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					          Fuel Retailing
Emerging Trends, Options and Challenges




                 RB Sahi
                  President
         Retail Petroleum Business
        Reliance Industries Limited
Structure of the presentation



        1   Trends



        2   Options



        3   Challenges




                                2
Structure of the presentation



        1   Trends




       What do stars Foretell




                                3
Industry Scenario




                                        MMTPA               CAGR

                              2001-02      2006-07(Est)      %

 Retail HSD - mmtpa             28.0            33.2        3.5%

 Retail MS - mmtpa              6.8             9.1         6.1%




  While GDP has grown consistently at over 6% CARG, petroleum
  products consumption has not followed suit : Though the
  current year is an exception, the trend needs to be respected.

                                                                   4
Demand realignment

  New highway projects to influence a major
  realignment of HSD consumption

  On completion of golden quadrilateral & E-
  W & N-S corridors over 60% of HSD
  consumption is expected to take place on
  these sections alone

  New satellite township developments will
  have a major impact : realigning urban
  demand
                                               Source : NHAI
  Intercity passenger traffic is expected to
  boost MS consumption on the highways

Demand realignments provides new opportunities for petroleum marketers   5
Surging vehicle sales:
Boosting retail demand
                                                                                  Commercial
                                             VEHICLE SALES IN INDIA               Cars
                                                                                  3 w heelers
                                                                                  2 w heelers
                     8,000,000
                     7,000,000
  NUMBER OF VEHICL




                     6,000,000
                     5,000,000

                     4,000,000
                     3,000,000
                     2,000,000
                     1,000,000
                           -
                                 2002-2003         2003-2004          2004-2005          2005-2006
                                                               YEAR


                                      Vehicles            CAGR of 4 years
                                      Commercial                         17.71%
                                      Cars                               15.98%
                                      3 wheelers                         11.94%
                                      2 wheelers                         11.19%

                                                                                                     6
Trends - Infrastructure

  Development of Exotic Highways
  Cities & Highways connected thru Arteries
  Booming Suburbs , expanding city limits
  Price differential – Octroi limits
  Availability of Inner city land : Only a dream now




The Perils of City Retailing and Changing scenarios are driving the shift
  from City Retailing to Highway Retailing


                                                                            7
Changing consumer expectations –
Trucking Community

 Customer continues to be cynical about Q&Q
 Customer is now demanding higher levels of product & service delivery
 Businesses are putting intense pressure on entire logistics cost
 optimization : travel times under scrutiny
 Customer is more conscious of fuel efficiency & engine performance
 Professional drivers will now demand better living conditions




Increasing Consumer expectations from petroleum retailing

                                                                         8
Changing consumer expectations –
Urban and Inter City Traveler
 One Stop Shop
 Getaway from City
 Clean & Hygienic place to eat & wash
 Rest & recreation for highway travel
 Allied facilities like ATMs, Cyber cafes, courier services etc.
 Exposed to multiple retail formats in their daily life : Spoilt for choice




Urban Consumer is looking beyond petroleum products

                                                                              9
Government initiatives

 Government has progressively allowed entry of private sector into
 petroleum retailing
 Deregulation has been endorsed by successive governments
 Efforts have been made towards dismantling of APM
 Green fuel initiatives underway
 Common carrier infrastructure and product sharing may be actively
 considered by the regulator
 Shore based pricing under consideration




                                                                     10
Structure of the presentation



        1   Trends



        2   Options



        3   Challenges




                                11
2   Options




What can we do about it




                          12
Options : Market Oriented Strategies

  Traditional approaches towards marketing would only give incremental
  results The key for any marketer in today’s marketplace would be to
  differentiate, differentiate & further differentiate
  Meaningful differentiation can only come through a holistic
  understanding of the customer
  Technology to act as a key enabler of differentiation
  Managing Customer experience would be key to acquiring the Urban
  traveler
  Respecting the development of new markets : New Formats, New
  Locations

New strategies would be needed to capture new opportunities
                                                                        13
Achieving differentiation: A strategic
framework

    Generic           Fuel based differentiation
                      Service based differentiation
    differentiation
                      Non-fuel based differentiation
    strategies

    Strategic         Network planning
    tools             Supply chain management
                      Brand consistency
                      Channel Partner Relationships



    Strategic         Technology & IT
    enablers




                                                       14
Structure of the presentation



        1   Trends



        2   Options



        3   Challenges




                                15
What should not be underestimated


 3   Challenges




                                    16
Challenge Number 1 :
Profitability of Retail Outlets



 Low profitability seriously affects Fuel quality as well as various
 service parameters


 Decreasing throughput per retail outlet puts immense pressure on
 cost per KL – hitting profitability




                                                                       17
          Station opening and closing :
          Classical Theory

              Pre Deregulation       Post Deregulation
Margins




                                 Operating Exp + Cap charge
                                                 Station Opening




                                                 Station Closing
                                 Operating Expenses

                                                         Time


                                                                   18
Why do Retail outlets close down ?


                                   Operating cost
                                 Capital Ser Cost
                                   Total Cost
            2500
              1200                Revenue Cost
             600                                                             1000
            600
              1000                                                           500
            2000
              500                                                            500
                                                                           2000
            500800                                                 400
                                                           375   667
                                                                   400
                                                             375 1467
              400
  Rs. s .




            400600
            1500                             300
                                              400
                                              300           500
                                                            1250
    R
 Rs.




                                         283 1000
  Rs.




            300400
              300       222
                         222
                           222  250 243
                               250   286 333
                                     286 250
            1000 200200
                   200           250 814 867
                                750
            200200 600
              200         667
            100 0
             500
              100
              0
               0     500   450   400    350    300   250     200     150     100
               0 500  450  400         350    300    250    200     150       100
                  500  450  400         350    300   250     200     150      100
                  500 450 400            KLper Month250
                                             300
                                       350 per Month        200     150      100
                                         KL
                                        KL per Month
                                         KL per Month



                                                                                    19
International Experience:
ROs do close down


                                France    UK


                40400                               Falling number of
     45000
                                                      Retail Outlets
                        25500     25700
     30000
                                          19500
                                                  16200
                                                          12200
     15000



         0
                 1980              1990           2000


Outlets unable to meet operating expenses have no option but to close down

                                                                        20
International Experience :
Closer Home


                              Thailand




            Before Deregulation : No. of ROs - 3500

         3 years Post Deregulation : No. of ROs - 11000

            Subsequently 1000 Ros were Shut down
                   every year for 4 years

                   Frenzied opening of Outlets
          only to be followed by closing of Retail Outlets.


                                                              21
Reality of Retail Petroleum in India
                                                         No. of ROs
                35000

                30000                                                            27150
                                                                   22940                    31643
                25000
                                                         19809
   Growth in    20000
                                18239         18848


   no. of ROs   15000

                10000

                5000

                         0
                                 FY01         FY02        FY03        FY04         FY05     FY06



                                                        Sales Volume
                                                         Throughput
                         250
                                        201       192       189
                         40
                         200
                         39                                                166             39.6
                                                                                    149
                                                                                    39.3
     Volume              38
                         150                                        37.1                    128
   Throughput
                    KL




                                                          36.4
                MMTPA




                         37
   in MMTPA              100        35.7
                         36                    35.3
                         35
                          50
                         34
                         33 0
                                   FY01        FY02       FY03        FY04         FY05    FY06
                                    FY01         FY02       FY03       FY04         FY05    FY06


                                                                                                    22
What is behind this rapid increase in
ROs?

     One Company adds new Outlets and gains Market Share




  Others Respond by adding more Outlets to regain Market Share




       Net result, Overall volumes remain almost the same




                Volume per outlet falls drastically



                                                                 23
Result: Volumes per Retail Outlet
 Projected no of ROs - March 2007 – 35000
 Projected Retail Volume – 2006-07 – 42.3 MMTPA

                            Projected Throughput
      250
              201        192        189
      200
                                                 166
                                                            149
      150                                                               128        124
 KL




      100

      50

       0
            FY01        FY02       FY03        FY04        FY05       FY06        FY07

   Even if 60% of ROs sell at sustainable level (100-300 KL pm range) with an average of 200 KL
 pm :: Approx.
   The rest 40% will be clearly unsustainable (20-60 KL pm range) with an average volume of 40
 KL pm

                                                                                                  24
How profitable are our ROs?


                              Throughput of ROs
            60%
                                              Unprofitable
            50%        50%
                                              Borderline
            40%                               Profitable
 % of ROs




            30%                20%

            20%                        15%
                                                  8%
                                                              5%
            10%                                                     2%

            0%
                  50         100     150        250          350   >350
                                     Volume in KL


                                                                          25
Station opening and closing : Redefined

  Conclusion :

  1. Margin level at which one set of RO s cannot even meet their
     revenue costs, another set of RO s will not only survive but in
     fact thrive and prosper.
  2. Since Margins are a result of many factors – most of them
     beyond the control of an individual company, key to survival,
     growth and prosperity of the company and its channel
     partners, is to have high volume retail outlets, which are
     robust enough to survive low margin




                                                                   26
Challenge Number 2
Regulatory Environment



 Price distortion leads to adulteration of petrol and diesel : Policing or
 Marketing
 Network Planning Dilemmas :
  – Limited pricing discovery mechanism inspite of deregulation
  – Non-uniform tax structure across states :
 Non-level playing field : Can the new entrants survive ?




                                                                        27
Challenge Number 3
Threat of the Supermarkets

  Loss leader concept for Fuel catagory
  Low site operating costs : Shared with Supermarket expenses
  A highly competitive environment for sourcing fuel Supplies
  Exemplary customer service standards
  Host of Value added services : Possible cross loyalty programs




                                                                   28
Supermarkets- Value Added Services
 Wider availability of twenty-four hour opening;
 Outdoor payment systems,
 ‘Fast-pay’ credit card readers,
 Improved forecourt shop offers,
 Toilets,
 Wider acceptance of branded fuel cards,
 ‘While you shop’ car valet/servicing;
 The introduction of services specifically targeted at fleet managers and
 business motorists; for example: fleet cards,
 Linked promotions between petrol sales and in-store cafe/restaurant facilities,
 dry cleaning



                                                                               29
The UK Case Study – Threat of the
Supermarkets
Tesco, Sainsbury’s and Safeway, from a retailing base of 500 outlets,
 declared war on the oil companies and independent petrol retailers
 with their retailing base of 16,000 outlets, and won.
The consequence :
 The oil companies have lost 55% of their market;
 Some 5,000 petrol stations have been closed or gone out of business;
 All the oil companies are losing money on their retailing operations.
 Last year Esso declared losses of £200 million, Shell lost £130 million
 and BP disclosed losses of £85 million.
 Overall, pure petrol retailers in the United Kingdom have lost about £1
 billion.

  Source :Jonathan Shingleton Executive Chairman of BPRI, a WPP company based in   United Kingdom.   30
Challenge Number 4
Managing Technology

 Quality of Power Supply : High DG Costs
 Spread out network of ROs : High Maintenance Costs
 Training Costs : High Turnover of staff who can handle automation
 Channel Discipline : Big Boss is Watching you
 Organisational Mindset Requirement : How far are you willing to go




                                                                      31
Thank You
Thank You
Achieving differentiation: A strategic
framework

    Generic           Fuel based differentiation
                      Service based differentiation
    differentiation
                      Non-fuel based differentiation
    strategies

    Strategic         Network planning
    tools             Supply chain management
                      Brand consistency




    Strategic         Technology & IT
    enablers


         Details of each of these are in
         following backup slides

                                                       33
Generic differentiation strategies -Fuel
Based
                                      Branded fuel platform


                                     A more profitable route with all
           Q&Q platform              round positive rub offs
                                     Urban consumers, with an over
 Customer still cynical about Q&Q,   emphasis of brands in all aspects
 however would like to take it for   of life, provides the right setting
 granted                             Sharp growth of branded fuel sales
 A large base of ‘trust seeker’      for PSUs bears testimony to this
 segment exist
 Challenges are organization wide
 implementation of checks &
 balances and communication of
 the same to customers




                                                                           34
Quality & Quantity: A systems approach

Terminals             Transportation        Retail outlet            Consumer

 Replenishment        Comprehensive         Automated system        Accurate preset
system linked to      sealing mechanism     for tank gauging        premix deliveries to
stock monitoring at                         and wet-stock           2/3 wheelers
RO                    Vehicle monitoring    reconciliation
                      and tracking system                           Electronic
                                            Exception reports
 Product filling by   (telematics)                                  calibration and
                                            for online monitoring
bulk meters and                                                     tracking of metering
                                            of stocks
automated process                                                   assembly of
                                            Remote diagnostics      dispensing unit
                                            of key components
                                            in dispensing units




 Only a systems approach can ensure Q&Q across network

                                                                                      35
Generic differentiation strategies -Service
Based Service at forecourt
 Managing ‘waiting time’ at RO is crucial for superior customer
 experience
 Technology can offer innovative solutions for better customer
 experience
 New opportunities exist in the area of customer recognition, innovative
 payment mechanisms and loyalty programs
 Petroleum industry has to cross fertilize ideas from traditional service
 industries like hotels & airlines
 Customer feedback and continuous improvement is key to meet
 customer expectations


                                                                            36
Generic differentiation strategies -Service
Based allied customer services

 Targeted customer services addressing special needs of major
 customer groups is key to building loyalty


 Two levers to differentiate service would be:
          Customer insight
          Technology


 Innovative




                                                                37
Generic differentiation strategies -Non
fuels based

 The key challenges of a non fuel based differentiation would be:
    Creating the right assortment customized to local market condition
    Managing suppliers and optimizing sourcing
    Maintaining low operating costs




  For a non fuel based differentiation strategy to work, non fuel retailing
  has to metamorphose from impulse purchase only to a destination
  retail



                                                                              38
Generic differentiation strategies –Relational
Marketing

 Merchandizing Related products & services
     Agro based products
     Handicrafts
     Car / vehicle accessories
     Car / vehicle services
     Laundry services
     Horticulture


 Motels on time sharing basis
 Organizing Events


                                                 39
Generic differentiation strategies -Non
fuels based
Though non fuels has traditionally been looked at as a revenue enhancer/ real
estate value maximizer, opportunity exists to provide a differentiated customer
experience through non fuels assortment
                                                                        Asia
                                      Latin America



                                                                      Others
            US                                        ATM             ATM

                                  Check Cashing       Check Cashing   Check Cashing

                   Fast Food/     Fast Food/          Fast Food/      Fast Food/
                   Ready to Eat   Ready to Eat        Ready to Eat    Ready to Eat
    C Store Only   C Store Only   C Store Only        C Store Only    C Store Only


    None                           Diversification                             Extreme
                                                                                      Source: Mckinsey




                                                                                              40
Beyond Fuel

Huge opportunity for non-fuel in India
Reduction of risk though diversification
Higher profit margin
Many customer segments, hence more
maneuverability
Value added services through different
offering
Competition is bound to increase in non-
fuel also. Hence planning of real estate
and investment for non-fuel can be huge
advantage to a new entrant.

                                           Source: Datamonitor


                                                                 41
Strategic Tools : Network planning

  Automated demand predictions
  Computer based simulation models
                                     An optimized network
                                     with enhanced capital
  Trading area optimization
                                       productivity, high
  Use of GIS platform                 throughput per RO
                                                &
                                          high market
                                         effectiveness




                                                         42
Strategic Tools : Supply chain management

 Complex demand forecasting models
 Automated inventory monitoring
 Scheduling tools
 Tanker capacity utilization tools          Least cost of
 Vehicle tracking system/Telematics         placement with no
 Integrated supply chain solutions          stock outs
 End to end Q&Q implementation




      Integrated SCM solutions are the need of the hour

                                                                43
Strategic Enabler : Technology & IT

Oil company                Retail outlet               Customer


 Monitoring & control   Automatic reconciliation    Assurance of Q & Q
 Logistics               Smooth shift change        Confidence of
                                                   transaction
 Dynamic pricing         Automatic reporting
                                                    Speed of transaction.
 Improving RO effy.      Automatic billing and
                        accounting                  Loyalty discounts /
 CRM on forecourt                                  rewards
                         Improving RO staff
 System driven          efficiency                  Extended services
 No Dry-outs             Audit trail               Easy payment mode
                                                   options
                          Remote viewing of RO
                        transactions                Quality time at RO




         Automation provides multiple benefits across stakeholders          44

				
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