Challenges in Petro Retailing

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What is Retailing

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

This definition includes the interface of retailers with both vendors and consumers as well as other processes like supply chain management that impact retailers.

Retailing is the last link in the supply chain- The journey from well to wheel.

Retail is the face of the oil company.

Retail is selling– a point at which the ownership of product gets transferred to the Buyer.

Selling involves meeting customer’s need in the exchange of price.

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Special Nature of Petro Retail

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Petroleum products can’t be seen, felt or examined unless special efforts are made.

Petro retailing works on trust- consumer believe that they are getting what they areBuying. Its like gold- you can’t check the purity yourself so you trust the goldsmith.

Indian Market US Market

Quality interpreted as no adulteration Quality interpreted as impact on fuel efficiency and engine performance

Quality interpreted as getting the right amount of fuel

Quality is not a parameter for consideration

Price is not a differentiating factor always Price is a very important factor

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Retail Environment Market Share

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RO’s31,650 in 2006 - 40,819 in 2011.IOCL – Highest market share – 46.7%.

LPG distribution 6,477 in 2001 - 9,686 in 2010 from. IOCL – Highest market share – 53%.

SKO distribution 6547 in 2004 - 2010 is 6615 IOCL – Highest market share – 60%.

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Retail Environment RO Network

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• IOCL has the widest network of ROs across India with 19,057 ROs as in January 2011. 

• IOCL is the market leader in the retail sector of petroleum products with 46.7 percent market share followed by HPCL.

Company RO's (2002)

RO's(2010)

Market Share (2010)

IOCL 11724 19057 46.69BPCL 7332 8988 22.02HPCL 7304 9785 23.97IBP 3474 NA 0RIL 1316 1429 3.5Essar 443 1391 3.41Shell NA 94 0.23Others 48 75 0.18Total 31641 40819 100

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External Challenges

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Increasing Price of crude oil.

Government Regulating the priceI. Prices are not market determinedII. RSP has not moved in tandem with the international crude pricesIII. Current loss for OMCs is approx. Rs.243 cr. per day (effective 16th

sept-2011).

Absence of level playing field. PSUs are supported by issue of oil bonds and Private Oil Companies are forced to sell at higher prices.

Current Retail Loss: (eff. 16-Sep-11)Diesel Rs.6.05/ lt.PDS Kerosene Rs.23.26 / lt.Domestic LPG RS. 267/ Cylinder Continued subsidy burden on LPG & SKO.

High incidence of duties and state taxes on transportation fuels. Number of levies and their magnitude vary widely among states (E.g.: 26% VAT on HSD in Maharashtra as compared to 13.28% in Delhi).

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Internal Challenges

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• Financial Viability.• Unplanned Proliferation of ROs• Volumes have only increased at an annual growth rate of about 5%• Result -- Average throughput per RO has declined substantially.• Lower ROI and delayed payback period for the stakeholders

• Increasing cost of land and customer expectations in the urban areas viability of ROs is severely affected due to fall in throughput.

• Image of ROs is tarnished due to adulteration.

• Providing physical evidence of quality fuel across the network.

• Implementation of effective control mechanisms to prevent diversion of subsidized products in the open market.

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Internal Challenges (Contd..)

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• Automation of Retail outlets – Resistance from the existing channel network due to the current trade practices.

• Implementation of effective control mechanisms to prevent diversion of subsidized products in the open market.

• Building and Sustaining Customer Loyalty• No real product differentiator.• Capturing mind and wallet share through brand creation.

• Developing a business model to accommodate the diverse lifestyles and driving habits of Indian customers

• Customer expects consumer centric facilities:• Car wash service• Food courts• Convenience Stores

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Transformation

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Way Forward

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• Provide level playing field to all players (PSUs as well as Private).

• Governmental action in formulating a viable market related pricing policy.

• Planned set up of ROs to justify long term viability - Planned Townships etc

• Relaxation in statutory compliances - Single Window Clearance

o No. of permits to be decreasedo More economical

• Rationalization of duties and taxes.o Move towards ‘GST’ regime (in line with the international experience).

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Way Forward contd.

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• Planned set up of ROs to justify long term viability - Planned Townships etc.

• Evaluate options for Retail Outlets as receiving and storage points instead of only sales point - Warehousing facilities, Receipt points for NFRs etc.

• Generate additional revenue and margin streams from Alternate Fuels:o CNG, Auto-LPGo Bio-Fuel – Ethanol blended Gasoline

• Enhance Profitability by optimizingo Sales per available square footageo Product & Infrastructure Sharing between Private companies and PSUs to

economize logistics and S&D costs.

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Way Forward contd.

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• Model based on franchising format- adopted by ESSAR OIL LIMITED (EOL)

– Franchisee leases his land to EOL – Earns lease rent– Franchisee makes investment in site and operates the retail outlet – Earns return on the normative cost.

• Advantage to Stakeholders

– Spreading of risks and returns– Scalable– Low cost and quick pay back – Volume liked earnings.– Cost savings to carry out consumer promotion and franchisee incentive programs– Franchisee brings local influence for business and channel development.

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Way Forward contd.

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EOL is now focusing on introducing Auto LPG & CNG pumps in its outlets through tie-ups with Aegis Gas and GAIL Gas, respectively.

Two CNG stations have been commissioned in Surat and Ahmedabad, in association with Sabarmati Gas & Gujarat State Petroleum Corporation.

• Essar Oil has 1,635 retail outlets,1,381 operational and 254 in various stages of construction (as of 11th April 2011).

• Company increasing focus on non-fuel retailing at its outlets .

The Company is increasing non-fuel retailing activities in its current portfolio of retail outlets to provide an additional source of revenue for its franchisees.

The company has forged alliances with alternative fuel and non-fuel retailers (tie-ups with more than 20 brands) in segments like auto gas, auto components, lubricants and services. EOL is also in talks with retailers in the food & beverages, agro products, telecom and banking/finance segments to set up points of sale at its outlets.

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Way Forward contd.

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• In FY 2010-11, Essar Oil sold 7.19 MMT of diesel, petrol, LPG and kerosene to Public Sector Oil Companies.

• This is slightly lower than the 7.30 MMT of these products sold in FY 2009-10 to Public Sector Oil Companies, but this performance is commendable because of the more intense competition from other private sector refiners in the fiscal FY 2010-11.

• In total Essar Oil sold 8.95 MMT of products - 64 per cent (by volume) or 68 per cent(by value) in the domestic market.

• This has dropped from last year’s domestic sales of 9.55 MMT and reflects the Company’s considered strategy of exporting diesel during the low-demand monsoon months. The dip in domestic sales is also because of diminished demand for fuel oil in the Indian market because of natural gas availability from the KGD-6 block.

• Exports increased to 32 per cent in 2010-11 compared to 25 per cent in 2009-10

Sales performance

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Thank You

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