non fuel retailing_presentation_arvind dwivedi

Dissertation Presentation

By: Arvind Dwivedi

Guided By: Atul Razdan

A Study of Non – Fuel Retailing in Indian

Petroleum Industry Post Liberalisation

Arvind Dwivedi: University of Petroleum & Energy Studies

Outline

IntroductionResearch ObjectivesResearch MethodologyFindings

Background of Indian Petroleum Industry Changes in Indian Petroleum Industry Importance of Non- Fuel Retailing Non- Fuel Retailing Initiatives Real Estate Utilization

ConclusionBibliography


Introduction

The Indian retail industry can be segmented in different segment

The downstream petroleum retailing is one of the largest segments of the Indian retail industry and the petro-retail sector is one of the most organized sectors of the retail industry

Deregulation of the petroleum retail sectorDifferentiated value propositions


Research Objectives

To Study the Background of Petroleum Industry in India

To Identify the Specific Changes in Petroleum Industry Post Liberalization

To Highlight the Importance of Non Fuel Offerings for Petroleum

Marketing Companies in India

To accentuate on the non fuel offerings and the initiatives taken by Indian

Oil Marketing Companies

To showcase the advantages of non fuel services for optimal utilization of

real estate


Research Methodology

Research Design: DescriptiveSources of Data:

1. Secondary data: a) Research reports on Non Fuel Retailing. b) Performance and strategy reports of petroleum companies. c) Articles on Non Fuel retailing. d) White papers on non fuel retailing e) Newspaper articles on non-fuel business f) Online journals.

Findings


Background of Indian Petroleum Industry

Historical BackgroundStructure of Indian Petroleum IndustryPetroleum Companies in IndiaEnergy Consumption in IndiaEnergy & Economy


Background: Historical

Oil sector came into existence in India in late 19th century with discovery of oil in 1889 at Digboi

Until 1960, industry confined to north eastern states with production of 5000 bopd

Cambay onshore basin, in 1958 and the Bombay offshore basin, in 1974, enhanced the production level to 0.7 mbpd

The first refinery came up at Digboi in 1901The process of nationalization was started in 1970


Background: Structure

Highly regulated industry with dominance of government companies

The Ministry of Petroleum and Natural Gas (MoP&NG) It governs the activities associated with exploration and production of oil and natural gas,

import and export of crude oil and products, refining, distribution, marketing, and conservation of petroleum products.

The three key organizations under the control of MoP&NG are : Directorate General of Hydrocarbons (DGH in 1993), Oil Co-ordination Committee (OCC in 1975) ,and Oil Industry Development Board (OIDB in 1975).


Background: Petroleum Companies

The Indian oil refining sector has 10 companies:

Indian Oil Corporation Limited (IOC) and its two subsidiaries, Chennai Petroleum Corporation Limited (earlier Madras Refineries Limited.) and Bongaigaon Refinery and Petrochemicals Limited (BRPL)

Bharat Petroleum Corporation Limited (BPCL) and its two subsidiairies, Kochi Refineries Limited (earlier Cochin Refineries Limited.) and Numaligarh Refineries Limited (NRL)

Hindustan Petroleum Corporation Limited (HPCL)

ONGC

Mangalore Refinery and Petrochemicals Limited (MRPL); and

Reliance Petroleum Limited (RPL)--merged with parent Reliance Industries Ltd. (RIL) with effect from April 1, 2001.


Background: Energy Consumption

Per capita primary energy consumption in India is very low 305 kg when compared to the world average of 1,487 kg.

Per capita primary energy consumption, the per capita consumption of oil & gas in India is also a low 117 kg against the world average of 925 kg

Oil, gas, hydroelectricity, nuclear power and coal are the five constituents of primary energy. Oil and gas account for 62.2% of the total world primary energy consumption.

This figure is higher at 64.8% for developed nations like the US. In India, coal is the principle source of energy accounting for over 55% of the total primary energy consumption.


Background: Economy

Oil and gas is a major contributor to economies worldwide The major components of the revenue contributed by the oil companies are as

follows: Crude Oil: Royalty of 20% of well-head value with a ceiling of Rs. 850/tonne;

Cess of Rs. 1800/tonne under the Oil Industries Development (OID) Act; Sales tax of

4%; Custom duty of 10% on imported crude; Natural Gas: Royalty of 10% and sales tax varying from State to State;\ Petroleum Products: Custom Duty and Excise Duty. Sales tax on domestic

sales Corporate Taxes: At the rate of 35% of profit before tax; and Dividends: The contributions under this head are significant since the

Government is a major shareholder in most oil companies


Background: Economy


Changes in Indian Petroleum Industry

Why did Government go for liberalization of economy?

Development of Indian petroleum industry Options for Development Important Developments

Developments Pre- Liberalisation Developments Post Liberalisation



Reasons For Liberalization

To liberate the ailing economy from shackles of balance of

payment crisis. Government asked world Bank &

International Monetary Fund (IMF) to bail out its ailing

economy



Development of Indian Petroleum industry Premature phase from 1947 to 1969 Consolidation phase from 1970 to 1989 The Liberalization phase from 1991 onwards`



Options for development

seek assistance of a great power like Soviet Union,

collaborate with a small country like Rumania

explore the possibility of a government to government co-operation

with other small but neutral countries like Austria which had developed

sufficient technical expertise in petroleum industry by that time

Try and develop the industry through self-help by employing

technicians and bringing necessary machinery from which ever source

available.



Important Developments

Developments Pre- Liberalisation

US replaced Soviet Union

Allotment of acreages to american companies with ONGC as

Indian partner

Entry of private players in refining sector in JV with Indian PSU

successfully replaced/barred entry of other alternative energy

sources



Developments Post Liberalisation Refining

Invitation to private companies in the refining sector Capacity expansion/new grassroot refineries both in the public

and private sectors Marketing

marketing rights for petroleum products if a company invests Rs.20 Billion in E&P

Dismantling Administrative Pricing Mechanism (APM) in phased manner


Administered Pricing Mechanism

The APM had its roots in the early seventies when Shipping Corporation of India (SCI) took loan from the World Bank to purchase oil carriers. The World Bank had then recommended a 'cost plus' pricing formula to SCI for freight calculation. The same principle in the name of 'retention concept' was introduced in 1976 for pricing of crude and petroleum products. The price of indigenous crude was based on operating cost plus 15% post tax return on capital employed. And oil refineries and marketing companies calculated the price of their products on the basis of operating cost plus 12% post tax on net worth.

The other important component of APM - a complicated pricing formula is 'cross subsidization mechanism

The economy had become dependent on petroleum and private parties were not happy with 12-15% assured return. They wanted more. Hence APM was dismantled in a phased manner.


Importance of Non Fuel Retailing

Winds of changeIndia vs World (US)Key issues



Winds of Change Callous Competitive Environment Mounting Expectations of Consumer Call for Alternate Sources of Revenue Shift in Branding (From Outlet to Corporate) Emergence of Non-Fuel Services As a Major Activity at

Retail Outlets Competition on price Alternate sources of revenues



India Vs World (US)



Key Issues How to build a unique and sustainable competitive

advantage? How to attract new customers and capture a share of their

wallet?



Build a unique and sustainable competitive advantage



Key Imperatives Develop in-depth consumer insight (Know the Consumer)

and Building offerings around the target consumer Building a strong brand proposition


Non-Fuel Retailing Initiatives

What Is Retailing?Non Fuel Retailing India as a Non Fuel Retailing DestinationOptions for Non-Fuel OfferingsNon Fuel Initiatives of Indian PSU’S



Retailing

“Retailing is the set of activities that markets products or services to final consumers for their own personal or household use whereas Retailer is someone who cuts off or sheds a small piece from something”



Indian Retail Sector

First Gear: (Create awareness)* New retailers driving awareness* High degree of fragmentation* Real estate groups starting retail chains* Consumer expecting 'value for money' as core value

Second Gear: (Meet customer expectations) * Consumer-driven* Emergence of pure retailers* Retailers getting multi-location and multi-format* Global retailers evincing interest in India

Third Gear: (Back end management)* Category management* Vendor partnership* Stock turns* Channel synchronization* Consumer acquisition* Customer relation's management

Fourth Gear: (Consolidation)* Aggressive rollout* Organized retail acquitting significant share* Beginning of cross-border movement* Mergers and acquisitions

Indian Retail Sector



Non Fuel Retailing Sale of Value Added Fuels – Branded Fuels Value added products and services – Non Fuel products and

services



India as a Non Fuel Retailing Destination 2nd Most attractive developing market 4th Largest economy after USA, China & Japan. 2nd Fastest growing economy in the world Would be 3rd largest economy in next 15 years 5th among the 30 emerging markets for retailers 300+ million middle class - the Real consumers Increased disposable Income Among top 10 FDI destinations Massive investment planned in infrastructure development in next 5

years Exponential growth is taking place in Retailing in India Organized Retail Only 3% but growing at 30%



Options for Non-Fuel Offerings ATM (Automated Teller Machine or Any Time Money) Quick care point Windscreen cleaning facility Free health check-up: INDE-PAY Vending Machine of Coffee and Coca-Cola Pay Phone Other Necessary Amenities

Toilets Drinking Water



Non Fuel Initiatives of Indian PSU’S Indian Oil Corporation Limited (IOCL)

XTRACARE innovative, plans to start fuel services at shopping malls Convenience stores (they sell a wide range of packaged foods, hot

and cold drinks) the company has tied up with major retailers and set up

convenience stores, super markets and other formats In urban areas, the stores are in two sizes, 300 to 700 sq feet and

700 to 1,000 sq feet. They are between 1,000 sq feet and 1,500 sq feet on highways

IOCL has 108 Kisan Seva Kendras (KSKs), its low-cost petrol pumps that sell agriculture inputs, equipment and daily essentials in rural areas


Non-Fuel Retailing Initiatives Bharat Petroleum Corporation Limited (BPCL)

“In &Out” stores In & Out stores have a wide range of services which include ATMs

of leading Banks, Music stores from Planet M and Music World, Beverages from Pepsi, Coffee and snacks from Café Coffee Day and Coffee Day Xpress, and a variety of impulse buys including confectionery, snacks, convenience foods, toiletries and select range of branded groceries and other FMCG products through exclusive tie-ups with such FMCG majors like ITC, Cadbury and Frito-Lay

The In &Out stores offer Western Union Money Transfer facilities in Mumbai. They also offer prepaid mobile recharge cards and e-charging of mobiles. It also has music stores by the name of Satellites and Unplugged from Planet M and Music World respectively at select outlets for music cassettes and CDs.


Non-Fuel Retailing Initiatives Hindustan Petroleum Corporation Limited (HPCL)

Club HP HPCL has struck strategic alliances with leading brands like Fed

Ex, Coca Cola India, Western Union Money Transfer, ICICI Bank, Cafe Coffee Day, Skypak, US Pizza, and many more. HPCL is also forging service specific alliances with several automobile companies and OEMs like Tata Motors to jointly recognize "Club HP" outlets, which will be authorized service centers for leading automobile brands

Club HP" outlets have been cataloged as Standard, Mega and Max depending on the levels of services and amenities available


Real Estate Utilization

Real Estate OpportunitiesTransportation NetworkEmerging Retail FormatsA Hypothetical Case for offering Non Fuel Services at an

Outlet



Real Estate Oportunities Organized retailing is less than 3% of total retail whereas; it is 20% in

China, 36% in Brazil and about 50% in Malaysia. Organized retailing has forecasts to become 24% by 2010 in India Estimated at 12 Million retail outlets of which, 95% would be smaller

than500 sq. feet (estimated number of outlets in Brazil approx 1.1 Million and around 905, 000 in US)

Lowest retail space per capita in the world at 2 sq. ft per capita. Early mover advantage still available due to huge untapped resources

and facilities Potential for high market capitalization Shifts in consumer expectations and buying behavior



Transportation Network India is observing speedy development of transportation infrastructure Second largest Road network in the world (3.34 million kilometers) Projects like EW and NS corridors and Golden Quadrilateral are

expected to boost movement of goods and people across country Average annual growth rate of vehicle ownership estimated at 10.16%

over the last 5 years Urban local bodies are taking initiatives for road development Strengthening of road networks have increased movement of people

and goods Increased movement along roads have opened retailing opportunities

explicitly for road users



Emerging Retail Formats



A Hypothetical Case for offering Non Fuel Services at an Outlet Following are the Financials considered for the hypothetical case:

Land area for fuel retail outlet: 1.00 acres ( urban or sub urban stop) Fuel operations: 0.65 acres (includes space for dispensers, tanks, office buildings,

electricity and generator rooms, etc) Retail operations: 0.35 acres (vacant space or unutilized space which can be used for

non fuel operations such as ATM , convenience store or restaurants, etc) Assumed FSI for retail development: 1.0

(FSI stands for Floor Space Index- ratio of total floor space to total plot size. FSI indicates that total plot area is being used for retail operations)

Built-up area for retail development: 15, 246 sq. ft. Land cost: NIL (included in cost of fuel outlet i.e. while setting up fuel operations) Construction cost: INR 1,200 per sq. ft.(average cost of construction in year 2006) Total Construction Cost: INR 18,295,200


Real Estate UtilizationAchievable Pricing By Means Of Non Fuel Offerings


Conclusion

The companies are still struggling to grasp the changing dynamics of the retail sector

The industry is still being designed. Mergers, entry of private players, issues on branding and consolidation in the upstream and downstream sectors have pushed non-fuel to the back-seat

The key to success lies in identifying and meeting customer behavior patterns and changing demographics

New and emerging retail formats will drive the diversity of the fast-changing retail backdrop

Retailers need to invest heavily in capturing specific market It is important for retailers to create a unique position in the marketplace

based on value, relationships or experience


Conclusion

“For now, the existing players are expanding — cautiously. In a highly-competitive environment, it remains to be seen who will crack the consumer riddle”


Bibliography Oil & Gas Industry in India - Indian Petroleum Industry

www.iloveindia.com/economy-of-india/oil-gas-industry.html

Indian Petroleum Industry

http://www.economywatch.com/world-industries/petroleum/indian.html

Directorate General of Hydrocarbons, FIFTH ANNUAL CONFERENCE ON “GAS In INDIA”

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http://en.wikipedia.org/wiki/List_of_petroleum_companies

http://www.economywatch.com/companies/petroleum-companies.html

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www.un.org/esa/sustdev/publications/esa99dp6.pdf

http://www.indiaenergyportal.org/

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Retailing in India: A nation of shopkeepers

http://www.euromonitor.com/Retailing_in_India_A_nation_of_shopkeepers

http://www.iloveindia.com/economy-of-india/oil-gas-industry.html


http://www.dghindia.org/site/pdfattachments/breaking_news/5th_conf_gas.ppt

http://www.economywatch.com/companies/petroleum-companies.html

http://www.un.org/esa/sustdev/publications/esa99dp6.pdf

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Bibliography Background of Petroleum Industry

http://gail.nic.in/energyzone/industry.pdf

Exchequer earns 3.5-4% of GDP by taxing oil

http://www.mydigitalfc.com/2008/oil-taxes-35-4-gdp

Ten years of economic liberalization

www.cpim.org/marxist/200102_marxist_eco_ppatnaik.htm

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http://business.mapsofindia.com/globalization/india-industry/

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www.dghindia.com

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http://www.mydigitalfc.com/2008/oil-taxes-35-4-gdp

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http://www.dghindia.com/

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Bibliography

PIRG Update, November 1997

The Statesman, 18th July, 2001

The Economic Times, 26th September, 2001

T he Hindu Survey of Indian Industries,1999

M.A Pathan, Chairman, IOCL, 3rd Annual Indian Oil and Gas Conference,2-4 December,1998, New Delhi

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Industry Petroleum Retail : A Battlefield

www.managementparadise.com/projects/misc/petroleum.pdf

Fueling Growth in Petro-Retailing: New Business Opportunities

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Bibliography

Fueling Growth in Petro-Retailing: New Business Opportunities

www.ficci.com/media-room/speeches-presentations/2003/Jan/jan-petro-srini.ppt

From Market Research to Consumer Insights

www.russellreynolds.com/pdf/thought/MarketResearch_WhitePaper_8_New.pdf

Building a Strong Brand by Dave Dolak

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Bibliography

Indian Oil eyes US$ 496.27 million from non-fuel retail

www.ibef.in/artdisplay.aspx?cat_id=596&art_id=16713&arc=show

IOC launches XTRACARE retail plan

archives.chennaionline.com/events/Business/2004/12ioc.asp

IOC to seek franchises at 2,000 fuel outlets

http://www.livemint.com/articles/2007/07/12000705/IOC-to-seek-franchises-at-200.html

The New Non-Fuel Push

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Inside In & Out (Flash)

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THE ‘In & Out’ CONCEPT

http://www.bharatpetroleum.com/wheels/inOutStores.asp

Club HP - High - quality personalized "Vehicle and Consumer Care"

http://www.hindustanpetroleum.com/En/UI/RetailClubHP.aspx

Real Estate Opportunities in Fuel Retailing

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