. Compared to the pure fuel retailers, these

supermarkets are much better placed to serve the customers because of being ubiquitous.

These supermarkets are thus eating up the share of the pure fuel retailers.

One big advantage to the supermarkets is that they have low site operating costs

as it shared by the supermarket expenses. They provide exemplary customer service

standards much better than the pure fuel retailers as they are in the business of hospitality

from a long period. The supermarkets also provide host of value added services much

more the pure fuel retailers to the customers thus attracting them to these sites. It is also

possible for companies to introduce many possible cross loyalty programs.

The various benefits or value added services provided by supermarkets which are

not all provided by pure fuel retailers include:

Wider availability of twenty-four hour opening,

Outdoor payment systems,

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‘Fast-pay’ credit card readers,

Improved forecourt shop offers,

Toilets,

Wider acceptance of branded fuel cards,

‘While you shop’ car valet/servicing;

The introduction of services specifically targeted at fleet managers and

business motorists; for example: fleet cards,

Linked promotions between petrol sales and in-store cafe/restaurant

facilities, dry cleaning

One example of how supermarkets have taken off business from the oil

companies and independent retailers is from UK. Tesco, Sainsbury’s and Safeway, from

a retailing base of 500 outlets, declared war on the oil companies and independent petrol

retailers with their retailing base of 16,000 outlets, and won.

The consequences:

The oil companies have lost 55% of their market;

Some 5,000 petrol stations have been closed or gone out of business;

All the oil companies are losing money on their retailing operations.

Last year Esso declared losses of £200 million, Shell lost £130 million and BP

disclosed losses of £85 million.

Overall, pure petrol retailers in the United Kingdom have lost about £1 billion.

The above are a few challenges which the oil companies have been facing or will be

facing in the near future if they don’t work on the solutions from now on.

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8) COMPARISON OF INDIAN OMCs

Here is a year wise analysis of the three Indian Oil marketing companies (OMCs).

How these companies have been faring in the last years and analyzing which company is

better in terms of market sales, gross profit and retail network.

MARKET SALES OF OMCs YEARWISE (MT)

2001-02 2002-03 2003-04 2004-05 2005-06

IOCL 47.17 46.46 46.81 48.86 47.52

BPCL 19.15 19.86 20.37 21.03 21.63

HPCL 18.02 18.84 19.53 20.09 19.48

Table 1: Comparison of market sales of the three OMCs from 2001-02 to 2005-06

Market Sales

0

10

20

30

40

50

60

2001-02

2002-03

2003-04

2004-05

2005-06

Years

Mkt sales(MT)

IOCL BPCL HPCL

Fig 36 : Comparison of market sales of the three OMCs from 2001-02 to 2005-06

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GROSS PROFIT (Rs. Crores)

2001-02 2002-03 2003-04 2004-05 2005-06

IOCL 7533 10863 12013 8722 9931

BPCL 2114.4 2720.4 3301.6 2092.2 1422.6

HPCL 2046.69 3139.06 3642.66 2381.83 1134.07

Table 2: Comparison of the gross profit earned by the three OMCs from 2001-02 to 2005-06

02000400060008000

100001200014000

Gross Profit (Rs. Crores)

2001-02

2002-03

2003-04

2004-05

2005-06

Years

Gross Profit

IOCL BPCL HPCL

Fig 37: Comparison of the gross profit earned by the three OMCs from 2001-02 to 2005-06

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RETAIL OUTLET NETWORK

2001-02 2002-03 2003-04 2004-05 2005-06

IOCL 7870 8034 9138 10228 11754

BPCL 4711 4854 5530 6426 7332

HPCL 4729 4863 5502 6667 7313

Table 3 : Comparison of no. of retail outlets of the three OMCs from 2001-02 to 2005-06

02000400060008000

1000012000

No. of ROs

2001-02

2002-03

2003-04

2004-05

2005-06

YEARS

RETAIL NETWORK

IOCL BPCL HPCL

Fig 38: Comparison of no. of retail outlets of the three OMCs from 2001-02 to 2005-06

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Studies show that although IOCL is much ahead in terms of retail outlet network

but still BPCL stands out when it comes to market sales. IOCL is better placed having a

good gross profit but that’s just because of the large network and handling bigger

volumes.

BPCL is clearly the winner in the Indian petroleum retail sector due to a variety of

factors including better customer service, branded fuels (it was the first to launch branded

fuel in India), and other value added services it provides to its customers. One winning

strategy was to launch its "new generation" high performance petrol called "Speed". By

way of this maiden endeavour, within the Oil marketing sector in India, Bharat Petroleum

has successfully initiated the concept of branding to a trade that was, until now, largely a

commodity business. Bharat Petroleum's efforts have all along been to build a superior

understanding of customer needs and relentlessly work towards fulfilling these needs.

Enhanced Fuel Proposition movement displays the 'Pure for Sure' signage very

prominently at the Outlet. Retail Outlets have been equipped with state-of- the-art

modern infrastructure, including the Multi Product Dispensers to pre-set price and

quantity of fuel and Electronic Air Gauges facilitating precise inflation of tyres.

Attractive Canopies are suitably designed to provide shelter and adequate lighting of the

forecourt at most Retail Outlets.

On the Non-Fuel front, Bharat Petroleum has introduced the Errand Mall concept

successfully at select markets. Called the 'In & Out' , these malls offer the customer a

broad range of facilities and brands to choose from. ATM's, Cybercafe, Courier services,

Laundry, Photo Studio, Music, Fast Food, Greeting Cards, Courier Services, Bill

Payments, Movies / Entertainment Tickets, etc. have made Bharat Petroleum's Retail

Outlets a happening place and indeed an rewarding experience for motorists. To make

life more convenient and rewarding for customers, Bharat Petroleum has introduced the

'Petro Card™' for individual customers and the 'SmartFleet Card' for fleet owners.

Using the Petro Card entitles the customer to PetroMiles under the PetroBonus rewards

programme. Bharat Petroleum has also pioneered the concept of convenience stores at

select petrol pumps that operate under the name 'Bazaar'. These Bazaars provide a wide

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range of convenience items and fast foods to customers in a clean, air-conditioned and

friendly environment.

 

Thus we come to the conclusion that BPCL through its various value added

services and its branding strategies has emerged as the market leader out of the three oil

marketing companies in India.

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9) CASE STUDIES

9.1) EFKON IN NATIONWIDE FUEL PAYMENT & LOYALTY PROJECT OF HINDUSTAN PETROLEUM CORPORATION IN INDIA

EFKON AG - a multinational company based out of Graz, Austria, is a world

leading provider of Smart Card based multi-application Transportation Payment

Solutions and Active Infrared Communication Systems globally. EFKON provides

cutting edge solutions for electronic toll collection and enforcement systems, smart card

payment systems, and central clearing house operations.

EXECUTIVE SUMMARY

Hindustan Petroleum Corporation Ltd. (HPCL) is the second largest oil

marketing company in India and is a Government of India Undertaking. HPCL runs 4500

retail outlets in across India. Few years back HPCL embarked on a program to roll out

smart card based retail and fleet loyalty products using e-payments. ICICI Bank, India’s

second largest bank was chosen to do cash management, sales and banking operations for

the project. HPCL & ICICI Bank chose Efkon as the technology provider for the project.

The project includes three different programs, one targeted at retail customers (HP

Smart1) and one targeted at fleet owners (Drive Track) and third is credit fleet card

integrated into the credit management host of ICICI Bank (Drive Smart).

HISTORY OF THE PROJECT

To execute the project set-up a joint venture in India: I-Pay Clearing Services (P)

Ltd. Efkon owns 74% of IPay and control the management of the company. The project

was set-up in record time of 3 months from the date of signing of the ‘Application

Service Provider’ agreement with ICICI Bank. The project at its inception targeted to

capture 300K customers and approx 1500 retail outlets in the first 3 years. However, the

project in its first years of operation became extremely popular and successful with

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customers. As a result of extremely stable backend system which could be easily

upgraded for increased volumes I-Pay was able to scale-up operations in-line with the

fast growth in customer and transaction numbers. Within the first 3 years the customer

base has crossed 1050K. Today the project covers every major city and highway in the

country and has spread across 2500 retail outlets of HPCL.

PROJECT BRIEFS:

Till date EFKON AG, via I-Pay Clearing Services (P) Ltd. has executed 4 key

projects for HPCL via ICICI Bank Ltd. The following section provides a brief overview

of the projects:

Smart1 Program (e-Purse for Private Customers)

HPCL envisaged a fuel loyalty program for retail customers aimed at providing

loyalty benefits for vehicle owners primarily the urban population. Giving multiple

options of enrollment like over the counter cards (without visual zone personalization)

and bulk orders besides the normal application based enrollment process enabled easy

penetration and acceptance of the product by the urban masses. Once enrolled into the

program the card owner can go to any of the 2500+ HPCL fuel outlets, load the money in

the ePurse of the card and make purchases pertaining to Fuel, lubes, services etc. Smart 1

program is also supported by ancillary third party organizations like TOP GEAR which

provide services like free towing in case of break down, and attending any vehicle

problems in case of a break down for example free towing, fuel, parts failure etc. for any

reason on the highway. Thus the vehicle owner can rest assured that once enrolled into

the program he need not worry about maintenance and upkeep of this vehicle. The

following are the key highlights of the project :

600,000+ cards issued till date

2,500+ outlets deployed

Multi-application system (Fuel, Toll)

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Pan India Central Clearing house system enables settlement of >15K M INR

worth of transactions annually.

Complete card lifecycle management processes like enrollment and issuance,

card load re-load, fuel rate table transfer, blacklisting, blocking/unblocking

and replacement are inbuilt into the program

Web based MIS tool for account administration

Enables HPCL to track and trace lifetime value of the customer,

understanding consumption patterns across geographies,

Generates additional float for ICICI Bank

Drive Track Program (e-Purse for Fleet Customers)

HPCL being a fuel retailing company wanted to create a loyalty program that

would enable targeting the next ig group of customers who were high volume low

frequency purchasers viz. the fleet operators unlike the Smart1 program wherein the

customer profile is usually characterized with low volume high frequency of Usage.

EFKON lent its support to this program after thorough understanding of ground realities

and designed a robust complete system for HPCL. The issues faced by Fleet Operators in

the traditional over-the-counter, cash based transactions methods were: Ascertaining the

true cost of trips in light of consumption of fuel, toll, repairs and en-route expenses, large

amount of cash carried by the driver, tracking and tracing the location of the vehicle,

stopping mal-practices and pilferage, big lead times in case of emergencies as there was

no mechanism of transferring funds to the driver in absence of two way communication.

EFKON designed a system that addresses all the above key problems. The following are

the key highlights of the project:

ePurse on the card enable the fleet operators to pre-load the card with cash

equivalent amount to buy fuel, pay for services etc. at the petrol/gas station/

groceries on the highway

Remote re-load option to remotely transfer cash on the card in case of

emergencies

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An inbuilt mechanism of tracing point to point movements of the vehicles

700,000+ cards issued till date

2,500+ outlets deployed

Pan India Central Clearing house system enables settlement of >15K M INR

worth of transactions annually.

Complete card lifecycle management processes like enrollment and issuance,

card load re-load, fuel rate table transfer, blacklisting, blocking/unblocking

and replacement are inbuilt into the program.

Web based MIS tool for account administration

Enables fleet owners to ascertain the running cost of their fleets.

Drive Smart Program (Credit Card for Fleet Customers)

ICICI Bank provides comprehensive range of financial products to vehicle/Fleet

owners across India. Being a forward thinking bank, ICICI conceptualized a system

wherein credit could be extended to large fleet operators based on their credit worthiness

with the bank. EFKON was again chosen as a worthy partner to enable ICICI Bank to be

in good stead with the visions of the bank. EFKON accordingly designed a system called

“Drive Smart” program which enabled extension of credit purchases to fleet operators.

The following are the key highlights of the project:

100,000+ cards issued till date

2.500+ outlets deployed

Multi-application system (Fuel, Toll)

An inbuilt mechanism of tracing point to point movements of the vehicles

Pan India Central Clearing house system enables settlement of >5K M INR

worth of transactions annually.

Complete card lifecycle management processes like enrollment and issuance,

card load re-load, fuel rate table transfer, blacklisting, blocking/unblocking

and replacement are inbuilt into the program

Web based MIS tool for account administration

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A recent project for HPCL called eFuel Controller project enables customers to pay via

cash, credit card or debit card option along with loyalty card option thereby giving

tremendous flexibility to the end customers.

Efkon Scope of Work

I-Pay has played the role of an Application Service Provider & System Integrator

for the project. The entire software has been designed and deployed by Efkon and

integrated into the front-end equipment. The major scope of the project is:

Design & development of the clearing house, terminal and network software.

Set-up of a nation-wide network on a Virtual Private Network (VPN)

backbone.

Set-up of the clearing house host and deployment of the same.

Development of Front-end Terminal embedded software.

Design & Development of Contact-less smart card readers.

Deployment of terminals and smart card readers.

Integration of smart card management host with the ICICI Bank’s host Vision

Plus.

Set-up of Operations centre to handle:

Smart card personalisation bureau.

Despatch management.

Network management.

Card data management and transaction management.

Help desk.

Customer call centre.

Execution of the project

Challenges

The major challenge Efkon was to develop in a short time a customized and future

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upgradeable clearing house software. Further, it was the first experience for Efkon to

provide ASP services. Efkon had always been a projects company and this was its first

experience at being a technology service provider. A large organisation had to be built in

Austria & India to enable the operations. Efkon took major business risks by investing in

the software development without assured returns. Much of the returns were dependent

on the success of the program and the stability of the clearing house host. In both cases

Efkon came out with flying colors. The system today has multi application capabilities

based on global platform specifications. In addition the contact less terminal readers were

developed by EFKON. The multi tier architecture with so called “hubs” as terminal

concentrators supports fully offline capabilities.

Execution

The project was implemented through cross country teams who worked extremely

closely to achieve the goals of the customer. The fast ramp-up of the project is a proof of

the robustness of Efkon technology and quality. Today over a million+ customers have

been issued smart cards under these projects.

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9.2) CLASSIFYING SITES AS VOLUME OR PROFIT DRIVERS

Source: www.kssg.com

ConocoPhillips, a multinational oil company, markets petroleum products through

approximately 14,300 outlets in 44 US States, including approximately 330 owned and

operated.sites. The Phoenix market is densely populated with a number of major

competitors including Chevron, Texaco and Mobil, low cost retailers such as Arco and

Diamond Shamrock and a number of “Big Box” retailers such as Albertsons and

Safeway. The market is fiercely competitive and can include more than 100 gas stations

within a 3 to 5 mile radius. In recent times, QuikTrip (a low price, high volume outlet)

also entered the market.

The Challenge

How to analyze sites to understand their relative price-volume sensitivity and use

the findings to apply appropriate pricing tactics? To avoid trying to grow volumes at sites

with low price-volume sensitivity that may be better suited to a profit-oriented strategy?

Raising prices will increase gross profit but have a negative impact on volume (assuming

costs remain constant). Conversely, reducing prices will increase volume but could have

a negative effect on gross profit. However, individual sites will exhibit different levels of

volume or profit change for a given price move. The challenge was therefore to:

understand the extent to which volume or gross profit at a particular site

changes in response to a price move;

classify the site as a volume-driver (higher price-volume sensitivity and

greater volume response) or profitdriver (lower price-volume sensitivity)

apply appropriate pricing tactics to maximize gross profit for given

network volume targets.

The study involved the pricing of 38 gas stations and analysis of volume and

gross profit performance.

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The Solution

The measurement of site sensitivity was paramount to the study and was

monitored closely by the ConocoPhillips team. During the initial set-up of the PriceNet

system the sell-out volumes, own retails and competitor retails are used to establish these

price-volume sensitivities by site and by grade. The sensitivities then provide a number of

key insights to the market:

- main competitor(s) and competitor rankings

- site and individual grade price sensitivity

- classification of a site as volume or profit driving

Using these sensitivities KSS helped ConocoPhillips redefine a pricing strategy

that included changing key competitor definitions at 20 of the 38 sites in the study and

applying tactics appropriate to site classification of volume or profit driver.

The Benefits

Figure 1 below highlights the five most price-sensitive sites and the five least

price-sensitive sites from the Phoenix market. The results clearly illustrate that highly

price-sensitive sites can support tactics to increase volume (market share) while

maintaining gross profit. In this case, a 0.55c decrease in price relative to competition

results in a volume increase of around 40% and a relatively small, almost negligible

change in gross profit. The sites with low price-sensitivity can support tactics to increase

gross profit while maintaining market share. A 0.5c increase in price relative to

competition results in a very small change in volume and an increase in gross profit of

8%.

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Fig 39: Site sensitivity comparison

In a market where price changes are becoming more frequent and competition more

fierce, it is important manage your price position ensuring you maximize your volume

and gross profit potential. Working in this manner will clarify the markets in which you

price and help validate and, in many cases, refine your pricing strategy. Understanding

the sites as profit drivers or volume drivers would enable the oil companies to review

their pricing strategy and make more intelligent decisions on how to price.”

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10) CONCLUSION & RECOMMENDATIONS

Retailing is the most active and attractive sector of the last decade. While the

retailing industry itself has been present through history in our country, it is only the

recent past that has witnessed so much dynamism. It's the latest bandwagon that has

witnessed hordes of players leaping onto it. While international retail store chains have

caught the fancy of many travelers abroad, the action was missing from the Indian

business scene, at least till recently. The emergence of retailing in India has more to do

with the increasing purchasing power of buyers, specially post- liberalisation, increase in

product variety, and the increasing economies of scale, with the aid of modern supply and

distribution management solutions.

A definition of retailing is essential in order to be in a position to assess the

impact of retailing and its future potential. The current retailing revolution has been

provided an impetus from multiple sources. These `revolutionaries' include many

conventional stores upgrading themselves to modern retailing, companies in competitive

environments entering the market directly to ensure exclusive visibility for their products

and professional chain stores coming up to meet the need of the manufacturers who do

not fall into either of the above categories. Attractiveness, accessibility and affordability

seem to be the key offerings of the retailing chain.

Retailing is a technology-intensive industry. Successful retailers today work

closely with their vendors to predict consumer demand, shorten lead times, reduce

inventory holding and thereby, save cost. Wal-Mart pioneered the concept of building a

competitive advantage through distribution and information systems in the retailing

industry. They introduced two innovative logistics techniques - cross-docking and

electronic data interchange. Today, online systems link point-of-sales terminals to the

main office where detailed analyses on sales by item, classification, stores or vendor are

carried out online. Besides vendors, the focus of the retailing sector is to develop the link

with the consumer. `Data Warehousing' is an established concept in the advanced nations.

With the help of `database retailing', information on existing and potential customers is

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tracked. Besides knowing what was purchased and by whom, information on softer issues

such as demographics and psychographics is captured.

FIVE PRINCIPLES TO CEMENT CUSTOMER TRUST:

T - Truth

Trust and solid relationships are built on telling the truth. Companies must maintain this

principle both with internal and external customers. It is imperative that this value is

represented in everything a company does. We have seen how the lack of solid ethics can

crumble even the largest of companies.

R - Responsibility

Trust is built when everyone within an organization realizes what their responsibilities

are and that they are held accountable for them. Choose to schedule reviews quarterly for

every member of the company to make sure they are aware of their responsibilities. Take

ownership of mistakes and be diligent to find ways to make corrections.

U - Unselfishness

Trust is built when employees give of their time and talent in the workplace and do it,

unselfishly. Customers appreciate the employee who goes out of their way to satisfy the

customer. Customers don't appreciate hearing how badly the employee wants to go home,

or how they didn't get a break, or how awful their schedule is.

S - Security

Trust is built on a feeling of security. Good lighting in the parking lot and store entrance,

fitting rooms with doors that lock, employees that handle ringing up a sale with accuracy,

and alarm systems that are visible are all ways to make the customer feel safe in your

place of business. Employees want to feel a sense of job security and that they are

appreciated for the job they do.

T - Teamwork

Trust is built when everyone within the organization feels a sense of ownership. How

well do your employees work together? Are they willing to go out of their way to help

each other out? Do the managers roll up their sleeves to help when the workload is

overwhelming? Is there a reward system in place that encourages employees to want to

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excel? Most importantly, are there cheerleaders within the organization to keep the

momentum going when times are tough?

We are at a time when gaining a customers' trust is critical. It is a daily process,

on purpose. It is a time to maximize potential, ethically and to deal with conflict and

problems, with credibility.

The petroleum retailers are also not left behind. Forecourt retailing is yet to

emerge in a big way in India. But with renewed thrust from the oil companies, the

concept is poised for the next stage of evolution. The concept of forecourt retailing at

petrol stations is not new. It began in the 1980s when British Petroleum launched its first

convenience store. In India, where consumer interface was recognised as a key factor, the

concept was taken up in the late 1990s by Indian Oil Corporation, which started its multi-

purpose distribution centres at petrol pumps in semi-urban and rural areas. The concept

has been in vogue ever since. But recently it shot into limelight with oil companies trying

to milk this revenue stream for more moolah.

The oil marketing companies need to clearly identify customer needs and

establish a strong corporate brand targeting select customer bases. The companies need to

drive product and service offerings at retail outlets based on identified customer needs.

They should develop cost-effective retail outlets, upgrade existing assets for better

throughput and customer service. They should orient their distribution pattern and

logistics in tune with demand in target markets and develop superior franchisee selection

and training systems along with appropriate risk-reward mechanisms to drive

performance.

In this respect, the oil companies have been coming up continuously with various

initiatives to differentiate themselves from other competitors and attract customers. They

have come up with various loyalty programs, cash card payment solutions, convenience

stores, ancillary services, food outlets, various other value added service at the retail

outlets to give the customers value for their money. Although the above matter to a large

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extent in bringing people to a retail outlet, the main drivers include convenient location,

branded fuels and assurance of quality and quantity. Thus the companies should look for

network expansion, supply chain optimization, steps towards anti adulteration measures

and aggressive branding strategies,etc. to give the consumers the best they can.

Fig 40: Winning in Emerging Markets: Some preliminary ideas

Source: Ficci

OilCos have made sporadic attempts at exploring non fuel retail(NFR)

opportunities in India – Car Wash, ATMs, Co Branded Credit Cards, Cyber Cafes,

Convenience Stores, Food Outlets, etc. Though one-off success stories have been

reported no cohesive strategy has emerged as yet on the NFR front. With the third largest

distribution network ( after post offices and FMCG outlets ) there is a lot of untapped

potential left for exploring in this arena. The next few years should see all Oil Marketing

Companies experimenting in this field.

Focus on cherry-picking high through-put sitesMatch ‘local’ cost structures, especially capexNo cookie-cutter approach – deploy formats ranging

from ‘bells and whistles’ to ‘stripped down versions’

Divest unprofitable sites

Water-thin margins

Ensure adequate local talent and senior management attention on regulatory management

Regulatory uncertainties

Look at non-fuel not as an add-on but as a core part of the retail opportunity e.g., build destination proportions

Nascent non-fuel retail

Introduce dealer management as a core function – develop integrated package of sticks and carrots

Explore master-franchising

Fragmented channel structure

Tailor value proposition to local needs/tastesUnique consumer characteristics

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The scope of offering NFR services is at the retail outlets is enormous to say the

least. It has to become ‘Multidimensional’. Some activities which must be seriously

explored –

Bill Collection Centres/Courier Dropboxes ( Cities )

Product Sourcing Centres - warehouses( For Retailers )

Food Courts/Rest Houses – ( Highway )

Fertilizers/Pesticides/Seeds/AgriTools/Insurance/Agri-Loans–collection

centers/warehouses ( Rural Outlets )

Real estate – Banks / Vehicle distributors

The target should be to generate 5% of the revenues to start with from

these activities and gradually increasing the share to 20%

Sweat the assets and services to the maximum

The domestic players in the downstream petroleum sector have seen several emerging

challenges in the recent times, the most important being the regulatory risks arising from

an inability to raise retail prices. Increasing competition from new entrants, surplus

situation in the domestic market and exposure to volatile, though currently buoyant,

refining margins are also set to fundamentally change the landscape for the sector

participants. While PSU oil companies still enjoy several sustainable competitive

advantages, the success of their upstream and downstream diversification initiatives are

likely to have a critical bearing on their prospects, going forward.

Ultimately,

“It’s the customer who will emerge as the winner. The company who identifies its

customers and his needs and provides satisfactory services will emerge as the leader”

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11) REFERENCES

11.1) BOOKS & RESEARCH PAPERS

1) Battacharya, D K, Research Methodology, Excel Books, 1st edition

2) Berman,Barry and R. Evans, Joel. “Promotional Strategy”, Retail Management –

Strategic Approach, 9th ed. Prentice Hall of India, New Delhi

3) Coughlan,Anne T.; Enderson, Erin; Stern, Loius W.; and El-Ansary, Edel I.

(2003) “Retailing”, Marketing Channels 6th ed., Prentice Hall of India Pvt. Ltd.,

New Delhi, pp. 390-431.

4) Dr. Varshney, R.L. and Dr. Gupta, S.L. Marketing Management – An Indian

Perspective, 18th ed, Sultan Chand & Sons, New Delhi,pp. 859-93.

5) Kotler, Philip; Keller, Kevin Marketing Management , PEARSON Education,12th

edition

6) Strategic Shift in Indian Downstream Sector, by AT Kearney

7) Issues in Deregulation of the oil & gas sector, By RK Narang, Ardhendu Sen, and

Leena Srivastava (TERI, New Delhi).

8) Indian Oil & Gas Sector: An update on performance trends, ICRA

9) HP solutions for the oil and gas industry, by Hewlett Packard

10) IOCL Annual report 2005-06

11) BPCL Annual report 2005-06

12) HPCL Annual report 2005-06

13) IBP Annual report 2005-06

14) ‘Petro Retailing’, Study Material, University of Petroleum & Energy Studies

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11.2) INTERNET LINKS

1) www.infraline.com

2) www.energyinstt.org.uk

3) www.imagesretail.com

4) www.businessworld.in

5) www.iea.com

6) www.pwc.com

7) www.petrotech2007.com

8) www.eretailbiz.com

9) www.shell.com

10) www.atkearney.com

11) www.ficci.com

12) www.ibef.org

13) www.iocl.com

14) www.bharatpetroleum.com

15) www.ril.com

16) www.hindustanpetroleum.com

17) www.en.wikipedia.org

18) www.indiaonestop.com

19) www.retail-leaders.org

20) www.zeenews.com

21) www.efkon.com

22) www.retaildesigndiva.com

23) www.ft.com

24) www.findarticles.com

25) www.fai.com

26) www.automation.com

27) www.petroleumbazaar.com

28) www.ndtv.com

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29) www.goldmansachs.com

30) www.forbes.com

31) www.inrnews.com

32) www.ernstandyoung.com

33) www.prweb.com

34) www.npnweb.com

35) www.kssg.com

36) www.timesofindia.indiatimes.com

37) www.rediff.com

38) www.google.com

39) www.dogpile.com

40) www.answers.com

41) www.thehindubusinessline.com

42) www.domain-b.com

43) www.fuel4arts.com

44) www.eMarketer.com

45) www.hpcl.com

46) www.marketingprofs.com

47) www.mercermc.com

48) www.startups.co.uk

49) www.theeconomictimes.com

50) www.thehindu.com

51) www.tribuneindia.com

52) www.tutor2u.net

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