winning in emerging markets petroleum retailing

Winning in Emerging Markets Petroleum Retailing

Winning in Emerging Markets Petroleum Retailing

INDIA OIL & GAS RETAILING DISTRIBUTIONINDIA OIL & GAS RETAILING DISTRIBUTION

January 28, 2005January 28, 2005

MBO-ZZT274(WEMPR)-20031205-(SN)(df)

2

• Set context for downstream opportunities in Emerging Markets

• What makes Emerging Markets challenging

• Potential winning retailing models

WINNING IN EMERGING MARKETS PETROLEUM RETAILING


3









4

Key drivers leading to emerging markets grabbing higher share of petroleum sales• Flattening demand for

fuel in developing countries– Vehicle penetration has

reached saturation levels (>1 in the USA)

– Fuel efficient vehicles

• Increasing demand for fuel in emerging market– Increasing vehicle

ownership/penetration with rising disposable income

– Rising industrial fuel demand

Source: DRI WEFA; interviews; team analysis

1980 2001

North America

WesternEurope

Eastern Europe and former CIS

Emerging markets (Asia Pacific + Middle East + Africa +other America)

63 77

Per cent, million barrels per day

Worldwide petroleum sales

1

CAGR

1

0

-3

3

Per cent

EMERGING MARKETS ACCOUNT FOR A SIGNIFICANT PROPORTION OF PETROLEUM SALES

100% =


5









6

FIVE THINGS THAT MAKE EMERGING MARKETS CHALLENGING

Wafer-thin margins even when compared to the developing world

Significant regulatory uncertainties

Nascent development of non-fuel retail in most markets vs. the developed world

Fragmented channel structure

Local consumer characteristics


7

WAFER-THIN MARGINS EVEN BY DEVELOPED MARKETS' STANDARD US cents per litre

*RO servicing includes primary and secondary distribution, depot/terminals costs**Includes land lease***Does not include marketing and other corporate costs

Source: Interviews with CST; various gas station owners; OPAL; various local sources

12.6

9.4

7.7

7.6

6.4

6.0

5.4

5.4

3.9

0.9

Italy

Spain

Germany

France

UK

US

China

Thailand

India

Indonesia

Gross integrated margin for

main grade gasoline – 2002

1.6

1.6

1.4

0.8

6.1

2.3

4.5Regular fuels margin

Premium fuels

Fuels gross margin

RO serving costs*

Labor cost

Other site costs**

Site EBITDA***

Developed market

Comparison of average site economics (integrated margins)

Average throughput KL/month

530

3.0

0.9

0.4

0.6

5.8

1.5

5.2

Emerging market

250

Not yet reflecting

market rentals


8

Pakistan 365 • Pakistan State Oil• Shell • Caktex

• ?

Vietnam 185 • Petrovietnam • ?

Thailand 785 • PTT

• Shell• Esso

• No

Taiwan 988 • Chinese Petroleum Corp (CPC)• National Petroleum• Taisugar

• ?

India 2,130 • IOCL

• BPCL• HPCL

• Yes

South Korea2,140 • SK Corp

• Hyundai Oil• LG-Caltex

• No

Russia 2,595 • Gazprom

• Lokoil• TNK-BP

• ?

China 4,975 • Petrochina• Sinopec• BP

• Yes

COMPETITIVE INTENSITY IN DIFFERENT EMERGING MARKETS IS SET TO INCREASE

Size of market Top 3 players Increase in competitive intensity expected

Consumption in ‘01 (MBPD)

Source: EIA; litsearches; PFC reports; websearches

Philippines 343 • Petron• Shell• Caltex

• ?

Malaysia 472 • Shell• Petronas• Esso

• No


9

MARGIN PRESSURE IS LIKELY TO CONTINUE GOING FORWARD

Source: Team analysis

CONCEPTUAL

US cents per litre

Fuels volume

5.2-5.4

Demand 43.6 BLPA

• High acquisition and new investment/rental costs provide support for retail margin

• Wholesale margin likely to be competed away to average costs

• New players' unit cost, even with 50% higher average throughput, will be close to current margin

Metro sites: limited room to drop further

Fuels volume

Current margin

Existing sites

Existing sites

New sites

• Existing highway sites likely to face increased margin pressure with new high volume – low cost entrants (land cost difference less extreme)

• Assuming new players successfully double average throughput, up to 10% unit site cost advantage could be achieved

Highway sites: further margin decline possible

Fuels volume

Current margin

New high volume sites

Existing sites

5.2

New margin

India example

Site/volume at risk

Room for price war

Demand

Cost/margin

Deregulation: entry of new players (e.g.,

Reliance)

5.4


10

Product specifications

CRITICAL REGULATORY UNCERTAINTIES REMAIN: INDIA EXAMPLE

• Coastal prices artificially regulated higher than inland

• Price caps are imposed by government fiat

• Gap between announced specifications and industry preparedness, e.g., petrol slated to move from 87 octane to 91 octane by 1 April 2005 in 11 cities, but refineries not fully ready

Pricing flexibility

Universal Service Obligations

• Stated 11% of sites in backward areas may be applied disproportionately to new entrants to level playing field

Tariffs and taxes

• Changes in import tariffs will impact relative competitiveness of players without local product

• Change from sales tax to VAT (or not) will alter supply chain economics

Pipeline tariffs and access

• Replacement cost tariffs would increase entry barriers

• Likely purview of proposed regulator on oil pipelines unclear


11

40

23

23

14

HIGH DEPENDENCE ON FRAGMENTED, FRANCHISEES

Source: Interview with CST; team analysis

. . . with low capability and commitment

Per cent of total dealers

Quality of dealers

Low capability, low commitment

High capability, low commitment

High capability, high commitment

Low capability, high commitment

Large part of the network controlled by fragmented dealers. . .

Others

CODO

Per cent of total sites

Operating model in typical emerging markets

COCO 10

60

30


12

LOCAL CONSUMER CHARACTERISTICS IN EMERGING MARKETS

Convenience stores• Over 60% of

customers are walk-in customers vs. fuel customers

Chicken McGrill• To suit Indian

tastes it has a tangy sauce and a “tandoori” flavour

Lay’s Corn• Corn products

do not fit the palate of Indian consumers who prefer snacks of either besan or rice

Modified corn flakes to remain crisp for longer in hot-milk

Noodles• Three-fold

increase in consumption when prices dropped from Rs.7 to 5 per 100 gm

Shampoos• Dramatic

increase in consumption when excise value reduced from 120% to 70%

• Very high value for money focus

• Different non-fuel buying behaviour


13

China(major cities)

NON-FUEL RETAIL RELATIVELY NASCENT

Source: Euro monitor for China; AC Nielsen for Indonesia

Indonesia

India

Regulatory status

• Retail sector open to JVs since 1992• All FDI restrictions expected to be

removed in 2007• Wholesale sector to deregulate in

2007

• Unlimited entry to foreign retailers (100% foreign ownership allowed with some conditions)

• Distribution channels deregulated

• FDI restricted (only wholesale and retail franchising allowed)

• Zoning laws restrict large formats

Major players

• Hypermarkets (65% of modern format sales): Carrefour, Wal-Mart, local players (Tier 3 cities)

• C-stores: Kedi, Lianhua, 7-eleven, Lawson

• Hypermarkets: Carrefour, Makro, Indogrosir

• Supers: Matahari, Ramayana, Tops, Hero (Dairy Farm)

• C-stores/mini: Starmart, AM/PM, Circle K, Indomaret

• Food World• Subhiksha

Modern trade penetration

Non-fuel retailing development

FOREIGN PLAYERS/JVS

35

22

2

USA=85%


14









15

KEY STRATEGIC CHOICES FOR PLAYERS IN EMERGING MARKETSStrategic choicesArea

• Focus only on cities • Simultaneous entry into cities and highways

Class of market1

• No convenience store/non-fuel emphasis

• Full-blown c-store as per global model

• Basic, scaled-down store

• Tailored non-fuel formats for local market

Non-fuel proposition 7

• One site, one dealer

• Large master franchisees (McDonalds, Yum Foods)

• 10-12 sites per dealerSingle vs. multiple site franchisees5

• Long-term tie-up for regular and high-performance fuel

• Tie up with NOCs through service-fee arrangement

• Trading for regular fuels; tie-ups for high performance fuels

• Creation of mother-depots and rely on coastal freight for primary transport

• Active trading from domestic and international sources

• Investments in standard depots and terminals in areas of operations

Product supply6

• Create pockets of scale in few regions/states

• All-India play (focused on top 20-25 cities and golden quadrilateral highways)

2 Geographic focus

• Customer Service

• Premium fuels, (e.g., V-Power & Puradiesel) with regular fuels

• Price • Fuel purityCore value proposition in fuel4

• Builds scale in few cities/highway stretches and then roll-out to others

Pace of expansion3 • Simultaneously build scale across multiple strategic cities/highway stretches


16

THESE CHOICES WILL DRIVE DIFFERENT BUSINESS MODELS

Description

NOT EXHAUSTIVE

Issues

• Focus on small number of urban sites in one region for next 2-3 years

• Focus on premium fuel offerings and improved customer service

• CORO franchising model

• Will this strategy make the operations in a country material and sustainable?

Business model 1

• Continue to focus on high-throughput sites but raise aspiration to 500+ sites in 2-3 years (covering key highways and cities across India)

• Explore master-franchising strategy to accelerate pace and to make strategy capital-light

• Can we execute?

• Will master-franchising work?Business model 2

• Aspire to build 1,000+ sites in next 3 years across highways and key cities

• Invest $300-500 million to build network

• CORO franchising model (as master-franchising route likely to be difficult if such high investment required in a 2-3 year time frame)

• Is this risky?

• Can we execute?Business model 3


17

WINNING IN EMERGING MARKETS: SOME PRELIMINARY IDEAS

• Focus on cherry-picking high through-put sites• Match ‘local’ cost structures, especially capex• No 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/tastes

• Unique consumer characteristics

winning in emerging markets petroleum retailing

Documents