Winning in Emerging Markets Petroleum Retailing
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Transcript of 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
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• Set context for downstream opportunities in Emerging Markets
• What makes Emerging Markets challenging
• Potential winning retailing models
WINNING IN EMERGING MARKETS PETROLEUM RETAILING
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• Set context for downstream opportunities in Emerging Markets
• What makes Emerging Markets challenging
• Potential winning retailing models
• Set context for downstream opportunities in Emerging Markets
• What makes Emerging Markets challenging
• Potential winning retailing models
WINNING IN EMERGING MARKETS PETROLEUM RETAILING
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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% =
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WINNING IN EMERGING MARKETS PETROLEUM RETAILING
• Set context for downstream opportunities in Emerging Markets
• What makes Emerging Markets challenging
• Potential winning retailing models
• Set context for downstream opportunities in Emerging Markets
• What makes Emerging Markets challenging
• Potential winning retailing models
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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
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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
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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
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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
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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
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40
23
23
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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
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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
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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%
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WINNING IN EMERGING MARKETS PETROLEUM RETAILING
• Set context for downstream opportunities in Emerging Markets
• What makes Emerging Markets challenging
• Potential winning retailing models
• Set context for downstream opportunities in Emerging Markets
• What makes Emerging Markets challenging
• Potential winning retailing models
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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
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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
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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