Non Fuel Retailing_report_arvind Dwivedi

A STUDY OF NON FUEL RETAILING IN INDIAN PETROLEUM INDUSTRY POST LIBERALISATION Dissertation Project Report Submitted in partial fulfillment of the requirements for the Award of the degree of

Master of Business Administration (Oil and Gas) By ARVIND DWIVEDI

Under the guidance of Prof. Atul Razdan

University of Petroleum and Energy Studies, Dehradun 2009

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

ACKNOWLEDGEMENT

First and foremost, I would like to express gratitude to my Institution, University of Petroleum & Energy Studies for providing me a magnificent opportunity in the form of this dissertation to work and learn. I would like to express gratitude to Prof. Atul Razdan for sharing the journey of conceptualizing and developing all the ideas. He stood in times of difficulty and despite of his busy schedule devoted a major chunk of his time towards this project. He has been a part of all the activities and duly guided the project to its destination. I am indebted for his endeavours in making this project a success. He has truly fulfilled his role as a guide. I would also like to acknowledge the help and support extended by all my friends whose names could not be mentioned here. They all have been very co-operative and provided impetus to this project. Without their help this project would not have reached its destination. I express my gratitude for their suggestions and help they extended to this project. I will not miss the opportunity of expressing thankfulness towards all my teachers and the faculty of University of Petroleum & Energy Studies for sharing their knowledge, which provided necessary ingredients to this project. In the end, I want to thank Mr. Bill Gates and his Microsoft Corp. for MS Word and MS PowerPoint. Without them this report would not have been in its present form.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

CONTENTS

KEY TERMS………………………………………………………………………………………………………………………..1 EXECUTIVE SUMMARY……………………………………………………………………………………………………...2 RESEARCH OBJECTIVES……………………………………………………………………………………………………..4 RESEARCH METHODOLOGY……………………………………………………………………………………………….6

FINDINGS CHAPTER 1 Background of Indian Petroleum Industry………………………………………………………………….…7 1.1 Historical Background.……………………………………………………………………………………………………7 1.2 Structure of Indian Petroleum Industry…………………………………………………………………………..8 1.3 Petroleum Companies in India….……………………………………………………………………………………11 1.4 Energy Consumption in India………………………………………………………………………………………….13 1.5Energy & Economy………………………………………………………………………………………………………….14 1.5.1 Contribution of Oil Companies to Exchequer………………………..……………………….16 CHAPTER 2 Changes in Indian Petroleum Industry……………………………………………………………………….19 2.1 Why did Government go for liberalization of economy?.................................................19 2.2 Development of Indian petroleum industry …………………………………….……………………………19 2.2.1 Options for Development ……………………………………………………………………………..20 2.2.2 Important Developments……………………………………………………………………………….21 2.2.2.1 Developments Pre- Liberalisation…………………………………………………………21 2.2.2.2 Developments Post Liberalisation………………………………………………………..22 CHAPTER 3 Importance of Non Fuel Retailing…………………………………………………………………….…………27 3.1 Winds of Change.…………………………………………………………………………………………………………..27 3.1.1 Callous Competitive Environment………………..………………………………………………..27 3.1.2 Mounting Expectations of Consumer…….…….…………………………………..……………28

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

3.1.3 Call for Alternate Sources of Revenue……………………………………………………………28 3.1.4 Shift in Branding (From Outlet to Corporate)……………………………………………….29 3.1.5 Emergence of Non-Fuel Services As a Major Activity at Retail Outlets………..29 3.1.6 Competition on price……………………………………………………………………………………29 3.1.7 Alternate sources of revenues……………………………………………….......................30 3.2 India versus world (U.S.)................................................................................................31 3.3 Key Issues and Imperatives for the Industry………………………………………………………………..32 CHAPTER 4 Non Fuel Retailing Initiatives……………………………………………………………….………………..37 4.1 Retail in India………………………………………………………………………………………………………………….37 4.1.1 What Is Retailing?.................................................................................................................37 4.1.2 Scenario of Retailing in India…………………………………………………………………………………………….37 4.1.2.1 Key Challenges……………………………………………………………………………………………………….37 4.1.2.2 Present Indian Scenario………………………………………………………………………………………….39 4.1.3 Traditional Retail in India……………………………………………………………………………………………………39 4.1.4 Indian Retail is Changing Gears…………………………………………………………………………………………40

4.2 Non Fuel Retailing…………………………………………………………………………………………………………..42 4.3 India as a Non Fuel Retailing Destination………………………………………………………………………..44 4.4 Options for Non-Fuel Offerings……………………………………………………………………………………….47 4.4.1 ATM……………………………………………………………………………………………………………………………….47 4.4.2 Quick care point……………………………………………………………………………………………………………..47 4.4.3 Windscreen cleaning facility……………………………………………………………………………………………48 4.4.4 Free health check-up……………………………………………………………………………………………………..48 4.4.5 INDE-PAY……………………………………………………………………………………………………………………….48 4.4.6 Vending Machine of Coffee and Coca-Cola…………………………………………………………………….52 4.4.7 Pay Phone………………………………………………………………………………………………………………………52 4.4.8 Other Necessary Amenities……………………………………………………………………………………………52

4.5 Non Fuel Initiatives of Indian PSU’S……………………………………………………………………………53 4.5.1 Indian Oil Corporation Limited (IOCL)…………………………………………………………………………….53 4.5.2 Bharat Petroleum Corporation Limited (BPCL)……………………………………………………………….55 4.5.3 Hindustan Petroleum Corporation Limited (HPCL)……………………………………………….57

CHAPTER 5 Real Estate Utilisation……………………………………………………………………………………………61

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

5.1 Real Estate Opportunities………………………………………………………......61 5.2 Transportation Network……………………………………………………………61 5.3Emerging Retail Formats……………………………………………………………63 5.3.1 Highway Stops……………………………………………………………….64 5.3.2 Sub Urban Stops……………………………………………………………..64 5.3.3 Urban Stops……………………………………………………………….....64 5.4.4 A Hypothetical Case for offering Non Fuel Services at an Outlet………………..65 Conclusions……………………………………………………………………………………………………………………..…………67 Bibliography.……………………….…………………………………………………………………………………………….……..69

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

KEY TERMS

Non- Fuel Products & Services: All the products and services which are sold or provided on petro retail outlets other than fuel (petrol, diesel, A-LPG, CNG)

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

Liberalization: Liberalization refers to a relaxation of previous government restrictions, usually in areas of social or economic policy. Economic liberalization is a very broad term that usually refers to fewer government regulations and restrictions in the economy in exchange for greater participation of private entities.

Optimal Utilization: These are the methodologies for improving the quality and desirability of the current product or a product concept.

Strategy: These are the short term techniques which need to be exercised in order to achieve the organization goals & objectives.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

EXECUTIVE SUMMARY

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

EXECUTIVE SUMMARY The Indian retail industry can be segmented in different segments viz. cosmetics, footwear, sanitary products, entertainment etc. 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.

India had deregulated the petroleum retail sector in 2002 by dismantling APM and enabling new players to enter the market. The entry of private players like Reliance, Essar, Shell, NRL, and many more have increased the competition by means of the quality of fuel and the non fuel offerings at their retail outlets.

With a market determined pricing mechanism in place, prices will be lowered, which would reduce the margins from fuel products. In such circumstances, the petroleum retailers will need to have differentiated value propositions to improve revenues. It will require customer centric approach and building of a strong brand equity and identity. Non-fuel products tender higher margins as compared to petroleum products and enable companies to sustain themselves, especially during times when oil prices are high. However, it is to be kept in mind that petroleum retailing is a retailing of petroleum product and service, with differentiation possible in either or both areas.

Now, it is not all about offering fuel only at the petrol stations. The new look petrol pumps, apart from dispensing fuels; now offer the best of retail chains providing a value added service to busy consumers. This trend is in circulation in the international markets and the big petrol station convenience stores earn more than 30 to 40 per cent of their profits from the non-fuel activities. The range of value added services is all beneath one roof. The new-look petrol pumps are now the more advanced multi-purpose dispenser petrol-pumps. The petrol pumps

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

are computerized, thus reducing waiting time which not only ensures accuracy, but also saves a lot of time for customers and avoids misconception and arguments.

The study gives a comprehensive overview of petroleum industry in India, the way it has evolved through shackles of time and its current status with respect to companies, regulations and customers. The study tracks the origin and the journey of industry till date. It has also focused on the kind of services expected by consumers, which are being provided on retail outlets and which can be provided on outlets. These services will cumulatively increase the revenue realization as well as optimal utilization of land available on an outlet.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

RESEARCH OBJECTIVES

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

RESEARCH OBJECTIVES

• To Study the Background of Petroleum Industry in India

The first objective of this study is to study the Indian petroleum industry in details. The objective would encompass the genesis of Indian petroleum industry, the consumption mix, the major players and regulators in this industry and its contribution to the economy.

• To Identify the Specific Changes in Petroleum Industry Post Liberalization

The second objective had been framed to focus on the changes which have taken place in the industry post liberalization. This objective has taken in consideration the reasons for liberalization, pre-liberalization scenario and the changes which took place in refining and marketing sectors post liberalization.

• To Highlight the Importance of Non Fuel Offerings for Petroleum Marketing Companies in India

The third objective has led to reasons for increasing importance of non fuel retailing in context of Indian Petroleum Industry. This objective has streamlined the process to explore the reasons for increasing importance of allied retail business. It also focused on ways to enhance the market share and level of customer satisfaction.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

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

Marketing Companies

The fourth objective of the study focuses on the importance of retail, its presence in India, non fuel initiatives of global oil majors and analyses the non fuel offerings of Indian oil marketing companies. It has also encompassed the various services provided by the petroleum companies and the brands under which they are served.

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

estate The last objective of the study highlights the importance of non fuel services for optimal utilization of real estate. Here we have taken a case study to showcase the revenue enhancement that can be achieved by introduction of various non fuel offerings on the real estate available on petro retail outlets.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

RESEARCH METHODOLOGY

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

RESEARCH METHODOLOGY

Research Design: Descriptive The topic characterizes following things 1. Information needed is defined only loosely. 2. Research process is structured but flexible. 3. Sample is small and not completely representative. 4. Analysis of secondary data is qualitative. The major part of the research is an exploratory research design. Some portions follow the descriptive design criteria. This type of research design is generally followed by further exploratory or conclusive research.

Sources 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.

Limitations - Limited samples taken for interview. - It is a study of only state run corporations and does not include private players.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

FINDINGS

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

CHAPTER 1

Background of Indian Petroleum Industry

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

1.1 Historical Background of Indian Petroleum Industry1 The oil sector came into existence in India in late 19th century. Oil was first found in Assam at Digboi in the year 1889. Until 1960, oil exploration and production activities were confined to the North-Eastern region of the country producing on an average 5,000 ,000 barrels per day. The sighting of the Cambay onshore basin, in 1958 and the Bombay offshore basin, in 1974 enhanced nced the production level to 0.7 .7 million barrels per day. The first refinery came up at Digboi in the year 1901. However, new refineries came into existence in the late 1950s-early 1950s 1960s by international majors such as Esso, Shell, and Caltex. The process of nationalization of petroleum industry was started in 1970’s, after the Oil Shock, and was complete by 14th October, 1981. The process of nationalization forced the international oil companies comp to move out of India. After fter nationalization, distribution systems and pricing of products came under government’s control. Components of Primary Energy Consumption2 1.4% 5.2% 7.8%

30.1%

Natural Gas Oil

55.5%

India’s Primary Energy Consumption (million barrels of Equivalent) Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

1.2 Structure of Indian Petroleum Industry3

Primarily, the Indian oil sector has been a regulated sector dominated by Government undertakings. However, with the Government loosening its control, new private sector players are now gaining presence. Unlike the international oil majors; the Indian oil sector has companies operating in three distinct sub-segments: Oil & Gas Exploration and Production (E&P), Crude Refining, marketing of petroleum & petroleum products (R&M) and, their Distribution. The various players in each of these sub-sectors are listed in the figure below. The Indian Petroleum Sector

Oil & Gas Exploration

Natural Gas Distribution

Refining & Marketing

GAIL Gujarat Gas

ONGC, OIL CPCL, RPL, BRPL, NRL,

IBP

IOC, BPC, HPC

ONGC is the leading player among the Indian exploration & production companies. Other players in the upstream sector include 1. Oil India Ltd. 2. Gas Authority of India Ltd. 3. Indian Oil Corporation 4. Gujarat State Petroleum Corporation 5. Reliance Industries

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

6. Essar Oil 7. Videocon 8. Cairn Energy 9. Hindustan Oil Exploration Company 10. Niko Resources 11. Hardy Oil 12. Tata Petrodyne 13. Selan Exploration Technologies Ltd. 14. L&T, 15. Premier Oil 16. Geo Global Resources, and many more.

Government Controlled Companies: OIL, ONGC, IOC, BPCL, HPCL, and GAIL. CPCL, BRPL and IBP are now the subsidiaries of Indian Oil Corporation whereas,. KRL and NRL have become subsidiaries of Bharat Petroleum Corporation Ltd..

Joint Sector Companies: MRPL was the joint venture of Aditya Birla Group and Hindustan Petroleum. However, ONGC has bought the stake of the Aditya Birla Group making it a completely public sector company.

Private Sector Companies: Reliance Petroleum Ltd. (RPL), Gujarat Gas, Essar Oil Ltd., etc.

It is evident that Government companies have subjugated all the sectors of the Indian Petroleum industry. However, on a futuristic note, Government is relaxing its control over pricing & distribution, giving an opportunity for the private players to enter the industry.

The Ministry of Petroleum and Natural Gas (MoP&NG) governs the Indian Petroleum industry. This ministry governs the activities associated with exploration and production of oil

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

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 the Directorate General of Hydrocarbons, the Oil Co-ordination Committee (OCC) and the Oil Industry Development Board (OIDB). Oil Co-ordination Committee was setup in 1975 to: 1. Allocation of indigenous and imported crude oil to the refineries 2. Planning for imports, transportation requirements and storage infrastructure, based on short-term estimates for supply/demand 3. Determine the product mix of refineries 4.

Organize a monthly industry co-ordination meetings and supply plan meetings to resolve problems, work out supply plans and maximize product yields

5. Administering the pricing mechanism for controlled petroleum products 6. Monitoring the oil pool account 7. Co-ordinating marketing functions; 8. Monitoring the performance of the industry so as to achieve optimality.

OCC has been dissolved with the dismantling of APM,(administered price mechanism) from 1 April, 2002. It has been succeeded by the Petroleum Planning and Analysis Cell (PPAC). The role of PPAC is: •

to analyze the trends in the international oil markets and domestic prices

•

evaluate and forecaste import and export trends of petroleum

•

to maintain an information database and communication system to deal with emergencies and unforeseen circumstances.

PPAC also administers the subsidies in LPG sale as well as the freight subsidy for far-flung areas and operationalise sector-specific surcharge schemes.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

The Oil Industry Development Board was set up in 1975 to provide financial and other assistance as is appropriate for the development of the oil industry. The financial assistance is provided by disbursement of loans and grants for activities like prospecting, refining, processing, transporting, storing, handling and marketing of oil and its products products.

The Directorate General of Hydrocarbons was set up in April 1993. It is an independent regulatory body and supervises the activities of companies in the upstream oil & gas sector. It also looks after the oilfield development for sound engineering practices.

The New Exploration Licensing Policy brought in by Government is an invitation letter to private players so as to increase their participation in the Indian petroleum industry. Under this policy, the Government offers attractive fiscal terms such as: level playing field, zero cess liability; and 50% rebate on royalty payments for seven years for deep offshore areas. Oil exploration and production has also been given infrastructure status, which provides for a sevenyear tax holiday. So far, the Government has signed production sharing contracts (PSCs) for 47 blocks in the first two rounds of NELP and has awarded 23 blocks under NELP III. In the backdrop of the giant gas discovery made in recent times, the government has launched NELP IV during May 2003. A total of 24 blocks are on offer in this fourth round of NELP. In the last NELP round 54 blocks were offered and priority was given to an Indian consortium with global players.

1.3 The Petroleum Companies in India4

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)

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

•

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.

There are 18 refineries having a combined annual installed capacity of 116.97 million metric tonnes (as on 1st April, 2003). RPL is a private sector refinery, MRPL a joint venture of ONGC (after buying stake from Aditya Birla group) and HPCL, and the rest public sector enterprises. ONGC has commissioned a mini-refinery with a capacity of 0.078million tonnes at Tatipaka in East Godavari district of Andhra Pradesh in September 2001.

Marketing of petroleum products is done mainly by the three public sector undertakings (PSUs), namely IOC, HPCL and BPCL. While IOC, HPCL and BPCL have integrated operations in refining and marketing, IBP (earlier an independent marketer) is a pure marketing company taken over by IOC in February 2002.

Earlier, the marketing sector was under the strict control of GoI. However, now it has been decontrolled. With effect from April 1, 2002, pricing of all products are linked to import parity prices. While the administered pricing mechanism for domestic LPG, Kerosene, Petrol and Diesel have been dismantled, prices of domestic LPG and kerosene are subsidised. PSUs account

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

for 90.5% of the total sales of petroleum products in India, the balance 9.5% sales is supplied by imports and sales of decontrolled products by private players.

Distribution and marketing of gas is done primarily by GAIL. The players in the natural gas distribution industry are small and regional in nature, such as Indraprastha Gas Ltd. (in Delhi), Gujarat Gas (in Gujarat), Mahanagar Gas Ltd. (in Mumbai), and the two State Government undertakings in the North-Eastern States (Assam Gas Company Ltd. and Tripura Natural Gas Company Ltd.).

1.4 Energy Consumption in India5

The per capita primary energy consumption in India is very low 305 kg when compared to the world average of 1,487 kg. With a total primary energy consumption of 314.7 million metric tonnes of oil equivalent (MMTOE), India accounts for just 3.4% of the total world primary energy consumption.

However, at this stage, the point to note is that while the consumption of primary energy in the world grew at a low compounded annual growth rate (CAGR) of 1.1% during 1991-2001, it experienced a higher growth of 4.3% in India. The world primary energy consumption showed a higher growth rate of 3.1% per annum during the 1970s before declining to the current level.

The decline in the growth rate is due to technological advances and process improvements that improve fuel efficiency. These efficiency gains are apparent in items as diverse as automobiles, airplanes, household electrical goods, power plants and manufacturing equipment.

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

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.

However, the share of oil & gas has increased from 34.8% in 1991 to the current level of 38.4%. The reasons for the growing importance of oil and gas are to be found in their multiple, varied and cost-effective applications. Further, other factors such as environmental problems (in the case of coal and nuclear energy), difficulty in handling (coal), higher capital costs, and limitation to specific geographic regions (hydroelectricity) have restricted growth in the use of other forms of energy.

As per the Hydrocarbon Vision 2025, the share of oil & gas in the primary energy is expected to increase to 45% by the year 2025. While, the share of oil would decrease to 25%, the share of gas would increase to 20%. Growth in share of gas would largely be dictated by environmental reasons coupled with efficiency factors.

As in the case of 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. Thus, the growth in primary energy consumption, the increasing share of oil & gas in the primary energy consumption, and the low per capita consumption of oil & gas are indicative of an enormous potential for growth in the demand for oil & gas in India.

1.5 Energy & Economy

Oil and gas is a major contributor to economies worldwide. There is hardly a nation that does not seek this indispensable natural resource. A country that already possesses oil wants more. Nations struggle to explore for oil, and import it at almost any cost. It is also an important contributor to the export realizations of many countries. In countries like Russia, nearly half the hard currency earnings come from crude oil exports. The figure stand at about 80% for Venezuela and 95% for Nigeria and Algeria.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

Oil has many applications and without it almost nothing in the modern world will move. Transport by rail, road, sea or air is largely dependent on oil. The wheels of industry need oil, and agriculture cannot progress without sufficient supplies of oil and its products. Without oil or its close associate, natural gas, urban domestic life will become miserable. Oil lights homes and streets and serves as a fuel for cooking. In cold countries, oil or gas is needed for heating homes.

A wide range of chemical fertilizers, pesticides, chemicals, medicines and toiletry items are produced from petroleum. In spite of these varied and multiple applications, the common man has a very obscure idea of where all these products come from.

The importance of the oil & gas sector is best explained in terms of the economic effects whenever oil supply disruptions have taken place. Oil price shocks accompanying supply disruptions have hurt a number of economies and have been a major cause of inflation and recession, as was the case in the 1970s. The economic impact of oil supply disruptions in terms of increased inflation and unemployment, and reduced economic growth can be so severe as to result in a loss of gross domestic product (GDP), mostly because of lost investments. For instance, during the 1973 oil shock, GDP declined for the US, Europe and Japan by 4.7%, 2.5% and 7%, respectively. Similarly, in the 1979 oil shock, world GDP declined by 3%.

Similarly, low oil prices also impact economy negatively. When oil prices fell to historic lows in 1998—in real terms they were lower than the 1973 level—the revenues of the OPEC members plunged to about US$100 bn., only one-fifth of their 1998 revenues in real terms. Oil price movements have also had effects on the financial performance of oil companies. The six biggest American oil firms posted grim fourth quarter results for 1998: their after-tax profits fell by 90%, or US$4.8 bn., compared with the same quarter a year earlier.

The two ways in which oil shocks had weakened a nation’s economy were through direct (or wealth transfer) costs and indirect (or adjustment) costs. The economy bears direct costs when the rising prices of imported oil cause a transfer of income from the consuming to the producing

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

nations. The indirect costs are caused by the rise in the price of oil relative to other production input.

Supply disruptions raise oil costs, which reduces the profit-maximizing output of oil-using firms and thereby lower the GDP. As GDP shrinks, the demand for labor and non-energy inputs declines, further increases unemployment. There is a strong linkage between GDP and energy consumption (of which oil and gas are major components), and with the exception of only two periods—1974-1975 (after the 1973 crisis) and 1980-1982 (after the 1979-1980 crisis) energy and the economy have followed a similar path of progress.

1.5.1 Contribution of Oil Companies to Exchequer6 The petroleum, oil and lubricants (POL) segment has been an important contributor to the Indian Exchequer (Central and State). 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

Recently, the Government has divested its stake in many public sector oil companies—with the objective of mobilising resources to meet the fiscal deficit. This would lead to lower dividend inflow to the exchequer in future. Some of the initiatives on the disinvestment front included the cross-holding arrangement among ONGC, IOC and GAIL—where each of these companies had Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

been directed to buy out a share of the Government's stake in the other company. This crossholding scheme involved: an equity swap of 10% between IOC and ONGC; ONGC and IOC picking up 5% stake in GAIL; and GAIL picking up 2.5% stake in ONGC. Further, the Government has sold 33.58% of its stake in IBP to IOC, its entire stake in CPCL and BRPL to IOC, and its entire stake in KRL and NRL to BPCL. The proposed methodology of disinvestment had the dual objective of mobilising resources and strengthening the stand-alone refining (KRL, CPCL and BRPL) and marketing (IBP) companies.

Table 1.1: Government Holding in Public Sector Oil Companies Oil Company

Central Govt. Holding*

Oil and Natural Gas Corporation Ltd. (ONGC)

84.1%

Oil India Ltd. (OIL)

98.13%

Gas Authority of India Ltd. ( GAIL)

67.35%

Indian Oil Corporation Ltd. (IOC)

82.03%

Hindustan Petroleum Corporation Ltd. (HPCL)

51.01%

Bharat Petroleum Corporation Ltd. (BPCL)

66.2%

IBP Co. Ltd. (IBP)

26.00%

*as on March 15, 2002. Source: Oil Companies, Ministry of Petroleum and Natural Gas

The public sector undertakings (PSUs) in the oil industry earn good profits and account for over 38% of the total profit after tax earned by PSUs as a whole. Moreover, the dividends declared by the oil PSUs comprise close to 45% of the total dividends declared by PSUs as a whole.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

Table 1.2: Profits of PSUs (Rs. million) 1995-96

1996-

1997-98

1998-99

97

1999-

2000-

00

01

Profit after tax (All PSUs)

147630

161250

202790

225090

231342

284916

Profit after tax (Oil PSUs)

51547

55261

74207

86073

95698

117271

Share of Oil PSUs in PAT

35%

34%

37%

38%

41%

41%

Dividend (All PSUs)

22050

28365

36089

49316

54375

82599

Dividend (Oil PSUs)

6764

8127

10439

22112

25226

34485

Share of Oil PSUs in

31%

29%

29%

45%

46%

42%

Dividend

Figures are only for profit making PSUs Source: Public Enterprises Survey, 20002001

Moreover, the excise and custom duty collections from the oil PSUs (as shown in the following Table), show that the petroleum sector's share of the total contribution on this account has averaged at a significant 20%. Thus, with one-fifth share of the national customs and excise revenue collections, the petroleum sector plays a key role in the nation's economy.

CHAPTER 2 Changes in Indian Petroleum Industry

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

2.1 Why did Government go for liberalization of economy? 7 Government of India liberalized the economy in 1991, 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. A structural adjustment process (SAP) was initiated across all sectors to accelerate and extend the liberalization process which earlier had been instigated (at least in hydrocarbon sector). The main features of SAP for sectors other than Hydrocarbons were:i)

Privatization, and,

ii)

Opening up of economy to foreign companies.

However, even before SAP, the petroleum sector was open to foreign companies. The affirmed policy of the government of the independent India was to develop hydrocarbon industry under public sector. However, in actual practice, the industry from its inception was very much dependent on foreign technology, capital and even on expert personnel. The foreign involvement has increased through the times across all the stages of industry such as exploration, production, transportation and refining.

2.2 Development of Indian petroleum industry 8 Indian petroleum industry in the post independent period (1947-till date) can be divided into three distinct phases:(i)

Premature phase from 1947 to 1969 In this phase, the government consolidated its control over the industry with Soviet assistance

(ii)

Consolidation phase from 1970 to 1989 During this period the US companies played dominant role replacing the Soviets

(iii)

The Liberalization phase from 1991 onwards

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

2.2.1 Options for Development Traditionally, the Indian petroleum industry was controlled by American companies. They dominated the industry till later second half of 1950s. However, after independence, the nation wanted to play an important role in this vital industry. The industry policy resolution of 1948 and 1956 reserved future development of petroleum industry for public sector undertakings. But foreign assistance was a necessity at least in the early stage. As collaboration with American oil majors were ruled out, other alternatives were explored.

The government considered four options as under for the development of its petroleum industry:i)

seek assistance of a great power like Soviet Union,

ii)

collaborate with a small country like Rumania

iii)

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

iv)

Try and develop the industry through self-help by employing technicians and bringing necessary machinery from which ever source available.

Though, collaboration with a small but neutral power like Austria was thought of as the best option, but the government decided for the first option. Thus, the Soviets took charge of the nascent Indian hydrocarbon industry. However, as their influence diminished over the years, U.S. companies and multilateral funding agencies like World Bank played significant roles in this sector.

In the early seventies, the government of India nationalized the refinery and marketing facilities of three foreign oil companies. Burmah -Shell, a British company desperately tried to stay in India even as minority partner to a joint venture with a national oil company . At that Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

time Cochin and Madras refineries were running under joint venture between the govt. of India and foreign oil companies. But the government did not accept Burmah-Shells' proposal. The other two American companies - namely Caltex and Standard Vaccum were themselves eager to leave the country due to their internal organizational restructuring and domestic compulsions. Their departure was not instigated by government of India’s decision of nationalization. However, they kept their linkages alive with the Indian industry by crude supplies.

2.2.2 Important Developments 2.2.2.1 Developments Pre- Liberalisation9 There were many important developments which took place during seventies and eighties, which need to be mentioned here to understand the liberalization process of this industry.

i) With the increasing importance of offshore exploration, involvement of US companies increased replacing the Soviets. In offshore exploration and exploitation, India was totally dependent on American and other Western companies. ii) In 1974, the government offered 7 million acres of Bay of Bengal to Natamas Carlsburg Co. of USA and Kutch basin (Gujarat) to Readings and Bates, USA for offshore exploration and production. It was mutually agreed that initially the foreign company would have 61% share in the joint venture and the price of the crude if produced would be based on Indonesian and Persian Gulf crude. The expenses would be recovered by means of Cost Oil which would be 40% of the total crude. ONGC would take 65% of the remaining crude and rest 35% would be taken by US Company. However, the ventures were unsuccessful. Till 1990, the government had invited four proposals for bidding. One noticeable feature of the fourth round was that, Indian private companies (along with foreign partners) were allowed to participate for the first time. As no major field were discovered by foreign companies, the government over exploited the existing fields. At a time when the global crude price was coming down, India’s crude production was increasing sharply from

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

10.51 MMTPA in 1980-81 to 34.00 MMTPA in 1989-90. The oil bearing wells were 'flogged to death'. As a consequence, production fell to 26.92 MMTPA in 1992-93. iii) In 1980’s, the government allowed Indian private companies to enter into refining sector as a joint venture partner with a public sector refining company. Reliance Industries Ltd (RIL) was allowed to self build the largest refinery in the country. For refining technology, the public sector refineries, during 1980s, were completely dependant on one American company M/s Universal Oil Products (UOP).The technology could not be absorbed because UOP did not transfer their technology to the refineries rather they leased it to the refineries. The same technology was being leased to many refineries thereby making no value addition to the industry.

iv)The marketing policy followed by the public sector companies made the economy and the society completely dependent on petroleum products. It had successfully replaced/barred entry of other alternative energy sources including natural gas.

2.2.2.2Developments Post Liberalisation Against these developments, we shall now discuss the effect of post 1991 economic liberalization on this vital industry. We will focus only on refining and marketing.

1] Refining:

In the eighties, the government decided to invite private companies in the refining sector. The private company Reliance Petroleum Ltd (RPL) became the second largest player in oil refining sector with a 27 MMTPA state of the art refinery at Jamnagar(now 33 Mtpa), Gujarat. Apart from approving new refineries in the private and joint venture (involving Indian and foreign companies) there has been no major policy change for the establishment of new refineries. However, the refining sector was de-licensed from June 1998. Moreover, private and joint sector refineries have been permitted to import crude oil freely without import license for actual use in their own refineries.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

In the downstream refining sector, presently, all the capacity of 57.4 MMT is with the public sector and the refineries operate under administered pricing and retention margins. To meet the projected growth in demand, the Government has issued letters of intent for capacity expansion/new grassroot refineries both in the public and private sectors. These are expected to add an additional capacity of about 64 MMT per annum as follows:i) Expansion of existing refineries in the public sector- 9.85 MMT ii) New grassroot refineries in the public sector - 6.00 MMT iii) New grassroot refineries in the private/joint sector. 48.00 MMT It may be seen that there would still be a wide gap of about 30 MMT between the refining capacity and demand by 2010.

2] Marketing:

In the nineties, major policies as under in the marketing of petroleum products with far reaching implications were announced by the government.

i) To attract private investment and simultaneously the international oil majors in exploration, the government had announced that any company investing nearly US$400 million (Rs20 billion) in exploration and production or other specified avenue, would be eligible for marketing rights for petroleum products in India.

ii) In September 1997, the government decided to dismantle Administrative Pricing Mechanism (APM) in phased manner. By April, 2002 it was fully dismantled and prices of petroleum products were determined on the basis of import parity system.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

The position in the marketing sector is slightly different. A number of products have been de-canalized for import by actual users and import of LPG and kerosene and their parallel marketing under free pricing by private sector have also been allowed. Still a large volume of the petroleum products indigenously produced and imported through canalising agencies is marketed by the four public sector major oil companies under administered pricing. Thus, there is a situation where the same product is marketed by the public sector oil companies under administered pricing as well as freely imported at market determined prices. Let us now understand the administered pricing mechanism or APM as commonly called and effects of dismantling APM.

The Administered Pricing Mechanism10

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' which enabled the Indian oil industry to establish its dominance in the energy sector. Cross subsidized petroleum products competed with other energy sources like coal, and penetrated into their domain. Thus, low priced kerosene had replaced vegetable oil for illuminating lamps and coal for cooking, subsidized LPG has become an essential household fuel, long distance trucks fed with cheap diesel easily competed with the railways in freight movement and subsidized naphtha made the coal technology unviable for fertilizer production. This pricing policy backed with elaborate distribution system has made the entire economy almost completely dependent on petroleum products. The 'retention concept' on the other hand Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

did not allow the PSUs to become sick. Thus investors (mainly multilateral funding agencies like World Bank, ADB etc) fund were safe.

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.

In this changed situation, the refining and marketing PSUs with old refineries and decades of 'retention' culture are finding it difficult to face competition in the post APM phase.

Added to this, private sector refineries will not be bound to purchase crude oil from national oil companies. They will search for better quality crude at cheaper rates from alternative sources. However, if the government compels the public sector oil refineries to purchase crude at a higher rate from ONGC/OIL, those refineries will be uncompetitive vis-a-vis private sector refineries. Existing public sector refineries will also face many more hurdles in the deregulated economy. The disadvantages of the economy of scale and finding matching crude at competitive price for old refineries will be the major challenges before the refinery sector.

a) Economy of Scale: Except Koyali refinery in Gujarat, all other fourteen public sector refineries are small in size (less than 8MMTPA capacity).Their capacities range between 0.65 MMTPA at Digboi (Assam) and 12.50MMTPA at Koyali(Gujarat).And most of these refineries were built before 1980s.Compared to this, the Reliance refinery built in 1999 with state of the art technology has a capacity of 33MMTPA. It is estimated that a new complex of 6.0 MMTPA refinery with Hydrocracker and delayed Coker as the major secondary processing units and in-house power/hydrogen production will have a net margin of about US$5.8/bbl. If the capacity is increased to 9.0MMTPA, the net margin will improve to around US$6.3/bbl. However, this estimate varies depending on the price of crude and petroleum products. In September 2001, the refining margin of IOCL refineries was only 30 cents per barrel as compared to RPL's margin of US$1 per barrel. In 2000-01, IOCL had to forgo over US$400 million on account of lower refining margins compared to the earlier years. The effect of de-regulation was visible brazenly. Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

b) Selection of crude oil: Under the deregulated market, the refineries will have to pay import parity prices for the crude and any fluctuations in the actual crude price will not be absorbed as before by the 'oil pool account' (a part of APM).Hence selection of proper crude oil for a particular refinery will be of utmost importance. In the emerging scenario of lower availability of sweet crude, dependence on heavy and sour crude oil is bound to increase. Major challenge to public sector refineries would be selecting and sourcing matching crude for fifteen different refineries for optimum production, meeting stringent environmental regulations and international quality standards.

It would be difficult for the existing refineries to compete with new or upcoming refineries in a liberalised scenario, until they modernise and up grade to bring improvements in product specifications. This is evident from the drop in the sales volumes of lubricants of public sector oil companies in the last couple of years.Some of the petroleum products like Lube Oil Base Stock (LOBS), Naphtha, LPG, Kerosene etc., have administered prices if sold by the public sector oil companies. These are also used as feedstock in the manufacture of other free trade products. For example, LOBS is used in the manufacture of lubricants; Naphtha is used in the manufacture of Benzene and Toulene and LPG is used in the manufacture of polypropylene feedstock (PPFS).

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

CHAPTER 3

Importance of Non Fuel Retailing

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

3.1 Winds of Change 11 India had deregulated the petroleum retail sector in 2002 by dismantling APM and enabling new players to enter the market. The entry of private players like Reliance, Essar, Shell, NRL, and many more have increased the number of retail outlets as well as the competition. On one hand it would foster competition but on the other hand it will also reduce the average throughput per station and total fuel volumes per player.

With a market determined pricing mechanism in place, prices will have to be lowered, which would further reduce the margins from fuel products. With insufficient growth in the number of vehicles, the fuel volumes are expected to remain stagnant, offering little scope for further improvement of the overall revenues and margins.

In such a scenario, the petroleum retailers will need to develop differentiated value propositions to improve revenues. It will require customer centric approach and building of a strong brand equity and identity. To impel revenues and margins, the retailers will have to attract new customers or increase share of their existing customer’s wallet. The second option of increasing share of customer’s wallet can be achieved by means of non-fuel products and services.

Non-fuel products tender higher margins as compared to petroleum products and enable companies to sustain themselves, especially during times when oil prices are high. However, it is to be kept in mind that petroleum retailing is a retailing of petroleum product and service, with differentiation possible in either or both areas.

3.1.1 Callous Competitive Environment The retail sector is destined to witness intense competition in future due to entry of the private players. In the competitive scenario, whosoever will have adequate infrastructure for transportation, storage and distribution will emerge as winner. With this game plan, the existing as well as private oil companies are strengthening their retail network continuously. 3.1.2 Mounting Expectations of Consumer Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

With increasing competition in the retailing sector, today’s consumers are becoming more and more demanding. The emergence of new psychographic segments in petro-retail market bears the testimony to this fact. A closer look at these segments tells us what exactly a consumer is looking for whenever he goes to a fuel station to purchase fuel. A consumer tries to find
Quality & Quantity assurance
Quick filling and efficient forecourt service
Rewards for loyalty
Premium fuels
Cashless transactions
Non-fuel services 3.1.3 Call for Alternate Sources of Revenue

One major challenge that the oil marketing companies are facing today is the need for the alternate revenue sources. Many factors have prompted this new affair in today’s petroretailing environment.

These factors are Increased pressures on margins  Desire to leverage real estate and increase revenues  Evolving customer segments like “Value time saving propositions, Quality and Environment consciousness, Prestige seeker etc.”  Need to differentiate offerings

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

3.1.4 Shift in Branding (From Outlet to Corporate) Ever since the market was deregulated, the oil companies have been actively bringing in the branding concept in petro-retailing which was a commodity market for years with no differentiation. However, consistent efforts make them taste success with the advent of branded fuels such as Speed, Xtrapremium etc.

Also, at the same time outlet branding was initiated and PFS (Pure For Sure), Club HP and Q&Q outlets came into existence. But still the oil companies have not found the way to make a customer point towards an outlet and say that “as this outlet belongs to a particular company, it will be the best in Q&Q and others concerns”. In other words, corporate branding is on the cards in the future of petro-retailing.

3.1.5 Emergence of Non-Fuel Services As a Major Activity at Retail Outlets The dismantling of APM has removed the privilege of assured returns for the PSUs thereby increasing the pressure on their margins. To compete with the private players, who are with deep pockets, it is an imperative to make huge investment in the services being offered at the outlets. Since the base product is same, the differentiating element would be the non-fuel services.

Also, the changing face of the Indian consumer is one of the main reasons for offering the non-fuel services at petro-retail outlets. Today, he is looking at a one stop solution to all his needs – buying groceries, withdrawing cash from his bank, making utility payments, renewing his insurance cover, grabbing a quick bite, obtaining Pollution Under Control Certification and of course filling fuel in his car. On the other hand the driver on the highways is seeking a clean and hygienic place to relax and freshen-up, service his vehicle and have a good meal at the restaurant in the pump.

3.1.6 Competition on price Price until recently was not a differentiating factor in Indian market. Prices were controlled and fixed by the Government making it same for all the companies. However, with private Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

players in the market, the picture has changed. Essar is an evident example of this. In the future when the market determined pricing mechanism will come into full effect, we will see the focus of competition shifting from Q&Q to price.

3.1.7 Alternate sources of revenues The growing competition will increase pressure on margins. Therefore, the retailers will have to seek for alternate sources of revenue. By taking examples of foreign experiences, to taste success in this ruthless competition, retailers need to develop a sustainable non-fuel model which should find synergies with core fuel business. However, strategic foresight is one thing, but what matters most is the superior execution of the strategies. This is the factor which shapes core competency for a company that is hard to replicate by the competitors.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

3.2 India versus world (U.S.) 12 Currently there are some stark differences in the Indian market when compared with the more developed markets (here we have considered U.S. market) Let us find the contrast of Indian petro retail sector to the U.S. petro retail.

US market

Indian market



Quality interpreted as ‘no



adulteration’

Quality interpreted as impact on fuel efficiency and engine performance



Quantity interpreted as getting the



consideration

right amount of fuel, i.e. integrity 

Price is not a differentiating

Quantity is not a parameter for



Price is a very important factor

factor

However, as the Indian market evolves, •

Parameters such as integrity of fuel quantity and purity would become hygiene factors

•

Consumer needs will change and require changes to the value proposition being offered

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

3.3 Key Issues and Imperatives for the Industry Given the opportunities and changing consumer needs, there are three key imperatives for retailers. Let’s first have a look at the two important or key issues. Key Issues •

How to build a unique and sustainable competitive advantage?

•

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

Let us discuss each of the issues one by one:



Building a unique and sustainable competitive advantage 13

Sustainable competitive advantage is the prolonged benefit of implementing some unique value-creating strategy based on unique combination of internal organizational resources and capabilities that cannot be replicated by competitors. A sustainable advantage can be build up by following 5 strategies:

• Attracting New Customers And Capturing Share Of Their Wallet Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

1. An open evening Providing refreshments and a free vehicle cleaning would attract customers. A local paper can be used to promote the event (such as free check up camps, etc). Both retailer and customer stand to gain, especially if a prize is there from supplier. Invite the paper people to participate in publicity. Liaison with the paper to measure response, and ensure they are in attendance with photographer for follow-up publicity. 2. Make outlet look inviting Inviting outlet does not mean a total makeover - just rearranging furniture and creating an interesting shop window will make a difference. Few new posters or branded displays will also help. 3. Community Spirit Local charities or community organizations such as the local Chamber of Commerce, Lions Club, and Round Table, Women's Institute, school fetes or fairs - all will bring potential new customers. A shop or counter can be set. Setting up shop does not have to be expensive - it may be just a table with brochures and latest offers. A sponsorship to any of these events can do wonders. 4. Use of Local Media One should not forget local media - it can provide many PR opportunities. Local press generally support businesses in the area, and its surprising what can develop from a small advertisement. The trick is to not only consider the implications for the business, but also remember to find and highlight the benefits for the third party. 5. Partnerships All options should be kept open for potential partners, as they are also seeking to attract new customers. This may be a local retail outlet, restaurant or supermarket. All of these are excellent shop windows for joint promotion of events. Offer to provide a placement/staff member in their environment on a trial basis to see if this attracts new customers and simultaneously demonstrate that new customers can be attracted into their store in return. 6. Motivate the staff Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

Engage staff in new approach so they are motivated to sell and understand the importance of acquiring new customers. Inform them of what is being done, why it's important, and encourage ideas and suggestions - some of them may surprise. Their support is paramount for success.

Key Imperatives for Retailers14  Develop in-depth consumer insight (Know the Consumer) and Building offerings around the target consumer Customer segmentation is an indispensable tool for performance improvement. Are we selling to the right customers? Which segments should be the primary target of our product-development efforts, sales and marketing activities? In which regions and countries should we be competing? In which markets can we create differential value? How should we differentially allocate our sales and marketing resource to various segments?

To answer such questions, a management team must understand which customer segments are most attractive in terms of size, profitability, and growth. They must also make an honest assessment of their company’s capabilities to meet each segment’s needs relative to the competition. Some segments “fit” a company better than others -- that is, the company has greater ability to serve these segments in a way that is differentiated from competitors. Some segments are more profitable, either because they generate higher revenues, because they can be served at lower cost, or both. And some segments are growing faster. Segments with high growth, high profitability, and sufficiently large revenue potential are a company’s natural focus. But the company may also be able to adjust its value proposition to serve high-growth customers that are not currently very profitable. Effective segmentation can also reveal underexploited opportunities within the customer base. By “de-averaging” customers and prospects, often a hidden pool of profit can be found which could be more fully exploited. A great starting point for this sort of analysis

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

is to identify segments nts that are willing to choose our product over others, or are willing to pay more for the bundle of needs and wants that our product represents.

 Building a strong brand proposition15 Retailers will need to create offerings depending on the needs of the target segment, which differentiate them from competitor competitor. Following are shown 8 parameters based on which differentiation can take place.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

Successful brand-building strategies will evolve from “product” related features to “service” related features

Product related features

 Quality  Quantity  Location

Service related features

 Personalized Consumer experience •

Speed of service

•

Attendant disposition

•

Station Ambience

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

CHAPTER 4

Non Fuel Retailing Initiatives

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

4.1 Retail in India16 Indian retail industry is in a transition phase. It is moving from an unorganized sector to becoming an organized sector. However, most of the retailing in our country is still unorganized. The retail spread out in US and India has a very wide gap. Although retailing in India is having an exponential growth, the road ahead is full of challenges. 4.1.1 What Is Retailing? The word "Retail" has its origin from a French-Italian word. “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 “ Retailers organize their availability on a relatively large scale and supply them to customers on a relatively small scale. Retailer can be a Person or Agent or Agency or Company or Organization, who is instrumental in supplying the Goods, Merchandise or Services to the End User or end Consumer. 4.1.2 Scenario of Retailing in India Retailing has been the most vigorous and eye-catching sector of last decade. Retailing industry has been present since ages in our country; it is only recently that it has witnessed so much vitality. The impetus to retailing in India has been due to the increased purchasing power of buyers (especially post-liberalization), increase in product variety and availability, and increase in economies of scale, with the aid of modern supply and distributions systems. The retail sales are at their peak and new technologies are enhancing retail productivity. Though there are many opportunities in retail business, still, retailers are facing numerous challenges. 4.1.2.1 Key Challenges: 1) Location: "Right Place, Right choice" Location is the most important and prime ingredient for any business that relies on customers. It is typically the most important deliberation in a customers store choice. Location decisions are inflexible because retailers have to either make sustainable investments to buy and Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

develop real estate or commit to long term lease. When formulating decision about where to locate, the retailer must refer to the strategic plan: * Investigate alternative trading areas. * Determine the type of desirable store location * Evaluate alternative specific store sites

2) Merchandise: The primary goal of the retailers should be to sell the right kind of merchandise. Nothing is more central to the strategic thrust of the retailing firm. It consists of activities of acquiring particular goods and services and making them available at a place, time and quantity so as to achieve the targets set by the retailer. Merchandising is perhaps, the most important function for any retail organization because it decides what finally goes on shelf of the store.

3) Pricing: Pricing is a crucial strategic variable due to its direct relationship with a firm's goal and its interaction with other retailing elements. The importance of pricing is increasing, because today customers want good value for money while buying merchandise and services. Also, price is the easiest and quickest variable for change.

4) Target Audience: "Consumer is the prime mover" "Consumer Pull", however, seems to be the most vital driving force behind the sustenance of the industry. The purchasing power of the customers has increased significantly. It is influencing the retail industry to a great extent.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

5) Scale of Operations: Scale of operations includes all the supply chain activities, which are carried out in the business. It is one of the challenges that the Indian retailers are facing. The cost of operations is very high in India as compared to global costs.

4.1.2.2 Present Indian Scenario * Unorganized market: Rs. 583,000 crores * Organized market: Rs.5, 000 crores * 5X growth in organized retailing between 2000 and 2005 * Over 4,000 new modern Outlets in the last 3 years * Over 5,000,000 sq. ft. of mall space under development * The top 3 modern retailers control over 750,000 sq. ft. of retail space * Over 400,000 shoppers walk through their doors every week * Growth in organized retailing on par with expectations and projections of the last 5 Years: on course to touch Rs. 35,000 crores (US$ 7 Billion) or more by 2005-06

4.1.3 Traditional Retail in India17 India is the country with most unorganized retail sector (More than 99% retailers function in less than 500Sq.Ft of area). Traditionally, the retail business was run by having a Shop in the front of the house. All the merchandise was purchased as per the fancies of the proprietor. The pricing was done on ad hoc basis or by seeing the face of customer. Generally, the accounts of trading & home were not maintained separately. The Manufactures used to distribute goods through agents to Distributors & Wholesalers. Retailers used to source the merchandise from Wholesalers & sell it to consumers. The merchandise price used to get inflated to a great extent as it reached from Manufacturer to End-user. Selling prices were largely not controlled by Manufacturers. Brand was not an issue for majority of customers. More than 99% customers were price sensitive & not quality or Brand Sensitive. Weekly Bazaar in many small towns was held & almost all the commodities were on the shelf including livestock. Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

Bargaining was the unwritten law of market. Educational qualification level of these retailers was low. Hence, market was controlled by handful of distributors &/or Wholesalers. Virtually there was only one format of retailing - mass retail. Retailer to consumer ratio was very low, for all the categories without exception. Varity in terms of quality, Styles were on regional basis, community based & in fact very low range was available at any given single place. Impulsive buying or consumption was restricted to food, vegetables etc. Purchasing power of Indian urban consumer was very low and that of Branded merchandise in categories like Apparels, Cosmetics, Shoes, Watches, Beverages, Food, Jewellery, were slowly seeping into the lifeline of Indian City folks. In the coming times, organized retailers will find it difficult to strike balance with the unbranded retail market which is very huge.

4.1.4 Indian Retail is Changing Gears 1) 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

2) Second Gear: (Meet customer expectations) {Here lies Indian Retail Sector} * Consumer-driven * Emergence of pure retailers * Retailers getting multi-location and multi-format * Global retailers evincing interest in India

3) Third Gear: (Back end management) * Category management * Vendor partnership Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

* Stock turns * Channel synchronization * Consumer acquisition * Customer relation's management

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

Retailers need to invest much more in capturing more specific market. Intelligence as well as real-time customer purchase behavior information is very important. The retailers also need to make substantial investment in understanding/acquiring some advanced expertise in developing more accurate and scientific demand forecasting models. They should also look forward to re-engineering of product sourcing philosophies-aligned more towards collaborative planning and replenishment. The existing small and medium independent retailers should closely examine the changes that are taking place in their immediate vicinity. They should also make some investments in improving the interiors of their respective establishments so as to make shopping an enjoyable experience for the customer. With retail marketplace changing shape and increase in competition, the potential for improving retail productivity and reduction in cost would no longer create differentiation. They will be replaced by value and relationships. It is important to note that these strategies are not strictly independent of each other. Value is not just a function of price, quality and service but also can be enhanced by Personalization and memorable experience. For winning in the intense competition, it is critical to understand the target customer's definition of value and make an offer, which not only delights the customers but is also difficult for competitors to replicate.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

4.2 Non Fuel Retailing Till a few years ago, petroleum retailing in India was a staid and dreary business. Cars, buses and two wheelers drove in, got the vehicles fuelled, paid cash, and drove out. The environment started changing when Shell did a makeover of some petrol pumps as part of the economic reform process. Improved signage, use of credit cards, and carwashes soon became an integral part of the petroleum retail outlets. Earlier petrol stations were merely used for selling fuel; now they are quickly getting converted into multi-facility joints. The idea, common enough in countries like Singapore and Malaysia —is to buy fuel, and shop alongside. However, these pumps are either owned by state-owned petroleum product companies like Indian oil, Bharat Petroleum and Hindustan Petroleum or are run as franchises by private entrepreneurs with limited capital. Indian Petroleum Industry has been witnessing a steady growth but the margin pressure has increased. There has been a steady growth of 2.8% in the last five years (2002-07). The desired impetus would be provided by enhanced economic activity.

To overcome margin pressure, Indian PSU Oil companies have started their Non Fuel Effort, similar to their global counterparts. Even losses of over Rs 300 crore (Rs 3 billion) per day from selling automobile fuels have not stopped government-owned oil marketing companies from expanding their retail network across the country. The three government-owned companies -- Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) -- are together planning to expand their non fuel business on existing outlets and provide the same on existing outlets to boost profitability.

The marketing businesses of oil retailers are suffering losses as they are forced to sell petrol, diesel, LPG and kerosene at subsidized prices. Demand for these products is growing at a healthy rate of about 8 per cent per year. It is perhaps a blessing in disguise. In last few years, opportunities in petro retailing have risen in two key areas: •

Sale of Value Added Fuels – Branded Fuels

•

Value added products and services – Non Fuel products and services

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

The table below shows the value added products and services which are being provided by global oil companies. Global oil companies are leveraging c store offerings for sustaining their loyalty program.18 Exxon Mobil

• •

• •

Albertsons

• • •

•

Shell

• •

• Esso (Canada)

• •

•

Loyalty Program – Speedpass Being rolled out in On-the-Run convenience stores & some co-located McDonald’s outlets 4.5 million subscribers Company believes the program results in an average of 1.2 extra fillings per month Loyalty Program - Gas Rewards Offers shoppers cents-off-per-gallon vouchers redeemable at AM/PM stores and 30 other Albertson’s supermarket fuel sites More than 700 grocery items are tied to discounts of 2- 20¢/gallon each for purchases of up to 10 gallons made at ARCO stations Loyalty Program - Shell Escape Earn Escape points each time you purchase products from the Select Stores Redeem your favorite items with the Escape points accumulated Loyalty Program - Esso Extra (Canada) Offers customers opportunity to accumulate points and enter contests, which can then be used to pay for gas or convenience items By joining Points.com, customers can trade Esso Extra points with points, miles or loyalty currencies from other participating programs.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

4.3 India as a Non Fuel Retailing Destination

The Indian Petro retailing industry is now poised to make huge tread both in terms of new forecourt retailing opportunities and better offerings for the customer at the retail outlet. With the onset of the deregulated scenario, the character of competitiveness among the petroleum companies augur well for the consumer with each of the companies espousing innovative ways to capture larger part of the consumer’s mind.

The emergence of organized retailing and a growing demand from consumers for a superior shopping experience has made Convenience Retailing a key business area for petroleum companies due to their wider presence at strategically located sites and the existing mammoth customer base.

Convenience need gaps have been felt in various fields and research shows that the urban consumer today seeks convenience in shopping for their basic requirements so that their precious time is reserved for more productive activities. Petrol retail outlets provide an excellent framework for setting up convenience retail chains. Here, the consumer enjoys dual occasion of, opportunity of combining shopping with the fuelling.

Hence, along with the strategic locations, the number of footfall in the petrol retail outlets gives petroleum retail companies the competitive advantage. Worldwide, petrol station convenience stores have developed into a serious business in itself with companies like BP, Shell, Exxon running their convenience store chains profitably. All of them have deployed best retail practices in their stores and offer a wide range of services including laundry, postal services, courier services, fast food etc.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

Here are some of the reasons so as to why non fuel petroleum retailing offers immense scope as far as India as a destination is considered.

•

2nd Most attractive developing market

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4th Largest economy after USA, China & Japan.

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2nd Fastest growing economy in the world

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Would be 3rd largest economy in next 15 years

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5th among the 30 emerging markets for retailers

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Largest young population in the world

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300+ million middle class - the Real consumers

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Increased disposable Income

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Among top 10 FDI destinations

•

Major tax reforms including implementation of VAT in progress

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Massive investment planned in infrastructure development in next 5 years

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Exponential growth is taking place in Retailing in India

•

Organized Retail Only 3% but growing at 30%

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

Some of the non fuel initiatives (Forecourt activities by Indian oil companies) taken by Indian Public Sector oil marketing (IOCL, HPCL, and BPCL) companies are as shown:

IOCL

• Entered into tie-ups with Akbarally’s for convenience stores, Apollo Hospitals for pharmacies, Dominos Pizza for pizza outlets and ICICI Bank, Centurion Bank and Bank of Punjab for ATMs • Formed an alliance with MTNL to enable its customers to make their payments at select outlets in Delhi and Mumbai • Introduced the first Jubilee retail outlet along Highways with numerous services such as first aid area, mini mall with post office and banking facilities and spare part retail shops • Introduced the ‘Top Gear’ outlets featuring fast food restaurants, pharmacies and auto car wash facilities

HPCL

• Entered into tie-ups with Cafe Coffee Day, Baskin Robbins, Subway, Crossword, Gitanjali Gems Limited and McDonalds to set up outlets at select locations • Introduced several convenience facilities at their outlets such as  HP Speed Mart (Convenience Store)  ATM’s  Automatic Car Wash  Commissioned India’s first public access Internet kiosk

BPCL

Launched convenience retail initiative under ‘In&Out’ brand offering a wide range of services • Entered into tie-ups with McDonalds, Cafe Coffee Day, Planet M and Music World to set up outlets at select locations • Tied up with Cross Roads (Car helpline) to offer customers value added services such as discounts on lubricants and engine oil and free petro cards

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

4.4 Options for Non-Fuel Offerings

To deliver the many conveniences and services, various oil marketing companies have associated with leading brands and companies like ICICI Bank, Coca Cola India, Fed Ex, Café Coffee Day, Western Union Money Transfer, US Pizza, Barista, Domino’s Pizza, Skypak, etc. The facilities on a particular outlet would depend upon the purchasing power of the people. The facilities like Café Coffee Day, Barista, Domino’s Pizza, US pizza, Crossword, Skypak, etc and other expensive outlets may not work everywhere. Apart from them there are many other facilities which can be offered to draw more and more customers, thereby increasing profitability and level of customer satisfaction. Here, we will have a glimpse of some of the facilities which are expected by a customer and can be offered to them on an outlet:

4.4.1 ATM (Automated Teller Machine or Any Time Money)

An ATM is the most expected facility at an outlet. Almost every customer now has a debit/ credit card and he/she expects an ATM at the outlet. Benefits from implementing an ATM:a) Customer will get an additional facility along will fuel and it will help to draw more customers. b) Increase in revenues due to the lease rent from the bank. A room 120 square feet is required to install an ATM which is a nominal expense. The company may get rent in the range of Rs 8000 to Rs12, 000 per month depending upon the location.

4.4.2 Quick care point:A mechanic who can quickly give a service to the concern vehicle and also he can do the air check. In the quick care point, various lubricants and coolant can be displayed with the Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

purpose of advertisements as well as enhancing customer awareness. The facility of tyre puncture should also be offered. This will further enhance the revenue of company. 4.4.3 Windscreen cleaning facility: A cleaning man can wipe the windscreen of four wheelers and front or body of the twowheelers while customer is getting his/her vehicle fuelled. This will augment the customer’s perception of brand as well as organization. An extra attendant can serve for the role of cleaner.

4.4.4 Free health check-up: In the outlet some free health check up camps can be organized by the company doctor. This will illustrate the responsibility of the organization towards the society. Some of the camps which can be organized may include the Pulse-polio camp and AIDS awareness camps.

A citizen reward program can be conducted during the same camp, which would cater to honoring of some local people who have made contributions to society. Auto/taxi drivers segment can be recognized and honored for their outstanding service to society.

On similar approach best employee award can be given to outstanding employee. It will boost the pump attendants to give perform best in their jobs. There performance can be monitored on the following parameters: 1) Punctuality: - Time of arrival and departure. 2) Discipline in the job. 3) How well an individual is prompting for branded fuel and other allied services. 4) Behavior with the customers. 5) Neatness.

4.4.5 INDE-PAY It is e- recharge machine which will provide a recharge of six different telecommunications companies along with the railway reservations. Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

The facilities offered by Inde - pay machine are as follows: 

Recharge Vouchers (mobile top-ups)



Flight tickets



Rail tickets



Utility Bill-Pay



Cinema tickets



Budget Hotels



Contests

The benefits of Inde - pay machine to the end user are: 

Alternate revenue stream



High ROI



Major Value added services under one single terminal



With the purchase of the terminal in addition to the value added services, PCO and POS the retailer gets the following 

IRCTC authorized e-ticketing agent certificate



Airline ticketing (IATA sub-agent license)



Wireless POS working over IP – saves per transaction dial out cost



Wireless POS – could be used in exhibitions/trade shows where merchants are deprived of a phone line to connect their traditional POS



The end user will be able to accept payments in cash, credit card and cash card.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

The current services available on Inde - pay machine are as follows:

SERVICES

BRANDS

CURRENT SERVICES

FUTURE SERVICES

BSNL, Reliance, Tata Indicom, Spice


Pre-paid mobile top-up Coming Soon: Hutch, Airtel, Idea, MTNL Railway Ticketing

Indian Railways (IRCTC)




Airline Ticketing

All major domestic airlines: Indian, Kingfisher, Deccan, Jet, Sahara etc




Non-Cash Bank Account services

Leading banks

-

PCO

Tata Indicom




Bill Payment

Leading utility companies




Card acceptance

All banks issuing Mastercard/VISA




Movie Tickets

Leading multiplexes

-

*Source: www.indepay.com

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun







The revenue generated on the above mentioned value added services are as follows: Prepaid Recharge – Mobile

Around 3.5% of coupon (approx.) Reliance – 2.5 to 3.5% Tata – 3.15% Idea – 2.5% Vodafone – 2.5% MTNL – 4% BSNL – 4%

Prepaid Recharge – ITZ Cash card

1.5%

Prepaid Recharge – Dish TV, Tata Sky

5%, 3.5%

Airline Ticketing

3% of base fare

Railway Ticketing – Non AC

Rs. 6/- per ticket

Railway Ticketing – AC

Rs. 12/- per ticket

Bill payments

Rs. 3/- per bill

Source: www.indepay.com

This machine costs Rs 15,995. It requires an internet connection which can be given by the basic PNT phone at the outlet, at a monthly rental of Rs 250* with an allowable 1 GB data transfer. This can be housed in the existing (3ftx5ft) Kiosk.

*Charges may vary depending upon location and service provider

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

4.4.6 Vending Machine of Coffee and Coca-Cola:Vending machine of coffee and coca-cola will help in enhancing the revenues. It will also augment the customer satisfaction level. Along with them, beverages items like mineral water bottles, snacks etc. can be display in a stand near the dispenser for sale.

4.4.7 Pay Phone:This is another facility which can be provided to the customers. It requires very less space and has low initial investment as well as zero maintenance cost. The pay phone will help in drawing the customers.

4.4.8 Other Necessary Amenities Toilets:Neat and clean toilets facilities should be available for the customers. Drinking Water:Purified drinking water facilities should be available to the customers. Depending upon the climate hot or cold water can be provided.

 From the above suggested non-fuel product mix earning per square per month from the above suggested non-fuel product mix: Serial No A B C D E F

Product-mix ATM Quick care point Coffee vending m/c Vegetable Shop Inde-pay Total

Earnings per sft per month in INR 100 485.71 161.96 100 287 178.82

*Source: Feasibility report on non fuel offerings of HPCL

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

4.5 Non Fuel Initiatives of Indian PSU’S 4.5.1 Indian Oil Corporation Limited (IOCL) 19

In 1996, Indian Oil Corporation (IOC) became the first Indian debutant in the Fortune 500 list. It is India’s single largest enterprise covering the entire petroleum value chain from exploration, refining, marketing, pipelines, petrochemicals, gas to global operations. It has announced plans to be a $60-billion entity by 2011-12. It has made a good beginning towards achieving that target by growing at the required CAGR (a little over 11 per cent).

To power its growth strategy, the company is exploring new horizons. These include non-fuel initiatives in petroleum retail. As of now, it is setting up pure retail operations, quite on the lines of what the big retail players are doing across India. It also has, surprising yet innovative, plans to start fuel services at shopping malls. For this initiative, it has already had discussions with the Ansals and Kishore Biyani’s Future Group. The third plan of IOC’s retail initiative is to strengthen the Convenience stores (they sell a wide range of packaged foods, hot and cold drinks) that it had set up at select petrol pumps a few years ago. Some of these initiatives should happen over the next couple of years.

Oil behemoth Indian Oil Corporation (IOC) is eyeing an annual turnover of Rs 2,000 crore from non-fuel retail in five years. The company’s non-fuel retail turnover is currently a mere Rs 4 crore, out of its total sales of Rs 2 lakh crore.

As a part of its strategy to push the non-fuel retail business, the company has tied up with major retailers and set up convenience stores, super markets and other formats, depending on the real estate it has at its outlets. It has been following a revenue sharing model. IOC has around 21, 000 fuel outlets in the country.

IOCL is seriously looking at the non-fuel business in a big way. They have plans to unlock the real estate stock on their outlets and develop them as profitable business ventures. Besides, this will also give opportunities for the retailers to tap the market further.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

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. The company is planning to set up 2,5003,000 new such pumps by the end of 2010.

Indian Oil has already unveiled its XTRACARE retail outlets all over the country. The XTRACARE retail branding exercise was kick-started with a countrywide retail transformation project nicknamed 'Operation Everest' in mid-2003. Over 1,000 select retail outlets were included as part of the campaign. Indian Oil XTRACARE outlets are benchmarked to international standards of quality and quantity, housekeeping, maintenance and customer service certified by the globally renowned agency - Bureau Veritas (BV).

While the industry standard is to take samples on a quarterly basis, Indian Oil has moved several steps ahead by introducing fortnightly, random sampling with specific importance given to RON (Research Octane Number) sampling which is truly the definitive test for quality and quantity.

In another pioneering move, the third party certification, by BV, is also being done, for the first time, on a range of parameters that include hygiene, service, and efficiency of fore court, allied services and customer satisfaction. The scale and spread of the 1,000 retail outlets is also an industry record.

The non-fuel services are being given a major fillip in the Indian Oil XTRACARE plan and the wide range of loyalty program with Xtra Rewards, Xtra Power and co-branded cards like Indian Oil Citibank Credit Cards. The automation project of XTRACARE is by far the most state-of-the-art in the country.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

4.5.2 Bharat Petroleum Corporation Limited (BPCL) 20 Bharat Petroleum has its convenience non fuel retailing initiative in the form of “In &Out” brand. This initiative was launched after having a greater understanding of consumers’ needs and to show consistency to its core objective of continuously adding value by innovation. The In & Out chain of convenience stores has been set up in the urban market at strategically located retail outlets having high customer footfalls.

The “In & Out” stores were launched in 2001. It offers a convenience proposition where a number of typical household necessities have been aggregated under one roof for the benefit of the customers. Presently, there are more than 240 In & Out stores across India. Strategic alliances have been formed with major brand owners and retailers in the country to further strengthen the convenience proposition.

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 Cafe 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.

Customers can use their Petro-Card (Loyalty card) at In & Out stores and earn Petromiles (loyalty points). In & Out stores are the largest organized convenience store retailing chain in the country with a standardized (same with minor changes based on location) layout across the country. It maintains a high level of aesthetics and ambience to offer consumers a revolutionary solution for their daily needs.

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.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

BPCL has pioneered the concept of Hood talkers in India. It is available at few select stores in Hyderabad, Mumbai, Delhi, Jaipur, Kolkata, Bhubaneswar, Chennai, Bangalore, Coimbatore, Ernakulum and Baroda. This concept has been widely implemented by global oil majors. For the convenience of customers who have very little time, these stores have mobile trolleys at the fuel outlet which will bring convenience to customer's car.

All purchases in these stores are through computerized billing. The retail information network and the sales data helps in getting information about the products customer's want.

Based on consistent customer feedback BPCL has made cell phone recharge cards available at the In & Out stores. BPCL has also launched E-Charge service. It is a complete system and service provider offering “electronic delivery system” for the prepaid product industry through electronic terminals.

With introduction of the E-Charge service through the In & Out stores, the customer would have the convenience of purchasing recharge cards of the desired cellular company and denomination of his choice. The service optimizes customer convenience, ensures complete security of the prepaid PINs and is highly scalable. The technology can also be leverage to introduce other products like movie tickets, etc and services like Bill Payments etc. Currently, this service is available at stores in Mumbai, Delhi and Hyderabad.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

4.5.3 Hindustan Petroleum Corporation Limited (HPCL) 21 Club HP is an important part of HPCL's strategic non fuel retail marketing initiative. It assures “high - quality personalized vehicle and consumer care”, as claimed by HPCL. The Club HP concept provides an assurance of "Expert and Personalized Service", "Consumer Conveniences" “Quick Fills", and "Total Vehicle Management”.

Club HP outlets hold the assurance of ‘Good Fuel Promise’ and deliver the right quality and quantity of the products. Fuel is delivered to these outlets in tank trucks fitted with tamper proof locks and a high degree of control is kept by to ensure that quality standards are strictly enforced.

The bouquet of services at Club HP outlets have a distinct set of basic and value added offerings which include digital air towers, efficient & expert Service, vehicle finance and insurance related assistance, , quick care points, bill payment facilities, eateries, refreshments, etc.

To deliver the many conveniences and services, HPCL has struck strategic alliances with leading brands like Fed Ex, Coca Cola India, Western Union Money Transfer, ICICI Bank, Café 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.

The roll out of "Club HP" began by initially targeting 85 outlets in the cities of Mumbai, Delhi, Bangalore and Kolkata. The “Club HP” brand is now available at around 1000 outlets in all major cities and towns across India.

"Club HP" outlets have been cataloged as Standard, Mega and Max depending on the levels of services and amenities available. Each outlet offers a bunch of standardized services depending upon market requirements and logistical abilities. Let us review them.

•

Vehicle Care - Each Club HP Mega and Max outlet is equipped with a service station. In addition, the outlets also provide vehicle consumable and accessories, all under one

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

roof. More and more outlets will be progressively upgrade to authorized service stations as part of our association with various vehicle manufacturers.

•

Digital Air Towers – The performance and safety of new generation cars depend a lot on the correct air pressure maintained in the tyres. The specially designed digital air pressure equipment not only ensures accurate air pressure in the shortest time but also adds to the comfort and safety of travel.

•

Quick Care Points - Consumers are offered a free check up of vital elements such as engine oil, brake oil, battery water, coolant, fan belt, radiator hose etc. by the specially trained "Club HP" attendants. In addition, a quick inspection of the tyres is done and recommendations given in case any immediate action is required.

•

‘Good Fuel Promise’ Towers - Consumers are offered the facility to personally conduct simple tests with the help of specially designed standard apparatus. A simple procedure booklet is also provided to help anyone check the quality and quantity of fuel. The consumers are also invited to fill in the printed certificate booklet which will be available at all "Club HP" outlets in order to record their assessment. This feedback is regularly screened by the HPCL team to plan remedial actions or service upgrades in accordance.

•

ATMs - HPCL has taken the lead in providing ATM facilities at its outlets in association with leading banks and is targeting over 400 ATMs very soon. Select Club HP outlets have already been equipped with ATMs.

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Vehicle Finance and Insurance Related Counsel - HPCL has tied up with leading vehicle insurance and finance service providers for these activities which include assistance towards issuance and renewal of policies as well as extension of loans for purchase of new or second hand vehicles.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

•

Communication Facilities - Each Club HP outlet is equipped with a pay - phone for the convenience of consumers. In addition, select outlets will also provide high speed internet browsing and e - mail facility

•

Bills Payments - HPCL has tied up with Skypak Financial Services which is providing drop boxes at all "Club HP" outlets. Consumers can utilize these drop boxes to pay bills relating to a variety of service providers. All one has to do is drop the bill and payment instrument (Cheque / Demand Draft) for the designated service provider and Skypak will route the same to the correct destination at no extra cost.

•

Basic Amenities - Each "Club HP" outlet will extend basic amenities such as "safe drinking water" through water purifiers, hygienic rest room facilities, food counters, basic medicines and first aid facility. HPCL has also tied up with Coca Cola India to provide beverages and bottled water as well as snacks at all "Club HP" outlets.

•

HPCL - ICICI co - branded Credit Cards and the Club HP Smart1 Cards Customers visiting the "Club HP" outlets will be able to use the HPCL - ICICI Credit Cards to reap the higher reward points offered by this unique product. The "Club HP Smart 1", a smart card based loyalty program launched for the cash paying customers, will also be available at select Club HP outlets to reward loyal Club HP customers.

Strategic Alliances is the ideal way for introducing the Value added services at the petrol pumps. FedEx and HPCL tie-up is one of the examples22. FedEx has opened “FedEx Authorized Ship Centers” across Club HP locations. Presently, these centers have been opened on 100 Club HP pumps in the cities of Delhi, Mumbai, Chennai, Bangalore, Kolkata, and Hyderabad. With this tie-up both the Companies have leveraged their strength which has resulted in value addition for the customer. Both the companies have derived advantages from this strategic alliance. Let’s have a glance on their individual advantages.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

•

•

Advantage HPCL o

Association with one of ‘America’s Top 10’ recognized brands.

o

New revenue stream for HPCL and its dealers at no additional cost.

o

Their dealers are imparted world class training.

o

Joint promotions to FedEx customer base.

o

World Class Value Added Service and convenience for their Customers.

Advantage FedEx o

Access to HPCL extensive retail network

o

Association with a leading brand in the country.

o

Helps FedEx get closer to its customers

o

Excellent Brand Coverage.

o

Scope for Joint Promotions.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

CHAPTER 5

Real Estate Utilization

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

5.1 Real Estate Opportunities23 Indian retail sector is offering a bunch of magnificent opportunities for petro retail companies. The collaboration with the major food, beverage, textile, cosmetic, daily consumables gives oil companies a wonderful opportunity of leveraging their resources for higher revenues and margins. Also they can offset the lower and shrinking margins on the fuel business. Real estate is the most important component of non fuel business. A suitable land on a strategic location can contribute to approximately 30% to 40% rise in revenues.

Let’s have a look at some of the statistics which prompt the oil companies to go for non fuel retailing of fast moving consumer goods and eateries

These statistics talk about India’s current status and indicate the hidden potential of retail market.

•

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

5.2 Transportation Network The existence of a growing transportation network is increasing the logistical support required for retail business. The rail, road networks and setting of cargo hubs is a major step towards simplifying and accelerating the growth and development of logistics infrastructure in India.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

Here is a highlight of the transportation infrastructure:

•

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

5.3Emerging Retail Formats

There are 3 formats which are being currently practiced and implemented by Indian petro marketing companies. The formats have been designed specific to category of location and the expected level of customer expectations.

The three prominent formats have been shown with the help of the diagram below along with the facilities they offer.

Highway Stop

• ‘Destination’ stop - USP • High levels of freight and passenger traffic volumes • Multi-grade fuels, leisure and entertainment, restaurants, hospitality, complete range of maintenance services, Convenience stores, ATMs, Cyber cafes, Large format discount stores/factory outlets

• Convenient short stops

Suburban Stop

Urban Stop

• Proximity of major urban centers with higher levels of vehicular ownership • Fuel dispensers, Convenience stores, Discount stores, Factory outlets, ATMs

• Short stops within urban areas • Predominantly higher levels of passenger vehicle volumes • Fuel dispensers, Convenience stores, ATMs, entertainment zones, book and music stores, 24x7 chemists, eateries

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

5.3.1 Highway Stops These retail outlets have been designed specifically for national and state highways. These outlets cater specifically to the expectations of truck or transporter’s segment. They also cater to the needs of long driving passenger vehicles. Some of the examples of highway stops are: BPCL’s Ghar, IOCL’s Swagat, HPCL’s Club HP, Reliance’s A-1 Plaza. All these outlets have facilities of eateries, ATM’s, rest houses, factory outlets of apparels, cosmetics, confectionary shops, etc. These outlets have been developed to tap the heavy traffic which prevails on the highways. These outlets provide a one stop shop for all the commuters travelling on the highways. They are huge in size and have all the modern amenities at customer’s disposal.

5.3.2 Sub Urban Stops These outlets reside primarily on entry of cities and in particularly rural areas. They cater to the needs of passengers travelling in or out of city and the drivers of heavy vehicles segment who want to take a halt out of city. They act as a short stop or small halt places. These outlets are categorized by the presence of small factory outlets, lube stores, ATM’s, service centers, etc.

5.3.3 Urban Stops These outlets are city outlets. They are smaller in size and cater to the needs of urban people. These outlets generally have ATM’s, outlets of branded apparels, company’s store of consumer goods. Depending upon the size and location of outlet, they can have eatery points such as Domino’s pizza, Café Coffee Day or book stores such as Crossword. Some of the stores also have music stores of Planet M and Music World.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

5.4.4 A Hypothetical Case for offering Non Fuel Services at an Outlet

This case has been taken from a presentation made by Trammel CrowMeghraj Property Consultants Private Limited (one of the leading international property consultants in India) to FICCI on the issue of opportunities for real estate in fuel retail.

Following are the Financials considered for the hypothetical case: 1. Land area for fuel retail outlet: 1.00 acres ( urban or sub urban stop) 2. Fuel operations: 0.65 acres (includes space for dispensers, tanks, office buildings, electricity and generator rooms, etc) 3. 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) 4. Assumed FSI for retail development: 1.0 (FSI stands for Floor Space Index- ratio of total floor space to total plot size. Here FSI indicates that total plot area is being used for retail operations) 5. Built-up area for retail development: 15, 246 sq. ft. 6. Land cost: NIL (included in cost of fuel outlet i.e. while setting up fuel operations) 7. Construction cost: INR 1,200 per sq. ft.(average cost of construction in year 2006) 8. Total Construction Cost: INR 18,295,200

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

Achievable Pricing By Means Of Non Fuel Offerings

Suggested Product Mix

Area

Rentals

Annual

(In Square Feet)

(INR per sq. ft. per month)

(INR)

ATM

150

60

108, 000

Convenient Shopping

4000

35

1,680, 000

Fast Food

4000

30

1,440, 000

Entertainment Zone

4000

20

960, 000

3096

35

1300, 320

Others (Factory Outlets, Book Stores, Kiosks, etc) Total

15, 246

5, 488, 320

The above hypothetical case clearly shows the kind of revenues which this kind of product mix can contribute to the revenue stream of an outlet. Such product mix will not only increase the revenue but will also enhance the brand credibility, customer satisfaction and brand loyalty.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

CONCLUSION

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

CONCLUSION “Is it the beginning of the end or the end of the beginning?” Since last six years, when retailing was first thrown open in the petroleum sector, oil companies are still struggling to grasp the changing dynamics of the retail sector. The launch of non-fuel retailing in India with much ordeal by petroleum majors has not impressed the Indian customers. The consumer off-take of groceries, fast-food, medicines, and FMCG products at fuel stations has not met up the expectations of the oil marketing companies. Considering non-fuel retailing is a proven business model in many countries — in the US, for instance, the petroleum sector sells the highest number of burgers — why are non-fuel sales not even one per cent of total fuel sales? Have the Indian petro companies got it wrong or the Indian consumer rejected the concept? At first instance, it is about priority. 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. The Indian petro retail scenario is balanced steadily for a quantum leap. Global names are set to speck the petro-retail landscape. At the same time, new and emerging retail formats will drive the diversity of the fast-changing retail backdrop. Organized Retail means 'Big Stores'- a common myth. Organized retailing is all about "aggregating value" and what shape, size and configuration the interface to customer takes is largely a function of offer and proposition. A growing population, a young workforce and zooming consumer confidence will fuel the expansion of this sector. As organized retail in rural India awaits the arrival of Reliance Retail, current majors like ITC, Godrej and DSCL are expanding their retail operations by setting up more stores, entering new states and offering newer product categories, giving a magnificent opportunity to oil majors for increasing their revenues by means of strategic tie-ups.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

For a start, retailers need to invest heavily in capturing specific market. The oil companies should also make substantial investments in acquiring some advanced expertise in developing more accurate demand forecasts pertaining to non fuel products and services. Re-engineering of product sourcing philosophies-aligned more towards collaborative planning and replenishment should then be next on their agenda. The oil companies should closely examine the changes that are taking place in their immediate vicinity, and analyze whether their current market offers a potential development of the area into a more modern multi-option destination. If it does, and most commercial areas in India do have this potential, it would be very useful to form a consortium of other retailers in that vicinity and take a pro-active approach to pool in resources and improve the overall infrastructure. The oil marketing companies should also keep investing in the interiors of their respective establishments to make shopping an enjoyable experience for the customer.

As the petro-retail arena grows in size and competition increases, the possibility for improving retail productivity and cutting costs is likely to decrease. Thus, it would become important for retailers to create a unique position in the marketplace based on value, relationships or experience. At the same time, it is critical to understand the target customer's definition of value and make an offer, which not only delights the customers but also is also difficult for competitors to imitate. For now, the existing players are expanding — cautiously. In a highly-competitive environment, it remains to be seen who will crack the consumer riddle.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

BIBLIOGRAPPHY

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

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Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun