gettingmoreoutofindianoilandgasretailsector-140617103939-phpapp01

8/10/2019 gettingmoreoutofindianoilandgasretailsector-140617103939-phpapp01

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Introduction

The convergence of several market and consumer trends is fundamentally changing the fuels retail industry in theworld and placing additional pressure on volume and profitability. The growing appeal of alternative fuel sand morestringent Corporate Average Fuel Economy (CAF) standards are expected to continue for the foreseeable future.This continuation means that sluggish demand for petroleum will likely be the new normal for the industry in the

forthcoming years. Today, more than a dozen alternative fuels are in production and use or are under development,including compressed natural gas (CNG) ethanol, electricity and hydrogen. As these fuels gain widespreadadoption, they will present a significant competitive threat to traditional motor fuels. This threat is reflected in theanticipated sales of nontraditional vehicles in the coming years.

A number of trends beyond high oil prices and weak demand are poised to change the downstream competitivelandscape. At one end of the spectrum are structural changes in the refinery business, reflected not only in theabove-average number of spin offs, sales and closures seen but also in the number of recently announced refineryupgrade projects, which will allow refiners to accommodate new sources and types of crude oil and potentiallyincrease their capacity. While the effect of these changes on the fuels retail industry is not fully known, it isanticipated that refinery owners and shareholders will be looking to recoup their upgrade investments and lowertheir cost to serve as they try to capture a greater share of a sluggish retail market.

Retailers recognize the crucial role of innovation for the performance of any retail business, but attribute a real rangeof meanings to the term. Shortages are seen in relation to technical, leadership as well as project management skills.The majority of retailers claim to know their markets well and to have little concern that lack of knowledge abouttechnological possibilities works to prevent innovation. In relation to regulation, the majority of retail firms reportno experience of barriers preventing innovation, although a number of specific issues do emerge. These include: theavailability of allowances for mitigating some of the risks of innovation, as well as a lack of a common agendaacross Government to stimulate investment in sustainable innovation, which often results in conflicting outcomes onthe ground for firms.

The Pricing Mechanism

Under the Administered Pricing Mechanism (APM), product prices were directly administered by theGoI. The APM was abolished in April 2002. Now the OMCs would be free to set retail product pricesbased on an import parity pricing formula. The opening up of domestic refining and retail sector toprivate-sector firms, has led to the advent of small private-sector retailing presence in India such as RIL,ESSAR etc. Per unit subsidies funded from the governments budget were maintained on LPG and on afixed proportion of supplied kerosene to safeguard the low income population. Now the retail prices forpetroleum products (including prices for domestic kerosene and LPG) are also expected to fluctuate withchanges in the price of Indias crude basket. The GoIincreasingly looked to restrict the ability of OMCsto increase retail prices in order to protect Indian consumers as the crude prices begin to rise in 2004.Soon the GoI once again centrally controlling upward price revisions and the post APM model wasdismantled.

The lower product retail prices than crude input prices has been the increasing accumulation of under-recoveries by OMCs. However, the rationalization of petroleum product taxes and duties has beenconsiderably disturbed and uneven across various levels of administration.Current policies within Indias downstream petroleum sector clearly have implications for investmentdecisions within this sector, which in turn will determine the way the sector evolves in the medium-term.As of now, the petroleum product pricing policy seems to be in a situation of inertia.

OMCs & GoI


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The uniqueness of the relationship of OMCs with the GoI has dramatically enhanced the investing

potential of these companies and therefore the dynamic growth of Indias downstream petroleum sector.The OMCs will be kept solvent and profitable over time lends was guaranteed by the government

provides OMCs huge advantages when raising capital for investment in financial markets. With OMCsassistance, the Indian government has been able to pursue its official policy of providing affordableenergy for Indias developmental needs and its significant poor population. At the same time, byabsorbing OMCs losses under this system and explicitly guaranteeing their operations, capital financingand investments, the government has created an investment climate for OMCs which has resulted inrobust capacity expansion and growth sector wise. The GoI aims to establish India as a global refinedproduct exporting hub, instructing OMCs to take a more outward-oriented operating posture, and on theother hand encouraging private-sector refiners to invest in export-oriented refining capacity.The measure of Indias refined product export capacity over time will be the build -up of excess refinerycapacity over domestic demand. Indias actual refined product export volumes are bound to surpass theaggregate of excess capacity. OMCs look to first supply the Indian market, and then to export the balanceof refined product produced. Private-sector refiners have no operational directive to first supply domesticmarkets so they will tend to produce a product schedule which optimizes total refining margins fromperiod-to-period, and will sell to customers, irrespective of location, to allow this. There is thus the

possibility of a situation in India of large exports of refined products in parallel with product imports tosatisfy domestic demand.

Need for a transition

Over the past several years, many of the Oil Marketing Companies have announced an exit from companyowned and operated businesses. Several forces are driving this shift. First, oil companies have recognizedthat they generate far less profit from retail operations than they do from their upstream operations.Moreover, oil companies have proven less effective as retail-site operators than as fuel suppliers, and theiroverhead costs are typically not competitive with those of standalone, non-oil company retailers. Inaddition, there is growing pressure for oil companies to improve returns on invested capitalwhich have

proved more attractive in the upstream sector. The most common point of contact of customers with OilIndustry is the Petrol Pump. In Oil Industry vernacular, Petrol Pumps are referred to as Retail Outlets(ROs). As per the existing Government policy, Petrol Pumps can be set up by Public Sector OilCompanies as well as Private Sector oil Companies dealing in storage and distribution of petroleumproducts as per published guidelines. Presently the Oil Companies engaged in retail business ofautomotive fuels are IOC, HPC, BPC, NRL, MRPL, ONGC, RIL, Essar and SHELL. These companiesare referred as Oil Marketing Companies (OMCs).

Emergence of new age consumer in the fuel retailing sector

A pivotal area for fuels retailers to consider is product/service innovation or offering something entirelynew that will help attract and retain customers and, at the same time, capture new revenue streams.Partnerships can potentially help retailers take advantage of such new revenue opportunities. This isespecially true if retailers are able to share and leverage customer information. In fact, at least one majorauto manufacturer leverages customer and telematics system data to generate unique leads and emailmarketing campaigns to support the growth of local dealer businesses.

Customer relevance is an increasingly important concept to retailers striving for high performance,especially given consumers desire for highly personalized offerings and experiences. By developing abetter understanding of the consumer and the marketplace than their peers, fuel retailers can deliver more


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appealing products and services to their customers across multiple categories. The key to improving therevenue potential of each customer lies in understanding as much as possible about buyers needspreferences and purchasing behaviors. Building customer analytics capabilities can pay off in a number ofways and allow fuel retailers to truly engage with their consumers at the local level.

Incorporating integrated telematics systems

The customers can now locate the nearest gas station from sophisticated integrated telematics systems orvia a smartphone app which are quite common which also helps to compare prices at nearby stations. Theregional players could notify customers about fuel price changes and allow them to purchase fuel inadvance or monitor prices via their smartphones. Smartphone app can help customers to prepare theirshopping lists, download coupons and check their fuel rewards balance. As the demand for fuel declines,incorporating innovative use of technology to attract, retain and engage customers will become adetermining factor in achieving competitive advantage.At the other end of the downstream spectrum is the continued expansion of hypermarkets and othernontraditional fuels retailers. With their combination of forecourt and backcourt offerings, hypermarketsoffer attractive retail alternatives for fuel consumers and will likely continue to build more brand loyaltyand market share. Addressing the challenges and opportunities that will accompany these changesrequires players in the fuels retail space to reexamine and adapt their existing business models,technologies and business practices. Those players that fail to do so risk losing market share and thecompetitive advantage that will reinforce high performance in the years to come.

Partnership with auto manufacturers .The companies could partner with auto manufacturers to transform existing pricing models. In a potential

partnership scenario, automakers could include the price of the suppliers fuel for one, two or three yearsinto the purchase or lease price of the car. Offering a purchase incentive that significantly reduces the costof gasoline at select stations for a period of time. In either case, auto buyers would then be able to fill upat any of the suppliers stations during the offering period without paying for fuel, or doing so at a steeplydiscounted rate. As such the days of searching for the best gasoline prices would be over. Automakershave already indicated their willingness to use such pricing schemes as a way to attract customers.

Locking in of fuel rates .For producers and suppliers, volume commitments might help ensure a secure foothold in a market whereoverall demand is falling and improve brand loyalty. For wholesalers, the value of pricing transformationlies in potentially saving money by locking in favorable fuel prices. For retailers, lock-in rates orpartnership agreements might require more flexible onsite payment processing and/or accountingapplications to accommodate the new pricing structures. Costs associated with implementing new systemsand point of sale terminals would likely be offset by the benefits of the new pricing programs, includingincreased foot traffic and, presumably, additional sales of other products sold at their locations. Similaronline programs are emerging for individual drivers too. MyGallons.com, for example, allows USconsumers to buy gasoline at current prices and use gallons from their fuel reserve when prices rise. Fuelcredits are stored on prepaid gas cards, which can be redeemed at a number of filling stations across thecountry.

Near field communication technologies (NFC) .Consumers today are starved for time. They want to carry out their purchase transactions as quickly andeasily as possible. In this context, mobile applications that enable multiple transactions via a single devicecould simplify the customer experience. NFC or near field communication technologies will beparticularly prominent in the mobile phone market in future which facilitates data exchange and wirelessconnections are bound to take customer convenience to a brand new level.. According to market research,NFC enabled mobile phones will make up more than 53 percent of the mobile market by 2015. At thattime, NFC is expected to also be the most-used solution for mobile payment. What is more, NFC is


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expected to enable mobile wallets, providing customers the opportunity to combine payment, loyalty,offers and coupons at the point of sale.

Google Wallet, an Android app that turns shoppers smartphones into their wallets, provides an earlyexample of how NFC enabled smartphones and mobile wallet solutions can potentially change the retailgame. By storing virtual versions of existing plastic cards on a phone, customers can simply tap their

phone on a retailers reader to send payments automatically and, at some merchants, redeem offers andtransmit loyalty account information so they can earn rewards for their purchases.

The emergence of apps as described here may be as valuable to retailers as they are to consumers. This isbecause these apps present an opportunity to shift consumers to less expense forms of payment. Each timea customer uses a mobile wallet or text app rather than a credit card, the retailer may be able to avoidsome of the credit card fees that have his torically diminished retailers already thin profit margins.Additionally, mobile payment technologies are already boosting customer loyalty and enabling thedelivery of advertising that will play a bigger role in driving revenue than the actual paymentfunctionality. In the future, it is assumed that every mobile wallet will have a loyalty and advertisingscheme included. Fuel retailers have a unique opportunity to achieve first-mover advantage byincorporating these mobile technologies into their business models.

Importantly, they also can position wholesalers as better, more committed customers to suppliers. In thepast, when demand was high and supply was limited, being a good customer was not a consideration.Now, as the market for fuels retail is shrinking, refiners can be more selective in choosing their wholesalecustomers. Those wholesalers and retailers that can demonstrate a commitment to creating a brandedexperience and more meaningful customer relationships are likely to be viewed more favorably.

Social Media

Social media applications can play a big role in learning about customers and ultimately creating a moredynamic and rewarding interaction. The retailers for example, could post special sales announcements fortheir followers on various social networking sites. Launching of mobile coupons that are redeemable onlyin their stores enhances brand loyalty further. Further, the retailers could once again combine a global and

local perspective in their use of social media to not only promote branded loyalty programs, but also offerunique and highly valuable experiences that local consumers want.

Back Office Integration

With the help of information technology a real time system that could be integrated with retail outlet andmarketing company to get data on stock available, sales and even can be used to assure the quality.


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With this cloud computing and software as a service (SAAS) will turn out to become the industry norm,retailers will then look forward at how this can be leveraged to reduce Total Cost of Ownership andenhance flexibility.

Stock reconciliation

In order to make it easy to downsize spend time counting and accurately checking both wet and drystock and inventory. These systems can do this with accurate methods to ensure that data is flawless.

Data upload

This can focus on replenishing the stock at retail outlet and thereby increasing supply chain efficiently

instead of waiting for each retailer to call and make order. This arrangement can use a single tanker to fillmultiple outlet. It is concerned with controlling data, with the consideration of price and quantity. Fromthis, stock is managed and sent directly to stores from a centralized system.

Point Of Sales

The back office system with the marketing company will then send accurate findings to the point of saleat retail outlet, illuminating the correct site for specific items.

Quality & quantity based differentiation

Customer are still cynical about Quality & Quantity, Its most important from a customer perspective toget an assurance that the fuel provided to them is of utmost quality and perfect quantity. A large base oftrust 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.

Customer Evolution

Customers today equipped with superior control over the transactions and the information in hand arenow in a position to demand more from their retailers. The expectation level has also risen with more

Terminal

Replenishment system linked to stock monitoring at RO Product filling by bulk meters and automated process

Transportation

Comprehensive sealing mechanism Vehicle monitoring and tracking system (telematics)

Retail Outlet

Automated system for tank gauging and wet-stock reconciliation Exception reports for online monitoring of stocks Remote diagnostics

Customer

Accurate preset premix deliveries to 2/3 wheelers Electronic calibration and tracking of metering assembly of dispensing unit


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emphasis on tailored and personalized products, integrated shopping experience, accessibility,convenience than ever before. With high level of price and quality discovery through vast quantities ofinformation at their disposal consumers now can exercise greater control over transaction than everbefore.

Retailers today have an unprecedented amount of data at their disposal for attracting and retainingcustomers, driving pricing strategies and shaping customer offers. The real challenge lies in optimizingthe access, analysis and use of that data to unearth new sources of revenue. Additionally, the proliferationof personal technologies makes it possible for retailers to not only better understand and reach their

customers, but also keep their attention long enough to influence their purchases. While the technicalsolutions that support fuel retailers strategic objectives will certainly vary, we believe investments mustalready be made in three areas: mobility, social media and analytics. Investing early in these technologieswill help fuels retail companies distinguish themselves from their peers.

Conclusion

Impending changes in the retail sector, like supply and demand imbalances, the emergence of alternativefuels and new customer expectations, are going to ultimately alter how fuels retail companies go tomarket, attract and retain customers, and achieve profitability. Fuel retail industry focusses mainly tosetback the challenges put forward by supply and demand imbalance. In this decade of market de-regularization with customers ready to pay for the fuel without any hesitation from administered pricingmechanism to market pricing mechanism focus will be mainly on the and look for better quality andservice for the customers. National oil companies particularly oil marketing companies will have toovercome challenges put forward by the emergence of alternative fuels, new players coming up in theretail segment and new customer expectations. This in turn will have a big impact on the overall valuechain to improvise the existing strategies and set to become truly global and compete in open market withthese changes will fundamentally alter how downstream companies go to market with new plans to attractand retain customers and ultimately achieve profitability. Examples from other industry sectors suggesthow fuel retailers can thrive while navigating the new fuels landscape. New pricing schemes, newrevenue sources and new ways of interacting with customers are just a few of the strategies poised to playan important role in defining fuel retailers future success.

A convergence of changing technology, increased regulatory and competitive pressures, disruptive marketdynamics, and emerging consumer trends will bring dramatic change to the fuels retail industry over thenext decade. The pace of change will continue to accelerate, straining legacy processes, systems andskills. Understanding what the future might look like and having a plan to compete in a new competitiveenvironment are essential considerations for companies looking to achieve and maintain highperformance in the years ahead.

References

FragmentedCustomers want

tailored and

personalizedproducts, services

and

experiences.This

means they areharder to target

InterConnectedCustomers expect a

brand experience

across multiplechannels and touch

points. This means

they are harder to

reach and engage.

WellInform

edCustomers are more

knowledgeable thanever before and are

comfortableintegrating

technology intotheir lives.This

means they areharder to impress.

Time-starv

edCustomers want a

convenient

experience, as wellas the accessibility

and transparency

needed to make

informeddecisions.This

means they are

harder to please.

Conscio

usCustomers are

concerned about

value and abouttheir health and the

environment.This

means it is harder to

win their trust.


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Accenture. (n.d.). Fuels retail.

BPCL. (n.d.). Retrieved 02 05, 2014, from www.bharatpetroleum.in.

IBEF. (n.d.). Oil & Gas Market & Opportunities.

IOCL. (n.d.). Retrieved 02 06, 2014, from www.iocl.com

Kieran Clarke, D. G. (2010). India's downstream petroleum sector. IEA.

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