Getting more out of Indian oil & gas retail sector

Dhanish Ahsen, Sebin K. Joseph, Vaisakh K. V.

Students, MBA, Oil & Gas Management

University of Petroleum & Energy Studies

Abstract

Petroleum retail sector is one of the largest segments of the industry. Petroleum retailing industry in India faces

significant challenges and is forced to adopt new and innovative strategies. Today‟s consumers are demanding, but

tomorrow‟s consumers will be armed and dangerous. So focus is on quality & quantity assurance, rewarding loyalty,

premium fuels, cashless transactions, on-fuel services, quick filling and efficient fore court service. The new look

petrol pumps, apart from dispensing fuels; now offer the best of retail chains providing a value added service to busy

consumers.

Empowered by technology for unprecedented choice, they will demand products and services that meet a constantly

shifting kaleidoscope of expectations, from convenience and affordability to a customized experience and

sustainable sourcing. GOI on April 1, 2002, opened up retail marketing to private and foreign companies. Indian

retail sector gets flooded with innovations of various forms those customers to buy more and spend more. 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. The retail outlets have the potential to

become a one-stop shop for meeting innumerable needs of the customers on the one hand, and increasing the

revenues of the outlet on the other.

Strong brands drive revenue growth and to drive revenue growth, petroleum retailers may have to either attract new

consumers or increase their share of the existing consumer‟s wallet. Enabling Oil companies to refine its product

offering , improve its brand and enhance customer relationships with targeted promotions. AS companies expand

into nontraditional markets, the barriers between retailers are blurring, creating and exploiting new market dynamics

The expectations of customers have been changing as customer belonging to the trucker community is now

demanding higher levels of product & service delivery. Businesses are putting intense pressure on entire logistics

cost optimization: travel times under scrutiny. Also the urban customer has become more vocal in demanding

services like one Stop Shop, rest & recreation for highway travel, automatic car wash, alliance with automobile

manufacturers to provide service at pumps, allied facilities like ATMs, Cyber cafes, courier services etc.

This paper deals about the innovative marketing strategies used by the National Oil Companies and private players

to attract consumers and build a brand affinity.

Introduction

The convergence of several market and consumer trends is fundamentally changing the fuels retail industry in the

world and placing additional pressure on volume and profitability. The growing appeal of alternative fuel sand more

stringent Corporate Average Fuel Economy (CAFÉ) 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 widespread

adoption, they will present a significant competitive threat to traditional motor fuels. This threat is reflected in the

anticipated 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 competitive

landscape. At one end of the spectrum are structural changes in the refinery business, reflected not only in the

above-average number of spin offs, sales and closures seen but also in the number of recently announced refinery

upgrade projects, which will allow refiners to accommodate new sources and types of crude oil and potentially

increase their capacity. While the effect of these changes on the fuels retail industry is not fully known, it is

anticipated that refinery owners and shareholders will be looking to recoup their upgrade investments and lower

their 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 range

of 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 about

technological possibilities works to prevent innovation. In relation to regulation, the majority of retail firms report

no experience of barriers preventing innovation, although a number of specific issues do emerge. These include: the

availability of allowances for mitigating some of the risks of innovation, as well as a lack of a common agenda

across Government to stimulate investment in sustainable innovation, which often results in conflicting outcomes on

the ground for firms.

The Pricing Mechanism

Under the Administered Pricing Mechanism (APM), product prices were directly administered by the

GoI. The APM was abolished in April 2002. Now the OMCs would be free to set retail product prices

based on an import parity pricing formula. The opening up of domestic refining and retail sector to

private-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 government‟s budget were maintained on LPG and on a

fixed proportion of supplied kerosene to safeguard the low income population. Now the retail prices for

petroleum products (including prices for domestic kerosene and LPG) are also expected to fluctuate with

changes in the price of India‟s crude basket. The GoI increasingly looked to restrict the ability of OMCs

to 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 was

dismantled.

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 been

considerably disturbed and uneven across various levels of administration.

Current policies within India‟s downstream petroleum sector clearly have implications for investment

decisions 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

The uniqueness of the relationship of OMC‟s with the GoI has dramatically enhanced the investing

potential of these companies and therefore the dynamic growth of India‟s 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 OMCs‟

assistance, the Indian government has been able to pursue its official policy of providing affordable

energy for India‟s developmental needs and its significant poor population. At the same time, by

absorbing OMCs losses under this system and explicitly guaranteeing their operations, capital financing

and investments, the government has created an investment climate for OMCs which has resulted in

robust capacity expansion and growth sector wise. The GoI aims to establish India as a global refined

product exporting hub, instructing OMCs to take a more outward-oriented operating posture, and on the

other hand encouraging private-sector refiners to invest in export-oriented refining capacity.

The measure of India‟s refined product export capacity over time will be the build-up of excess refinery

capacity over domestic demand. India‟s actual refined product export volumes are bound to surpass the

aggregate of excess capacity. OMCs look to first supply the Indian market, and then to export the balance

of refined product produced. Private-sector refiners have no operational directive to first supply domestic

markets so they will tend to produce a product schedule which optimizes total refining margins from

period-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 to

satisfy domestic demand.

Need for a transition

Over the past several years, many of the Oil Marketing Companies have announced an exit from company

owned and operated businesses. Several forces are driving this shift. First, oil companies have recognized

that 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 their

overhead costs are typically not competitive with those of standalone, non-oil company retailers. In

addition, there is growing pressure for oil companies to improve returns on invested capital—which have

proved more attractive in the upstream sector. The most common point of contact of customers with Oil

Industry 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 Oil

Companies as well as Private Sector oil Companies dealing in storage and distribution of petroleum

products as per published guidelines. Presently the Oil Companies engaged in retail business of

automotive fuels are IOC, HPC, BPC, NRL, MRPL, ONGC, RIL, Essar and SHELL. These companies

are 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 entirely

new 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 is

especially true if retailers are able to share and leverage customer information. In fact, at least one major

auto manufacturer leverages customer and telematics system data to generate unique leads and email

marketing 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 a

better understanding of the consumer and the marketplace than their peers, fuel retailers can deliver more

appealing products and services to their customers across multiple categories. The key to improving the

revenue potential of each customer lies in understanding as much as possible about buyer‟s needs

preferences and purchasing behaviors. Building customer analytics capabilities can pay off in a number of

ways 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 or

via a smartphone app which are quite common which also helps to compare prices at nearby stations. The

regional players could notify customers about fuel price changes and allow them to purchase fuel in

advance or monitor prices via their smartphones. Smartphone app can help customers to prepare their

shopping 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 a

determining factor in achieving competitive advantage.

At the other end of the downstream spectrum is the continued expansion of hypermarkets and other

nontraditional fuels retailers. With their combination of forecourt and backcourt offerings, hypermarkets

offer attractive retail alternatives for fuel consumers and will likely continue to build more brand loyalty

and market share. Addressing the challenges and opportunities that will accompany these changes

requires 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 the

competitive 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 supplier‟s fuel for one, two or three years

into the purchase or lease price of the car. Offering a purchase incentive that significantly reduces the cost

of gasoline at select stations for a period of time. In either case, auto buyers would then be able to fill up

at any of the suppliers‟ stations during the offering period without paying for fuel, or doing so at a steeply

discounted rate. As such the days of searching for the best gasoline prices would be over. Automakers

have 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 where

overall demand is falling and improve brand loyalty. For wholesalers, the value of pricing transformation

lies in potentially saving money by locking in favorable fuel prices. For retailers, lock-in rates or

partnership agreements might require more flexible onsite payment processing and/or accounting

applications to accommodate the new pricing structures. Costs associated with implementing new systems

and point of sale terminals would likely be offset by the benefits of the new pricing programs, including

increased foot traffic and, presumably, additional sales of other products sold at their locations. Similar

online programs are emerging for individual drivers too. MyGallons.com, for example, allows US

consumers to buy gasoline at current prices and use gallons from their fuel reserve when prices rise. Fuel

credits are stored on prepaid gas cards, which can be redeemed at a number of filling stations across the

country.

Near field communication technologies (NFC) .

Consumers today are starved for time. They want to carry out their purchase transactions as quickly and

easily as possible. In this context, mobile applications that enable multiple transactions via a single device

could simplify the customer experience. NFC or near field communication technologies will be

particularly prominent in the mobile phone market in future which facilitates data exchange and wireless

connections 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 that

time, NFC is expected to also be the most-used solution for mobile payment. What is more, NFC is

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 shopper‟s smartphones into their wallets, provides an early

example of how NFC enabled smartphones and mobile wallet solutions can potentially change the retail

game. By storing virtual versions of existing plastic cards on a phone, customers can simply tap their

phone on a retailer‟s reader to send payments automatically and, at some merchants, redeem offers and

transmit 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 is

because these apps present an opportunity to shift consumers to less expense forms of payment. Each time

a customer uses a mobile wallet or text app rather than a credit card, the retailer may be able to avoid

some of the credit card fees that have historically diminished retailer‟s already thin profit margins.

Additionally, mobile payment technologies are already boosting customer loyalty and enabling the

delivery of advertising that will play a bigger role in driving revenue than the actual payment

functionality. In the future, it is assumed that every mobile wallet will have a loyalty and advertising

scheme included. Fuel retailers have a unique opportunity to achieve first-mover advantage by

incorporating these mobile technologies into their business models.

Importantly, they also can position wholesalers as better, more committed customers to suppliers. In the

past, 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 wholesale

customers. Those wholesalers and retailers that can demonstrate a commitment to creating a branded

experience 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 more

dynamic and rewarding interaction. The retailers for example, could post special sales announcements for

their followers on various social networking sites. Launching of mobile coupons that are redeemable only

in 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 offer

unique 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 and

marketing company to get data on stock available, sales and even can be used to assure the quality.

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 and

enhance flexibility.

Stock reconciliation

In order to make it easy to downsize spend time counting and accurately checking both „wet‟ and „dry‟

stock 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 fill

multiple outlet. It is concerned with controlling data, with the consideration of price and quantity. From

this, 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 sale

at 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 to

get an assurance 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.

Customer Evolution

Customers today equipped with superior control over the transactions and the information in hand are

now 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

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 of

information at their disposal consumers now can exercise greater control over transaction than ever

before.

Retailers today have an unprecedented amount of data at their disposal for attracting and retaining

customers, driving pricing strategies and shaping customer offers. The real challenge lies in optimizing

the access, analysis and use of that data to unearth new sources of revenue. Additionally, the proliferation

of 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 technical

solutions that support fuel retailers‟ strategic objectives will certainly vary, we believe investments must

already be made in three areas: mobility, social media and analytics. Investing early in these technologies

will help fuels retail companies distinguish themselves from their peers.

Conclusion Impending changes in the retail sector, like supply and demand imbalances, the emergence of alternative

fuels and new customer expectations, are going to ultimately alter how fuels retail companies go to

market, attract and retain customers, and achieve profitability. Fuel retail industry focusses mainly to

setback 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 pricing

mechanism to market pricing mechanism focus will be mainly on the and look for better quality and

service for the customers. National oil companies particularly oil marketing companies will have to

overcome challenges put forward by the emergence of alternative fuels, new players coming up in the

retail segment and new customer expectations. This in turn will have a big impact on the overall value

chain to improvise the existing strategies and set to become truly global and compete in open market with

these changes will fundamentally alter how downstream companies go to market with new plans to attract

and retain customers and ultimately achieve profitability. Examples from other industry sectors suggest

how fuel retailers can thrive while navigating the new fuels landscape. New pricing schemes, new

revenue sources and new ways of interacting with customers are just a few of the strategies poised to play

an important role in defining fuel retailers‟ future success.

A convergence of changing technology, increased regulatory and competitive pressures, disruptive market

dynamics, and emerging consumer trends will bring dramatic change to the fuels retail industry over the

next decade. The pace of change will continue to accelerate, straining legacy processes, systems and

skills. Understanding what the future might look like and having a plan to compete in a new competitive

environment are essential considerations for companies looking to achieve and maintain high

performance in the years ahead.

References

Frag

men

ted

Customers want tailored and personalized products, services and experiences.This means they are harder to target

Inte

r C

on

nec

ted

Customers expect a brand experience across multiple channels and touch points. This means they are harder to reach and engage.

Wel

l In

form

ed

Customers are more knowledgeable than ever before and are comfortable integrating technology into their lives.This means they are harder to impress.

Tim

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tarv

ed

Customers want a convenient experience, as well as the accessibility and transparency needed to make informed decisions.This means they are harder to please.

Co

nsc

iou

s Customers are concerned about value and about their health and the environment.This means it is harder to win their trust.

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