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Chapters
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Non Fuel Business in allowances with

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the Fuel Business
4/29/2010

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Divyanshu

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 INTRODUCTION
1) RETAILING

The traditional utility today finds itself facing the most challenging market
conditions that it has ever experienced. Deregulation is bringing in new competition, not
only from other utilities but potentially from competitors with very different
backgrounds. These new market entrants can apply a variety of different strengths to
threaten the traditional business model. They may leverage an existing customer base or
use technology in general, and the Internet in particular, to leapfrog into the traditional
utilities’ market space and to steal business from them.

Retailing is defined as “A business that sells products and/or services to

consumers for their personal/family use”.

This definition includes the interface of retailers with both vendors and consumers, as
well as other processes like supply chain management that impact retailers. Retailers
have to do the following tasks:
• Analyze their customers
• Develop strategies
• Choose markets and channels in which to compete
• Make location decisions
• Find, design, purchase, price and promote merchandise and services
• Organize their operations and manage their employees and stores
• Create an atmosphere that is inviting to customer and conductive for buying.

With growing competition and deregulation, the rules of the game in the petroleum
retailing industry in India will undergo some changes in the next few years. The
revolution in the Indian telecom sector is a recent example of the effect of free market
dynamics on the structure of the industry and the strategies of various players.
Deregulation of the petroleum retailing sector in India will certainly lead to a similar

2
battle for market share, with new players attempting to gain share from current officials.
This will exert a downward pressure on profit margins and force industry players to adapt
their organizations and strategy. To succeed in this environment, the two key questions
are: How can the industry prepare for the change? What will be the most effective
strategies for petroleum retailers in India in the medium term?

1.1) WHEEL OF RETAILING

Emergence of new retailing forms and decline of old retailing forms could be
explained by “Wheel of Retailing”. According to this, many new types of retailing
institutions begin as low-status, low-margin and low-price operations. They become
effective competitors of more conventional outlets, which have grown fat over the years.
Their success gradually leads them to upgrade their services and proffer additional
services. This increases their costs and forces price increases until they finally resemble
the conventional outlets that they displaced. They, in turn, become vulnerable to still
newer types of low-cost, low-margin operations.

3
 Vulnerability Phase
Entry Phase
Mature retailer
Top heaviness
Conservatism
Declining ROI Innovation Retailer
Low status
Low price
Minimal service
Traditional Retailer Poor facilities
Elaborate facilities Limited product
Expected, essential and offerings
exotic service
Higher-rent locations
Fashion orientation
Higher prices
Extended product
offerings

Trading up phase

1.2) BRAND BUILDING METHODOLOGY

From what seems at the face, there is opportunity for petroleum retailers in India
to develop differentiated value propositions that will boost their revenues and improve
competitiveness and profitability in the new market economy. Some important points to
consider are:

• Strong brands drive revenue growth

In times of increased competition, firms often adopt strategies aimed

either at improving cost effectiveness or at growing revenues. In growth markets,
the major imperative should be revenue enhancement through profitable share and
market growth.

4
 • To drive revenue growth, petroleum retailers may have to either attract new
consumers or increase their share of the existing consumer’s wallet.

Creating strong brand equity will be a key to achieving these objectives,

consistently and profitably. Empirical evidence shows that strong brands add
perceived value which can command a price and/or volume premium by
differentiating from commodity products.

Build Execute the Align Monitor and

Know Build the Brand the Review
Identify the
your The Brand Strategy organisation Performance
Opportunity
Consumer Offer Identity

Fig 1: Brand Building Methodology

Source: A.T.Kearney

5
 Commodity Strong Brand

P1

Price
Price Premium

P2

Volume
Premium

V1 Volume V2

Fig 2: Shift in the demand curve leads to increased revenues

Source: A.T. Kearney

The following study is conducted to explore the strategic options for petroleum
retailers in India. It is very important to assess the value to be gained by adopting a
consumer-centric approach and in building a strong brand identity. Among consumers in
India today, brand recognition and differentiation of existing petroleum retailers is
currently low. This presents a potential opportunity to new players as well as existing
companies to adopt a differentiated consumer-focused strategy centered on building a
strong petroleum retail brand.

6
1.3) RETAIL POSITIONING MAP

By combining different service levels of retailing namely Self service, Self

selection, Limited service, and Full service, and different assortment breadths, we can
distinguish four broad positioning strategies available to retailers:

1.3.1) Bloomingdale’s :
Stores that feature a broad product assortment and high value added. Stores in
this quadrant pay close attention to store design, product quality, service and image. Their
profit margin is high, and if they are fortunate enough to have high volume, they will be
very profitable.

1.3.2) Tiffany :
Stores that feature in a narrow product assortment and high value added. Such
stores cultivate an exclusive image and tend to operate on a high margin and low volume.

1.3.3) Sunglass Hut :

Stores that feature a narrow line and low value added. Such stores keep their costs
and prices low by centralizing buying, merchandising, advertising, and distribution.

1.3.4) Wal-Mart :
Stores that feature a broad line and low value added. They focus on keeping
prices low so that they have an image of being a place for good buys. They make up for
low margin by high volume.

7
 Fig 3: Retail Positioning Map
Source: Marketing Management, Philip Kotler

1.4) KNOWING YOUR CONSUMER

To develop a strong brand and product proposition, a key imperative is to
understand your target consumer’s psyche, behavior and needs. Segmentation is a
powerful tool to help marketers identify the most profitable consumer segments and to
develop an offer which fulfils their needs better than competitors. Many successful global
petroleum brands have used detailed psychographic segmentation as the foundation of
building strong brands.

For example: Mobil split the U.S. petroleum consumer population into five
psychographic segments – Price Shoppers, Homebodies, Road Warriors, True Blues and
Generation F3. The latter three segments had high purchase frequency and low price
sensitivity and were therefore identified as the most profitable target segments. Mobil’s
marketing strategy was then built around these consumer segments.

8
 Mobil's U.S. Petroleum Consumer's
Segmentation

True Blues, Generation F3,

16% 25%

Road Warriors,
18%
Homebodies,
Price 21%
Shoppers,
20%

Fig 4: Mobil’s U.S. Petroleum Consumers’ Segmentation

Source : A.T. Kearney

Generation F3: Fuel, Food, fast; M/F <25 years

Homebodies: Females w/children; Local station
Price Shoppers: All demographics; Regular
Road Warriors: Middle Aged Men; High mileage; Premium
True Blues: M/F; Station Loyal; Cash
Similarly the Petroleum shopper in India has been segmented as follows:
• Routine Chore Doer
 Main driver is to minimize the hassle at the petrol station; petroleum
purchasing is seen as drudgery.
 Seeks additional vehicle repair and maintenance services.
 Likely to be a person engaged in monotonous routine jobs.

• Time Poor
 Strong need for locational convenience and other non-fuel related services.
 Characterized by his need of quick service and convenience.
 Likely to be a professional, 24*7 worker.

9
• Trust Seeker
 Probably unique to emerging markets such as India
 Driven by a strong desire for integrity and by strong
relationships with the retailer.
 A typical late adopter, akin to the Indian middle class.
 The ‘quality guarantee’ is the primary driver for purchase
decisions.

• Prestige Seeker
 Higher level emotional needs for reinforcement of self esteem
 Relatively more brand conscious
 May often be stereotypes as a ‘Self made man’
 Potential target for international or premium brands.

As the consumers in India have not been exposed to differential pricing in

petroleum, the price sensitive consumer is not as well defined as in other markets.
Comparing the drivers of petrol station choice with more developed markets such as US,
there are some stark differences which may give some pointers as to how consumers may
evolve in India. In the U.S., while location (71%) is the primary parameter, price (56%) is
also a very important factor. Product performance or quality (24%) is the third most
important factor. However, there is a big difference in consumer’s interpretation of
quality. In India, quality is interpreted as “no adulteration”, but in the U.S., it means
impact on fuel efficiency and engine performance. Quantity (interpreted in India as
getting the right amount of fuel, i.e. integrity) is not a parameter for consideration in a
market such as U.S.

As the Indian market evolves, parameters such as integrity of fuel quantity and
purity are likely to become hygiene factors, and not bases for differentiation. Marketers
would be able to evolve their brand offering in line with the development of consumer

10
needs- from purity to higher order needs such as performance, fuel efficiency or even the
quality of the buying experience.

1.5) BUILDING THE OFFER

The choice of the target consumer segment drives the development of the brand
offer and impacts many aspects of the organizational strategy such as location, pricing
and human resource policies. The target consumer should determine the value proposition
for example a company which is targeting the Prestige seeker would design its offerings
very differently from a competitor targeting the Time poor consumer type.

Let’s take a company A which is targeting the “Prestige Seeker” consumer type.
Its main strategy would be:

 Brand positioning: A superior product for a discerning customer.

 Product service offerings could include differentiated fuel products- premium
grade petrol, additives and services such as automated car wash.
 The look of the petrol stations would be ‘international’ with technology
enabled services.

Then there is another company B which is targeting the “Time Poor” consumer
segment. Its strategy would be very different from Company A:
 Brand Positioning : Build entirely on a “Time is value” proposition
 Focus on offering rapid transaction times, swipe-at-the-pump facilities, smart
cards, medicine shops, etc. to ensure that the “Time Poor” consumer gets the
quickest service possible.

11
 Petroleum retailers in India will have to become more consumer-focused as
competitive pressures increase and new players enter the market. Retailers can no longer
treat all consumers alike and offer an undifferentiated set of products and services. There
is ample opportunity for petroleum retailers in India today to build revenues and enhance
profitability by building strong and differentiated brand propositions based on in-depth
consumer understanding. This report is an attempt to look into these opportunities
available and the challenges the petroleum retailers in India are facing or will be facing in
the near future.

2) THE INDIAN PETROLEUM SECTOR – AN OVERVIEW

2.1) OIL AND NATURAL GAS SECTOR - INTRODUCTION

VALUE CHAIN

12
 The oil industry can be divided into three major components: upstream,
midstream and downstream. The upstream industry includes exploration and production
activities, hence is also referred as the exploration and production (E&P) sector. The
midstream industry processes, stores, markets and transports commodities including
crude oil, natural gas, natural gas liquids (NGLs) like ethane propane and butane and
sulphur. The downstream industry includes oil refineries, petrochemical plants, petroleum
products distributors, retail outlets and natural gas distribution companies. The
downstream industry provides consumers thousands of products such as gasoline, diesel,
jet fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics, fertilizers, antifreeze,
pesticides, pharmaceuticals, natural gas and propane. Both internationally and within
India the oil and gas sector is characterized by existence of "integrated" companies,
which are present in all these three sectors.

The flow chart below shows oil value chain depicting the entire process under
which both upstream and downstream segments are covered (Figure 5). To start with,
crude oil is explored and produced (Upstream) and then transformed into various
petroleum products with different end uses in refineries and finally marketed to retail
customers (Downstream). Except Aviation Turbine Fuel (ATF) and Liquefied Petroleum
gas (LPG), all the end products are sent to intermediate storage plants through
terminal/depots and finally to retail customers. As regards ATF it is distributed directly to
the Airfields or Air stations and refined LPG is dispatched to LPG storage/bottling plants
for liquefaction and marketing to retail customers. Pipelines are mostly used to transfer
the petroleum products and by products. For onshore fields, coastal tankers are used.

13
 Fig 5 : Oil Value Chain

Source: India Energy Portal

2.2) INDIAN ENERGY SCENARIO

The structure of primary energy consumption in India shows that coal (51%)
dominates as the major energy source. Hydrocarbon (oil 36% and Gas 9%) is the next
available energy provider of the nation. Natural gas is fast emerging as an alternative; it
meets around 8% of the primary energy needs. Considering the global trend of shift in
energy axis from oil to gas, the share of gas in consumption pattern, in the Indian context,
is also likely to increase gradually in the days to come.

India's Energy Basket

2%
2%

9%
Coal
Oil
51% Natural Gas
Hydro
36% Fig 6: India’s Energy Basket
Nuclear

14
 Source:Planning Commission,GOI

Currently, India's consumption (111.6 MMT in 2004-05) of petroleum products is only

about 1/5 of world's average per capita consumption. In the current 5-year plan, the
growth in consumption is expected to be around 3.5% to 4% dependin/g upon GDP
Growth. The medium and long term outlook for oil and gas consumption in the country is
expected to show robust growth. As per the Hydrocarbon Vision 2025 document, the oil
demand will rise to 195 MMT by 2011-12 and thereafter reach a level of 368 MMT by
2025.

In respect of natural gas, the consumption is expected to reach 313 million

standard cubic meters per day by 2011-12 and thereafter climb to 391 million standard
cubic meters per day by 2025. Accordingly. The share of Natural Gas in the basket is
expected to increase from the current 8% to 20% by 2025. Therefore, India is expected to
emerge as a big importer of oil and gas considering that the indigenous production of oil
and gas is not expected to keep pace with demand.

2.3) INDUSTRY SECTOR

The Indian petroleum sector is under the purview of the Ministry of Petroleum and
Natural Gas (MoP&NG).

15
 Ministry of Petroleum &
Natural Gas Gas

Upstream Downstream
Refining & Marketing Industry Bodies
Exploration & Production

ONGC Indian Oil Bharat Petroleum Planning

Petroleum & Analysis Cell
Centre for High
IBP, CPCL, Technology
OVL PCRA
BRPL KRL, NRL PetroFed
Oil Industry Safety
MRPL Directorate
Oil India Hindustan Petroleum India
Limited Reliance Petroleum International
Engineers India
Industries Ltd. Limited
Private E&P GAIL Director General of
Cos. Other Private Cos. Gas Transportation Hydrocarbon
Oil & Gas Marketing & Petrochemicals

Contrary to common perception, India’s retail prices for petrol and diesel are
relatively high despite subsidies. In fact, the total Government (central and states) taxes
and surcharges on petrol products exceed by far the annual budget subsidies for these
products. There is thus a certain rationale for the Government to maintain the current
system though it does have negative implications on the financial health of public oil
companies and acts as a deterrent to private investments in the sector. In addition, the
policy rationale of providing subsidies to allow poorer segments of society access to
commercial fuels, cannot be proven conclusively and irrational choices among different
fuels are being made due to distorted retail prices. The Indian energy market and the
economy as a whole would be better off if the Government would implement a
consistent, transparent and rational fuel pricing system but with a view to political
imperatives, this is unlikely to happen in the short-term.

From the Oil-Pool Account to Government Bonds

First, there was the APM.On 1 April 20023, the Administered Pricing Mechanism
(APM) for petroleum products was abolished as part of the continuing reform of the
petroleum sector towards a sector based on market mechanism. In theory, India.s public

16
downstream oil companies would now be free to set retail prices of all petroleum
products based on an international parity pricing formula under the supervision of a
petroleum sector regulator. The Government would abstain from influencing petroleum
product pricing. Up to then, prices were controlled (or .administered.) for two transport
fuels, petrol and high speed diesel, and two cooking fuels, kerosene and LPG.

The subsidy for the four products was not part of the Government budget but
came out of the so-called oil pool account. The oil pool account was funded by
surcharges on petroleum products to be dispensed in times of rapidly increasing
international prices and re-filled during times of lower prices. With the beginning of the
new FY on 1 April 2002, the APM and with it the oil pool account was abolished.

Subsidies for the two cooking fuels are considered an important social instrument
to help poorer households shift from biomass to modern fuels.4 following the
abolishment of the APM, the Government would thus provide subsidies for kerosene and
LPG ex-ante in its annual budget. Subsidies would not exceed 15% of the LPG and 33%
of the kerosene import parity price respectively. Within 3 to a maximum of 5 years all
budget subsidies on LPG and kerosene would be abolished and market prices would be in
place for all petroleum products in India. Petrol, diesel, LPG and kerosene account for
about 60% of India’s total petroleum product consumption. Diesel is India’s single most
important fuel as most of its vehicles, commercial and private, have diesel engines. Over
75% of India’s crude requirement is imported.

17
 Proportions of Consumption of Major
Petroleum Products in India (2004/2005)

Diesel,, 36%
Petrol,, 7%

Kerosene,, 8%

All other LPG,, 9%

Products, 40%

Fig 7: Consumption of major petroleum products in India

Source: Ministry of Petroleum Basic Statistics

….then market based retail pricing (partially, at least)

The practice of retail price setting was different from the theory right from the
beginning of the post-APM period. The so-called public downstream .Oil Marketing
Companies. (OMC), implemented regular retail price adjustments for petrol and diesel
during the first two FYs following the abolishment of the APM. Despite these regular
price increases the OMC incurred minor shortfalls for the sale of petroleum and diesel.
However, those shortfalls were mitigated through the refining margins which now
benefited from the import-parity pricing formula.

2.4) CURRENT SCENARIO

The demand for petroleum products has been constantly and steadily increasing in
India. It has grown at a CAGR of ~2.8% over last five years. The industry is expected to
grow faster in the future on account of increased economic activity. In terms of demand
mix, HSD and naphtha constitute more than 50% of the total demand (by volume). Going
forward, LPG, MS, and HSD are expected to be the major demand drivers.

18
 Refining capacity depends on the technology used in refineries, capable of
processing crude production into clean fuels. In the recent age of decreasing oil
production refining capacity have to have well supportive technology, which meet
increasingly more stringent environmental Standards. With the increase in global oil
demand and stagnant reserve, refining capacity deserves new capacity addition to meet
demand. But the graph shows slightly increasing trend of refining capacity till date in last
decade. Refinery throuput, as opposed to designed capacity, is computed by dividing the
number of refined barrels of oil processed by the actual number of days the refinery was
in operation. Refined capacity is lower than refined throuput in the graph below implying
under-utilization of capability of processing crude in the existing refineries and lack of
up-gradation. There are 18 refineries operating in the country, 17 in the Public Sector and
one in the Private Sector, with a total installed capacity of 127.37 million metric tonnes
per annum (MMTPA).

The Indian Oil and Gas sector is one of the six core industries in India and has
very significant forward linkages with the entire economy. The oil & gas sector meets
more than two third of the total primary energy needs in the country. The sector has been
instrumental in putting India on the world map. At present India is the sixth largest crude
oil consumer in the world and the ninth largest crude oil importer. The country is also
increasing its share in the global refining market. At present Indian refining sector is the
sixth largest in the world. This position is expected to be strengthened with plans of
Reliance Petroleum Limited to commission another refinery with a capacity of 29 MTPA
next to its 33 MTPA refinery at Jamanagar, Gujarat. As a result of this the Reliance
refinery would be world’s largest single place refinery.

19
3) FUEL RETAILING SECTOR

Call it the beginning of the end or the end of the beginning. Four years after
retailing was thrown open in the petroleum sector, oil companies are grappling to get a
grip over the changing dynamics of the sector. The spike in global crude oil prices has
come at a most inopportune time because this has deterred several new retail marketing
companies from going ahead with their plans. It is even worse for those oil companies
who are pure retailers without a refinery base. For them, it is time to shut shop even
before they have actually begun.

20
 Globally, the petroleum retailing landscape has transformed from only petro-
products to multi-product and services. The world over and in India, a lot of shift has
taken place to hawk fuel in malls, supermarkets and hypermarkets and non-fuels in fuel
pumps. People are looking for convenience and oil companies have sites that can lend
themselves to convenience stores.

3.1) PASSING ON THE PRICE INCREASE

Developed and emerging economies have passed on price increases to varying

levels as is evident by the following data :

Emerging Retail Price volatility absorbed by Explanation

Economie Fuel Prices / Remarks
s Governmen Oil Consume
t Compan r
y

Motor fuels retail price

directly correlated with
world crude oil price (fiscal
USA Deregulated    component lowest in
developed world). Govt.
watches fuel marketers
closely to prevent price
cartels

Motor fuels most expensive

(source of fiscal income for
UK Deregulated    the Govt.) and distribution
margins among lowest in
Europe

Retail prices indexed to

China Regulated    international spot prices plus
taxes and a fixed margin.
Govt has no right to
intervene in price setting.

21
 Proportion of price hike
India Regulated    passed to consumer with a
Partially lsg. Govt and oil companies
absorb significant portions
of price hikes.

Some cost passed to

Malaysia Regulated    consumer, while balance
absorbed by govt through
reduced taxes.

Brazilian consumer benefits

from availability of local
Brazil Deregulated    fuel substitute Ethanol and
may switch to either fuel
depending on the market
price.

Margins have also increased

Russia Deregulated    as Oil companies have
passed on additional cost
along with price increase.

Increased competition
leading to margin pressure
Thailand Deregulated    to oil companies.
Reintroduction of ‘oil fund’
for petrol/diesel due to
volatile international prices.

As companies expand into non traditional markets, the barriers between retailers
are blurring, creating and exploiting new market dynamics. In the UK, the supermarket
chains have managed to attain around, six percent of the fuel market since they moved
into this sector a few years ago. This has lead the fuel retailers to address their sales of
non fuel products. Sales of these products have increased over the recent years, and since
they offer a higher profit potential than fuel, it is better to maximize these sales.

22
 Now we will be taking a deeper insight into the developments occurring in the
petroleum fuel sector, prospects available to the oil companies, and the challenges these
companies are and will be facing in the near future.

3.2) RETAIL SBU

Every oil marketing company has its Retail function as the biggest business line.
There first task therefore is to refurbish the retail strategy. A retail business unit has to
devise its strategy around certain key issues which could be identified as:

⇒ Ensuring Quality and quantity which occupies highest priority in the minds of
the customers.
⇒ To provide a total customer experience through courteous service, basic
convenience facilities and cleanliness at retail outlets.
⇒ To create a pull, through offerings such as branded fuels and loyalty cards.
⇒ Allied retail activities
⇒ To enhance retail visual identity and focus on profitability of retail outlets
⇒ High volume flagship outlets to network all major highways.

3.3) FUEL RETAIL MILESTONES IN INDIA

1972 – SERVO, the first indigenous lubricant was launched by IOCL.

1975 – Multipurpose Distribution centers introduced at 132 retail outlets of IOCL

pioneering rural convenience.
1994 – Vision 2000, the Retail Visual identity programme was launched by IOCL
to upgrade facilities at retail outlets.
1995 – BPCL & Bank of Baroda signed an MOU to launch the first co-branded credit
card in the country which enables customers to buy petrol, diesel, lubricants and
other regular commodities.

23
1996 – BPCL launched Apollo Air Stations at its petrol pumps in Mumbai.
1998 – BPCL planned to open new, state-of-the-art, self servicing and automatic cut-off
nozzle facility petrol and diesel bunks.
1998 – BPCL launched its Mak lubricants in Calcutta.
1999 – BPCL introduced “Smart Card” technology under name Petro Card at retail
outlets in Chennai.
1999 – ICICI Bank Ltd. Tied up with BPCL to install off-site ATMs at the company’s
outlets.
2000 – IOCL signed retail agreement with Domino’s Pizza India Ltd. For setting a fast
food chain through IOC outlets in India.
2000 – Dishnet DSL tied up with IOCL to open internet hubs in all petrol bunks across
the country
2000 – HPCL signed a business initiative with ISP (Internet Service Provider) Satyam
Infoway Ltd. to set up more than 200 cyber cafes at its Retail outlets across the
Country.
2000 – Burger Giant Mc Donald’s tied up with BPCL to open and run restaurants at
select outlets across the country.
2000 – BPCL in association with Iftex Petrochemicals ltd. launched ‘Bharat Iftex’, a
co-branded multifunctional additive (MFA).
2000 – BPCL launched another card product, ‘Smart Fleet’, aimed at fleet owners and
corporates.
2001 – HPCL introduced its Smart Card in Bangalore for the first time in country.
2001 – BPCL launched its convenience stores chain christened as ‘In & Out Stores’
at select outlets.
2002 – New generation Auto fuels IOC Premium and Super Diesel launched by IOCL
later known as (XtraPremium and XtraMile respectively).
2002 – Tata Engg., BPCL tie up to market co-branded fuels.
2002 – BPCL launched premium grade petrol ‘Speed’ in Mumbai.
2002 – BPCL tied up with Café Coffee Day to open CCD outlets in select In & Out BPCL
petrol pumps.

24
2002 – HPCL tied up with Lubrizol for its own high performance petrol,branded
‘Power’.
2002 – HPCL unveiled branded petrol and diesel (Power, Turbojet respectively)
2002 – HPCL unveiled new retail brand ‘Club HP’ through which it intended to offer
quality personalized vehicle and consumer care through select outlets.
2002 – FedEx entered into one-year agreement with HPCL to set up transportation
services at HPCL’s 100 Club HP outlets in eight cities in the country.
2003 – Concept of XTRA, covering retail outlets and customer service, lauched by
IOCL.
2003 – BPCL launched ‘Speed93’
2003 – HPCL unveiled a high octane petrol brand in the market named ‘Power93’
2003 – HPCL unveiled ‘Smart Card’ branded as ClubHP Smart1 card to pay for petrol
or diesel bought at HPCL outlet.
2004 – Reliance Industries Ltd. entered into fuel retailing segment by opening its first
retail outlets for selling fuels.
2004 – BPCL launched ‘Hi-Speed Diesel’
2004 – HPCL signed agreement with US Pizza to open over 500 delivery units at
HPCL’s
outlets around the country.
2005 – BPCL launched Speed97,its new brand of high octane petrol mixed with
lubricant
additive meant to improve vehicle performance.
2005 – BPCL launched a new concept of ‘Vehicle Care Centres’ at its retail outlets.
2005 – HPCL roped in Sania Mirza to endorse retail brands.
2005 – Amex,HPCL unveiled co-branded credit card.
2006 – HPCL,MYTVS unveiled MYTVS Club HP Smart1 cards.
2006 - Kamat group joined hands with HPCL for food joints at HPCL’s outlets.

4) RESEARCH METHODOLOGY

25
Rationale for the study

Retailing is defined as a business that sells products and/or services to consumers

for their personal or family use. In the era of customer retention and customer
delightment and the thin margin of profitability due to cut throat competition, every
downstream company has to provide its best. The company which identifies its customers
and its needs will emerge as the leader.

Descriptive Title of the study

The descriptive title of the study was the emerging trends, options and challenges
in Non-fuel retailing, allowances with the Fuel Business and changing industry and
political scenarios and ever increasing customer expectations.

Objectives of the study

Main objectives are:

1) Viewed the changing trends in the petroleum sector as in price changes, surging
demands, retail infrastructure, increasing customer aspirations, etc.

2) Discussed the options available to the Oil marketing companies and to try and
develop a strategic framework for achieving differentiation among competitors.

3) Studied the challenges these companies do and may face in the near future
example being decreasing ppt (per pump throughput).

Type of research: The study was descriptive and conclusive as it was being done with
aim of reaching a definite conclusion.

26
Contribution from study:

Petro retailing is the major revenue generator for the downstream companies.
With so many private players coming into petro retail marketing, the company which
provides better customer services and Quality and Quantity assurance will be the major
gainer in terms of both market share and revenue. A customer chooses a firm over others
because it offers the greatest positive combination of end-result benefits and price (i.e.
the greatest value) in the perception of that customer. This study showed what are the
existing difficulties and shortcomings in this sector and what the companies should do
about it from the point of view of the people who are in direct contact with the customers.

5) EMERGING TRENDS IN THE FUEL RETAILING SECTOR

27
 A lot of changes are coming to Indian petrol marketing, stepping into broader
retail liberalization. Along with PSUs (IOCL, IBP, BPCL and HPCL), although Reliance
is India's biggest homegrown private-sector player, this incipient retail revolution extends
to foreign multinationals, which will get to sell directly to Indians for the first time. The
wheel has turned full circle since India nationalized subsidiaries of Shell (now Bharat
Petroleum) and US Esso (now Hindustan Petroleum) in 1974, turning petroleum into a
state affair. Shell, Reliance and another private domestic concern, Essar Oil, are
concentrating on highways where 330,000 truckers guzzle $10 billion worth of diesel
every year as the cities are crowded by the State oil companies.

The new entrants are offering choices to Indian motorists. Most pumps have been
isolated entities, selling a cocktail of kerosene, a highly subsidized product, and gasoline.
Today there are pumps every few kilometers. Tired truckers, who earlier curled up in
their vehicles for a nap and urinated by the roadside, now use motels, restrooms and
telephones offered by Reliance's new pumps. And urban Indians, who until recently
drove outdated cars and relied on word of mouth to find a clean pump, now drive large
Fords and Hondas and demand better fuel and service.

Competition is forcing Indian Oil, Bharat Petroleum and Hindustan Petroleum,

which together run more than 20,000 outlets nationwide, to clean up their acts with
various anti adulteration steps. The highway-building program should induce big
increases in Indian oil consumption, currently only a tenth that of the U.S. Only 7 in
every 1,000 Indians owns a car, as compared with 12 in neighboring Pakistan. Surely
$50-a-barrel oil will slow things in a largely poor country like India, but under normal
circumstances the gap with the West will close.

India requires an investment of at least $450 million in the petroleum sector to

gain retail rights. And it is tough to make your board understand why a bureaucrat or a
minister sitting in New Delhi should fix the price of your gasoline and diesel when you
have put that kind of money into the country. India deregulated the oil sector in 2002,
but, as with many things in this country, the gesture was purely symbolic. India's foray

28
into freer petroleum retail is a teaser to throwing open an estimated $200 billion broader
retail market (just under Wal-Mart's total sales) to foreign direct investment.
Supermarkets and department stores make up only 2% of this market, with the rest
coming from 12 million mom-and-pop stores, according to a Jardine Matheson report.
India badly lags its modern benchmark, China, in this aspect of consumerism--although it
is just ahead of China in opening gasoline retailing.

Name of the company Number of retail outlets

IOCL (with IBP) 16000
BPCL 7332
HPCL 7313
RELIANCE 1300
ESSAR 511
SHELL 40
ONGC 2

Some of the factors leading to the current changes in the petro-retail scenario in
India are as follows:

5.1) DEREGULATION OF THE PETROLEUM SECTOR

During the last 25 years, functioning of the oil industry was governed by the
Administered Pricing Mechanism. The APM served to achieve the following primary
goals:

• Ensure availability of certain products at subsidized rates to the economically

weaker sections of the society and for priority sectors like Fertilizers through a
system of cross subsidization of products,

• Ensure stable prices, so that the domestic market is insulated from the volatility of
prices in the international market,

29
 • Regulate returns to the Oil companies at reasonable levels, consistent with
efficiency of operations, to generate sufficient resources for encouraging growth
of infrastructure facilities,

• Minimize the cross haulage of products by making available products at a uniform

price ex-all refineries, and

• Achieve social objectives such as demand management.

During this period, the oil industry approached every need of the consumers in a
coordinated way. The supply plan mechanism, under which the product was made
available to all the players irrespective of the original ownership of the product, provided
for coordinated logistics movements. The coastal, pipeline and rail movements were
planned on industry basis. As a result, the infrastructure was also developed on industry
basis, with one of the companies acting as lead giving hospitality to the companies which
were not represented.

However, the APM also had certain major problems. The need to bring domestic
prices in line with the international prices, the new environment regulation requiring
considerable investment in the oil sector forced the Government to have a look at the
regulated regime.

To start with Government deregulated the Lubricants marketing in 1993. This

sector immediately witnessed entry of new players and number of competitors increased
multifold. The new players brought in new Unique Selling Propositions (USPs) including
international brands like Shell, Caltex, Mobil, Elf, Total etc., improved products and the
market became very active. On the other hand, a lot of companies also offered cheaper
alternatives, not always meeting the minimum specifications. The Government
deregulated refining sector and Industrial fuels marketing in 1998. This gave rise to
import parity pricing of the industrial fuels. Furnace oil and Naphtha prices, which
remained fixed over long periods like an year or so -started moving in line with the
international prices. The periodicity was initially one month. However, it was observed
that even this period could result in price distortions -resulting in imports from the nearby

30
markets. Eventually the prices started changing every 15 days and the cycle got settled.
Today, a major portion of direct fuels marketing is being done by the refineries directly
'in their own economical zone with certain product exchanges matching quantities on a
ton -to - ton basis. The next step was in 2001, wherein the ATF prices were deregulated,
which prices started reflecting international trends.

Finally effective 1st April 2002, domestic and transportation fuels were also
deregulated. This has led to fluctuating MS and HSD prices -changing every 15 days. The
domestic fuels viz. SKO and LPG are still subsidized and oil companies have retained the
selling prices of these products despite of increase in international prices. The retail fuels
followed the ATF model and the major change, which took place as a result of
deregulation, but was not felt by the common man, was the change in distribution system
and pattern. The deregulation also brought in customer focus in the working of the oil
companies. Petro-products, which were a commodity till then, were being seen
differently. The companies desired to establish their "Brand Image" in the market. They
realized that only the customers could make them grow and proper attention was given to
their needs.

The international format of a New Generation Outlet was introduced by BPCL to

the Indian customers. These outlets, in addition to being attractive and sleek, are very
efficient in customer handling and services. They included additional services like
ATMs, In and Out stores, Car Wash, etc. The companies introduced loyalty program me
and ease of payments through 'Petro Card' for urban consumers and through 'Smart Fleet
card' for major fleet operators. Both these programmes are based on Smartcard
technology. Deregulation opened avenues for marketing improved branded products.
IOCL came up with Xtra Premium,and Xtra Mile, BPCL came up with Speed93, Speed
97,Hi-Speed Diesel, and HPCL introduced Power petrol and Turbojet Diesel.
APM dismantled in 2002, but government still involved in fuel pricing; pricing
decisions based on social considerations. Private companies allowed marketing MS &
HSD - imports also decanalized in 2003. Public sector oil marketing companies are
technically allowed to sell petrol and diesel at market prices, although they end by selling

31
these at below market price, since their largest shareholder, the government of India,
regulates product pricing, in the hope that ruling party politicians win elections. After all,
diesel is a mass consumption product. The same logic applies to LPG and kerosene
pricing. Taxes make a good part of the price paid for petrol and diesel, which account for
50% of the petro-products consumed in the country. In the four big metros, tax as a
proportion of the final price is as high as 57% in the case of petrol, 37% for diesel, 23%
for kerosene and 22% for LPG. Reliance on the petroleum sector for garnering taxes is as
high as 20% for the central government. In the case of states, it is around 50%.

The oil companies are not allowed to raise prices by that level, because of the
existence of the price control system that exists as part of the Indian planning. Oil policy
in India requires to shift away from the interests of socialists, the interests of oil PSUs
and the interests of oil companies like Reliance. Instead, we need to apply the first
principles of a market economy. Better health of oil companies requires the sector must
be exposed to competition. At present, a host of barriers make it difficult for the private
sector to import and sell petroleum products in the country. In the 1990s, India found its
way out of a mess in the industrial sector - where there were thousands of incompetent
companies - by cutting customs duties and opening up to imports. The same story applies
in the petroleum sector. We should focus on opening up the Indian market for petroleum
products to global competition. Anyone should be allowed to open petrol pumps, buy
petrol from anywhere in the world and sell to customers. Each of these steps should be
jealously protected from the meddling of the ministry of oil and it’s cronies in the oil
sector. This will help destroy the monopoly of oil companies and force them to work in a
competitive framework.

The oil industry is on a threshold of change. It is changing its character from a

Government controlled - faceless - bureaucratic in nature to a vibrant, customer oriented
industry. The battlefield of competition would be the market place -where the customer
would be the king. He would decide based on his experience, choice, preferences,
preferred brand, services offered etc. The retail market would be witnessing entry of new
players like RIL, Essar and some multinationals. The oil companies would also require

32
coordinating amongst themselves to ensure that the costs are maintained at least possible
level. Both the competition and coordination in the oil industry would result in a better
market for the consumers.

5.2) INCREASING VEHICLE SALES

The sales of vehicles including 2-wheelers,3-wheelers, 4-wheeler LCVs and

HCVs have been increasing in the recent years. This puts an extra pressure of increasing
demand of petrol products on the oil companies to cater to. For meeting this surging
demand, they look towards improving their entire supply chain to cater to most of the
customers. Thus opening up of new retail outlets and improving the current ones comes
under solving the whole problem. People go for branded fuels to make their vehicles fuel
efficient.
The chart below shows the trend of increasing vehicle sales in India in the recent
years:

VEHICLE SALES IN INDIA

8,00
0,
7,00 000
0,
6,00 000
0,
5,00 000
NUMBER OF
VEHICLES

0,
4,00 000
0,
3,00 000
0,
2,00 000
0,
1,00 000
0, 00
0
-
2002-2003 2003-2004 2004-2005 2005-2006
YEAR

Commercial Cars 3 w heelers 2 w heelers

Fig 8: A graph showing increasing vehicle sales in India

5.3) CHANGING INFRASTRUCTURE

33
 New generation retail outlets provide all sorts of benefits to the consumers along
with filling of fuel. With the emergence of organized retailing in the country and a
growing demand from consumers for a superior shopping experience, Convenience
Retailing has emerged as a key business area for petroleum companies given their wide
retail presence, existing customer base and strategically located sites. Convenience need
gaps have been felt in various fields and research has shown that the urban consumer
today seeks convenience in shopping for their basic requirements so that their precious
time is reserved for more fruitful pursuits. Petrol retail outlets provide the right
framework for setting up convenience retail chains where the consumer has the
opportunity of combining shopping with the fuelling occasion.

Petroretail Outlets nowadays are equipped with state-of-the-art infrastructure,

including Multi-Product Dispensers to pre-set price and quantity of fuel and Electronic
Air Gauges facilitating precise inflation of tyres. Attractive Canopies are suitably
designed to provide shelter and adequate lighting of the forecourt at most Retail Outlets.

On the non-fuel front also, oil marketing companies have introduced various
services including convenience stores, food services, and Ancillary services. For eg.
BPCL has introduced 'In & Out’, these malls offer the customer a broad range of
facilities and brands to choose from. ATM's, Cybercafé, Courier services, Laundry, Photo
Studio, Music, Fast Food, Greeting Cards, Courier Services, Bill Payments, Movies /
Entertainment Tickets, etc. have made Bharat Petroleum's Retail Outlets a happening
place and indeed an rewarding experience for consumers. Similarly other companies
have their own convenience stores and other services like free air, free vehicle servicing
etc. which they provide to their consumers to attract and retain them.

5.4) UPGRADING TECHNOLOGIES

The companies are also going in for various innovative technologies especially
using Information Technology for various E-Retail solutions at their ROs. Some of these
include high quality dispensing units, intensive use of RFID (Remote frequency
identification device), etc.

34
Drivers for “Emerging Technology” in Petroleum Retail are :

 Efficient Customer Service & Enhanced Level of Customer Assurance.

 Compliance to stringent Environment, Health & Safety (EHS) standards.
 Need to fuel vehicles using “alternate fuels”
 Miscellaneous.
≈ Cost Reduction
≈ Ease of Construction / Maintenance.
≈ Better Control over Site Operation

Emerging Trends in the “Fuel Forecourt” include dispensing units, Robotic Fuelling,
Card Payment System, Intensive Use of RFID technology etc. Also for Customer
assurance to quality and quantity, there are methods to check higher reliability in
measurement and delivery with Temperature compensation.

Fig 9: Smart

Merchandising

Using

dispensers

Internet Ready and Wifi Capable Fuel Dispensers-Docking Station for Vehicle.–
Dispensers equipped with Touch screen and Speaker.–Transfer of “Media content” from

35
Dispensers to another wifi enable device (e.g. Mobile Phone or other entertaining system
like Car Stereo) using Bluetooth technology.–Dispenser’s Media enterprise will enable
the “Real Time” News Headlines, Traffic information and weather report on its screen.–
Full motion Video can be telecast.

Additive Injection System integrated with Dispensers for flexible “Dosing” of Additive
in any grade of fuel. There is no need to maintain separate tanks for different grades of
fuel. This system can be integrated with “Point of Sale System”

36
 Fig 10: Additive injection system integrated with dispensers

Autonomous Robotic Fueling Station

Customer drives in the Retail Outlet. He then inserts Payment card into the Pump
control interface. Selects the Product required. The transponder on the Windshield of
vehicle transmits the information about make and model of vehicle. By receiving the
car’s information, Robotic Arm knows the precise location of Fuel Cap and does the
following operations–Moving down to the exact location of fuel cap.–Opening of fuel
cap.–Nozzle insertion and beginning of fueling.

Increasing Use Of RFID

The vehicle is identified automatically at the entry to fuelling island.When nozzle
is inserted into the fuel tank, the vehicle usage data is transmitted automatically to the
Vehicle Scanning Unit (VSU) and Point of Sale (POS) or dispenser. The dispenser then
authorizes after validation of data.

37
 Fig 11: Automatic fuelling system

Benefits to consumers include:

☺ Assurance of fuel quality and the amount being dispensed

☺ The ability to use a variety of payment methods, such as cash, debit or credit card, or
loyalty card, at the pump
☺ Cashless transactions and self-service operations
☺ An extension of the automation system that could also control operations of
convenience stores located at retail outlets, car washes and other value-added services
they provide.

Benefits to oil companies include:

☺ Improved customer retention and an increase in market share as a result of greater
customer loyalty
☺ The ability to offer various loyalty programs to fleet owners
☺ Improvement in retail station operational efficiency and asset utilization
☺ The ability to study demand of products and loads at various outlets to make tactical
and strategic marketing decisions regarding petroleum retailing
☺ Greater visibility into the outlet operations
☺ Access to online data that will help monitor and prevent fraudulent practices

38
5.5) BRANDED FUELS

Branded petrol, such as Bharat Petroleum's Speed, Indian Oil's XtraPremium and
Hindustan Petroleum’s Power , are either (as in the case of the former brand) regular
unleaded petrol that have been treated with multifunctional additives or high-octane
petrol (as is the case with the latter) that has been treated with additives to boost the
performance and power characteristics of engines. Most new generation cars launched in
the country after 1990s need better quality fuel to be able to offer their best in terms of
smooth, knock-free performance and peak power output. The cost of maintaining the car
and the cost of spares that need frequent replacement will also be reduced with the use of
better quality fuel. Similarly, we have branded diesel like BPCL’s Hi-Speed, HPCL’s
Turbojet and IOC’s Xtra- Mile.
Further, the important point that tends to be always ignored is the longevity of
equipment and components in the car that go on to reduce exhaust emissions such as the
catalytic converter. Over the first two years of the car's usage, components, such as the
fuel injectors, fuel intake valves and ports, carburettor and the combustion chamber, tend
to slowly accumulate carbon deposits that affect the engine's performance. This
accumulation of deposits and their effect on performance is even more pronounced in the
new generation, Euro II compliant passenger car gasoline engines that feature multi-point
fuel injection; the effect of deposit accumulation and its effect on optimum fuel injection
will be felt even in carburetted engines.

Bharat Petroleum's Speed is a blend of petrol and multi-functional additives,

sourced from Chevron Oronite Company LLC, a ChevronTexaco company. The additives
comply with EPA 97 (Environment Protection Agency, US) requirements. Speed is said
to contain unique deposit control additives that effectively remove harmful deposits from
all fuel metering systems and components resulting in a better overall engine
performance, including easy starting and smooth idling, maximizes power and
acceleration, reduced emission and elimination of engine knocking. Overall, the benefits

39
of using Speed are said to be improved mileage and reduced maintenance costs in the
long run for all petrol engines, including those of two wheelers.

Indian Oil's XtraPremium is also unleaded petrol that comes pre-mixed with
additives. However, only in this case, the base fuel, in addition, comes with a higher 91
Octane content. Indian Oil XtraPremium's high-octane level and additives are said to give
the engine better anti-knocking and engine-cleansing qualities. Similar to Speed,
XtraPremium will also improve mileage and reduce emissions in the long run. Complete
combustion of the high-octane petrol will of course improve the engine's responsiveness,
acceleration and build up mileage in the long run.

These branded fuels are preferred by consumers even though they are a bit more
expensive than the ordinary petrol and diesel. Most of the time, these play a big role in
retaining customers and making them brand loyal to the particular company.

40
Fig 12: Some facts after market research on branded fuels
Source: BPCL

The customer has the demanding expectation of excellent engine design and fuel quality,
to meet the emission regulations, with high fuel efficiency, drivability,power and
comfort. Clearly, while customers have a close association with the brand, the association

41
with the parent company is poor. Selling a quality product is tough enough — increasing
customer awareness is trickier.

MS + HSD
Urban Markets

HSD Rural
Markets
Branded
fuels
MS Rural
Markets

Embryonic Growth Maturity Decline

Fig 13: Showing Product life cycle for different fuels and markets

5.6) NON- FUEL INITIATIVES

One of the more visible transformations in the retail business of auto fuels is the
recognition by the oil companies that non-fuel activities could be an important source of
revenue at their retail outlets. So we have convenience stores, fast food centers and other
such amenities finding a place at petrol stations. This is a very welcome change.
However, the possibilities are immense and efforts in this direction too slow and limited.
The guidelines issued by the Ministry of Road Transport and Highways stipulate that the
petrol stations should be a composite rest area for the highway users and provide all the

42
products and services that a highway user may require under one roof. These could range
from convenient stores, restaurants, cyber cafes etc. for the car users to dhabas,
dormitories, dhobi services etc. for the truckers.

Realising the importance of a greater understanding of consumers’ needs and

consistent with its core objective of continuously adding value to it’s customers through
innovative means, Bharat Petroleum has launched its convenience retailing initiative
under the “In&Out” brand. Bharat Petroleum is the 2nd largest oil marketing company
in the country with over 6000 retail outlets spread across the length and breadth of the
country. The In&Out chain of convenience stores is being set up in the urban markets at
strategically located retail outlet sites with high customer footfalls.

The “In & Out” store at Bharat Petroleum petrol pumps, which was launched in
2001, offers a convenience proposition where a number of typical household errands are
aggregated under one roof for the benefit of the customers. Today there are more than
240 In&Out stores across India, which bring in unmatched convenience at the petrol
station. Strategic alliances have been formed with major brand owners and retailers in the
country to further strengthen the convenience proposition.

Fig 14: Pictorial view of The In & Out store of BPCL

Similarly to power up its growth strategy, IOCL is looking into getting into

43
altogether new areas, non-fuel retailing being one of them. It plans to start fuel services at
shopping malls. For this, it has already had discussions with the Ansals and Kishore
Biyani’s Future Group. That should be up and running soon. IOC’s retail initiative is to
beef up the Convenio stores (they sell a wide range of packaged foods, and hot and cold
drinks) that it had set up at select petrol pumps a few years ago. It has hired retail
consultancy Technopak to help formulate a strategy to redo the outlets.

Forecourt activities by Indian Oil Companies :

Indian Oil Corporation Limited :

 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.

Hindustan Petroleum Corporation Limited :

 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

44
 ⇒ Automatic Car Wash

 Commissioned India’s first public access Internet kiosk

Bharat Petroleum Corporation Limited :

 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.

Fig 15: The sorry figure of profits from non fuel business in India

5.7) CHANGING CONSUMER EXPECTATIONS

45
 The consumers nowadays are the ultimate drivers forcing a company to make its
operations more efficient and effective. In this era of cut throat competition, the
companies are doing their best to attract new and retain old customers. But the
expectations of the consumers have been witnessing a never stopping scenario. The next
generation petro-retailer will adopt a consumer centric organizational model aligned to
a distinct value proposition.

Q & Q still are the major forces to influence a customer’s choice of a fuel retail
outlet. The companies should thus build on strategies to ensure them of the Q & Q of its
fuel. The consumer also demands a higher level of product delivery and customer service.
That’s why companies have come up with various technology driven solutions to make
the customer stay at the retail outlet fast and satisfying. The companies have come up
various ideas like automated dispensing units, Smart cards, etc. Quality is again
ascertained by the company in terms of branded fuels assuring the consumer of improved
and efficient vehicle performance.

Oil companies are working towards optimizing their entire supply chain eg.
FedEx’s agreement with HPCL mentioned in the previous chapter. The customer has
been becoming more and more conscious of fuel efficiency and engine performance. In
this respect, the oil cos. convince the customers to buy branded/premium fuels which are
meant for better engine performance and other benefits to the consumers. Also cos. Have
come up with other recreational facilities especially for outlets at the highways like
dhabas, onestop trucker shops (BPCL), etc.

To better service the customers, the oil cos. also give them other facilities like
clean & Hygienic place to eat & wash, rest & recreation for highway travel, allied
facilities like ATMs, Cyber cafes, courier services, convenience stores etc. Thus we see
that the companies are now changing their outlook and strategy just to please the
customer.

5.8) GOVERNMENT INITIATIVES

46
 The biggest initiative taken by the Government includes allowing the entry
of the private player like Reliance,Essar, Shell,etc. in the downstream retail sector. A
level playing field is an absolutely essential requirement for players to survive in any
competitive market. A competitive market makes the industry efficient and effective. The
expert committee report on the integrated energy policy makes the following
recommendation for a competitive environment across the energy sectors:

“Apart from pricing policies, an environment that allows multiple players in each
element of the energy value chain to compete under transparent and level terms is
essential in realizing efficiency gain within the energy sector”.

The Indian petroleum industry pursued the policy of liberalization in the year 2002 and
subsequently private players made huge investments along all segments of the petroleum
value chain. Private sector investment in retail marketing amounted to over Rs 7000
crores (appx. $ 1.56 billion), including investment by dealers and transporters. Private
sector presence in retail marketing has led to multifarious benefits to stakeholders. It has
created direct and indirect employment opportunities for more than 70,000 people.
Private players have introduced better technology, aimed at enhancing customer
satisfaction by delivering unadulterated fuel and better service quality.

These efforts were severely affected after the announcement of oil bonds to PSUs.
The Govt. is extending a subsidy of Rs. 3.39/ litre on MS and Rs 5.77/ litre on HSD to
PSUs. As a result, private players have shut down assets which delivered substantial
value to customers. Common carrier infrastructure and product sharing may be actively

considered by the regulator. Market based pricing is under consideration as well.

47
THE PAST………. AND THE PRESENT (A Pictorial View)

48
Fig 16: The past and the present (pictorial view)
6) OPTIONS AVAILABLE TO OIL MARKETING COMPANIES

The retail operations of any company have to be planned accordingly keeping in

mind both its top-line and bottom-line operations. The top-line issues would include
Corporate branding, pricing, category management, and customer retention. These are the
key issues which a petroleum retailer has to look into to make the product visible,
accessible and attractive to the customer, especially in the petroleum sector as it is mostly
generic i.e. non-differentiated. The bottom-line issues include distribution cost
optimization and other direct-indirect cost management.

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.

49
 Corporate Branding
Pricing
Top-line
oriented Category management
Customer retention
Retail
Plan
Distribution cost
optimization
Bottom-line
Other direct-indirect
oriented
cost management

Fig 17: Aligning metrics for profitable operations

Source: AT Kearney
It’s just good business sense to take what you already have, such as a good
convenience-store location with a loyal customer base, and find ways to generate more
income and profit. The concept of forecourt retailing at petrol stations is not new. It
began in the 1980s when British Petroleum launched its first convenience store. In India,
where consumer interface was recognised as a key factor, the concept was taken up in the
late 1990s by Indian Oil Corporation, which started its multi-purpose distribution centres
at petrol pumps in semi-urban and rural areas. The concept has been in vogue ever since.
But recently it shot into limelight with oil companies trying to milk this revenue stream
for more value.

6.1) FUEL BASED DIFFERENTIATION

In markets such as the U.S., petroleum retailers sell multiple grades of fuel based
on their octane ratings, additives added and/or process differences. Multiple grades cater
to an evolved consumer segment who seek enhanced fuel performance and can support
the premium price/margin business model. For example, in USA, a leading petroleum

50
brand has built a strong equity around ‘good performance’, enabling it to capture a
greater share of the ‘performance’ motivated consumer segment.The impact of this has
been the relatively high contribution of premium grades to the brand’s product mix,
translating into correspondingly higher revenues and profitability. Premium grade
petroleum consumers have been found to be less price sensitive and more brand loyal.

In India, the growth in the number of cars in the large car segment, adoption of
multi-point fuel injection engines and the introduction of stringent pollution emission
norms suggests that there maybe an opportunity for fuel-based differentiation targeting
the ‘Prestige Seeker’ and ‘Trust Seeker’ consumer segments.

Different companies have different brands which have been popular owing to the
advertising and positioning done by these companies.
IOCL : Xtra Premium Petrol, Xtra Mile Diesel, Servo Lubericant, Xtra Care outlets
BPCL : Speed, Speed97, Hi-Speed Diesel, In & Out Stores, Mak Lubericants
HPCL : Power Petrol, Turbojet Diesel, Club HP outlets

51
Fig 18: A pictorial view of retail initiatives taken by different Indian oil marketing cos

6.2) VALUE ADDED PRODUCTS & SERVICE BASED

DIFFERENTIATION

Apart from being used as a basis for differentiation, non-fuel products and
services can contribute significantly to revenue and profit enhancement. Non-fuel
revenues of Petroleum retailers contribute as much as 38.6% in the U.S. and 28% in
France, and their significantly higher profitability makes them particularly attractive;
average profit contribution non-fuel products and services is 65.8% in the U.S. and 40%
in France.

There are a number of products and services which petroleum retail stations can
offer, but they can all be broadly grouped into three categories –
⇒ Convenience stores,
⇒ Food service outlets, and
⇒ Ancillary services.

52
CONVENIENCE STORES:

The concept of convenience stores has not as yet taken off in India. Most
consumers in India today are unwilling to pay the price premiums required to support the
organized convenience store business model; the ‘MRP’ regime also restricts the c-store
operators’ ability to charge a premium for the higher service levels that it may provide.
Coupled with this are the difficulties in operating a profitable convenience store business
model in India where the supply chain for most products remains highly fragmented and
in-efficient.

The critical issue is to develop a product assortment that would drive both traffic
and consumer purchases; this being a function of the consumer group which the brand
targets. For example, for the ‘Routine Chore Doer’, the product offer could hinge on
fresh fruits and vegetables, e.g. a ‘Mother Dairy’ vegetable stall at every petrol pump.
Operating a c-store requires an entirely different set of capabilities from petroleum
retailing---- sourcing and supply chain management are critical skills for a c-store
operator and may need to be outsourced by Indian petroleum marketers as they build
other consumer facing skills. A reduced risk model could be an alliance with an
established retail chain e.g. Foodworld or Subhiksha which would provide the required
skill synergies and also ensure immediate consumer credibility and trials. This model has
worked well in more mature markets where consumers require greater choice and
assortment mix. It is also important that the petroleum c-store operator develop a strategy
that differentiates its convenience store from other similar stores as well as the traditional
retailer. There are multiple opportunities for differentiation in the convenience store
market; the key is to make a consumer-based choice.

For an international brand entering the market in India, targeting the ‘Prestige
seeker’ consumer segment, the ‘smart shop’ ---- clean, well-lit, wide aisles----may offer
a differentiated value proposition. A convenience store operator can select from eight
levers which provide a basis for differentiation depending on the needs of the target
consumer segments.

53
 Breadth of Store
offerings Appearance oro
Price
rO
R

Basis of
Image Food
Differentiation
or
OR

Convenience
Service
Distribution

Fig 19: Petro-retailers in India will need to adapt global business models to suit the local environment
Source: AT Kearney

FOOD SERVICE :

This is an emerging sector in the non-petroleum range of products from

sandwiches to full branded fast food operations. The critical issues are: what services
should be offered, and how should they be provided? In the U.S., food prepared on-site
for take-away is a significant category of foodservice sales and caters to the habit of
grazing i.e. eating ‘on-the-move’. In India, eating-out is more of a social event, and thus
the platform of ‘food on the go’ maybe less relevant.

Convenience stores are likely to be ‘destinations’ and not ‘traffic interceptors’ in

India. Therefore, full- fledged fast food operations could offer greater appeal at
petroleum stations. The exact nature of food service provided is a function of the target
consumer; a Barista coffee pub appeals to a very different consumer type from a
‘Chinese van’ consumer, but a Haldirams and a McDonalds may be complementary.

An interesting option could be to capitalise on the growth of organised Indian fast

food retailing, using relatively well located and spacious real estate (petrol stations) to

54
establish ‘chaat’ corners jointly with brands such as Haldirams, particularly in the smaller
towns. Petroleum marketers can adopt a number of operating models for food service.
From an alliance with an established brand such as McDonald’s to the retailer's own
brand/label. Factors to be considered in deciding which food service model to adopt:
1. Space available (including parking)
2. Labour implications
3. Skills/ resource requirements
4. Consumer demographics/psychographics
5. Competitive environment.

Branded food service offers the benefit of immediate brand recognition by

consumers. It also provides assurance of quality, freshness and consistency. In India,
where the concept of food service at petroleum stations itself is new, an alliance or joint
venture is likely to be the most suitable operating model.

ANCILLARY SERVICES:
Ancillary services complement regular convenience stores and food service by
providing additional reasons for consumers to visit the non-fuel area of the stations while
increasing the retailers’ share of the consumers’ wallet on each visit. The range of
ancillary services that can be sold through petroleum stations is large, and includes
ATMs, insurance sales agents, courier services, pre-paid card sales, laundry services, car
wash, newspaper and magazine stand, and even lotteries. The key question is how much
would consumers be willing to pay for these services? Car wash services are currently
available through the unorganized sector for as little as Rs.150 per month at one’s
doorstep; can a petrol service station compete profitably with this? There may be a latent
demand for laundry services among taxi, truck and auto drivers but not among urban
private car owners.
Key success factors in value added product/services based differentiation strategies
:
≈ Manage barriers to trial and usage, such as consumer’ perceptions of
differentials in price, selection and service.

55
 ≈ Customize the assortment and offering to local market conditions.
≈ Maintain low operating costs and tight inventory control.
≈ Manage suppliers and optimize sourcing.
≈ Build consumer loyalty through CRM, loyalty programs and incentives.

Asia
Latin America

Others
US AT AT
M M
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

Fig 20: Generic Differentiation Strategies

Source: Mc Kinsey

6.3) PRICE BASED DIFFERENTIATION

This is an obvious differentiator for any product or service, and in markets such as
the USA where as many as 56% of petroleum buyers cite price as a reason for selecting
their brand. It is a powerful platform for differentiation. In India, where there are a large
number of ‘bargain hunters’, a price-based strategy could be potentially very powerful.
The challenge of such a strategy however, is to maintain uniqueness and sustainability.
When a number of petroleum retailers adopt a low price positioning, other factors such
as the associated offerings to ensure customer retention become critical.

56
 Internationally, there are 2 broad categories of petroretailers which differentiate
themselves based on price– the grocery retailers selling petroleum and the high volume,
low margin convenience store retailer.

GROCERY RETAILING:

Hypermarket retailers are rapidly gaining share of the fuel market in the West. In
the USA, hypermarkets have 3.3% of the market value, and in Europe, 5.2% of the
number of petroleum retailing locations. Hypermarkets discount petroleum by as much as
6-12% and are projected to account for over 16% of the U.S. market by 2005. These
retailers use fuel sales as a loss leader to attract consumer traffic to their stores”. In India,
hypermarket operations are still nascent and unlikely to be a near term threat to petroleum
marketers. However the likely success of the hypermarket retail model in India will pose
a longer term threat to petroretailers here.

HIGH VOLUME, LOW MARGIN OPERATING MODEL:

Exemplified by companies such as QuikTrip and RaceTrac in the U.S., these

retailers have developed operating models building on the high price elasticity in
petroleum retailing. Selling petroleum at prices that are typically 5% less than the average
market price, companies such as QuikTrip are able to achieve as much as 75% higher
sales throughputs through their stations. Although their margins are as much as 40%
lower than the majors, their overall profitability is high. As in the hypermarket model,
they use the higher traffic through their stations to drive sales in their convenience stores,
which also typically sell at discounts to the market. The challenge to such a strategy in
the Indian context is that non-fuel sales are currently so low that the discount retailers
would be unable to boost overall profitability of their petrol stations sufficiently through
this route. Like QuikTrip, discount petroleum marketers in India would also need to
develop other consumer hooks such as ‘consumer experience’ to build consumer loyalty.

Key success factors for price based differentiation strategies:

57
 ≈ Ability to self more profitable products/services to subsidize lower margin
'loss leader' petroleum sales.
≈ High degree of consumer price elasticity which ensures that lower margins are
compensated through greater volumes
≈ Supply chain optimization and sourcing efficiencies to deliver lower priced
fuel consistently
≈ Non-price based strategies to build consumer loyalty. For example, service
experience.

6.4) CONSUMER EXPERIENCE BASED DIFFERENTIATION

Petroleum marketing has a strong service element which can be used as a

powerful lever for differentiation, especially in a commodity market environment. The
consumer experience, or ‘Moment of Truth’, as it is also called, has been very
successfully used by petroleum brands internationally to protect market share and to
garner loyalty. A leading Oil and Gas company in Canada has clearly differentiated its
consumer experience by ensuring warm and caring attitude towards its consumers. It
builds “environmental consciousness” and “community orientation” in its overall image
through sponsorships and theme creation. The company also continuously improves and
up-dates the retail ambience through systematic renovation at their premises.

In USA, Quiktrip also uses consumer experience to reinforce its price based
strategy. Surveys of Quiktrip consumers show extremely high value attached to their
overall experience at the pump premises. While Quiktrip ensures a warm and congenial
experience for its consumers by recruiting and grooming highly motivated individuals, it
also strikes the right chord with its consumers by storing their favourite drinks and
snacks. Quiktrip management believes in reflecting an image of “we do everything right”
in all its direct and indirect consumer interaction. Technology can also be used to greatly
enhance the consumer experience. Many petroleum majors have adopted latest
technology to ensure that consumers have a fast and hassle free service. These are mainly

58
in terms of the “swipe at pump” facilities, “at pump ordering” of non-fuel items through
wireless microphones, customized electronic reports for corporate fleet programs etc.
Mobil Speedpass is a good example of successful differentiation through technology-
enabled services. (Mobil Speedpass Automatic miniature radio transponders attached to
key chain or affixed to vehicles’ rear window. Transponder automatically transmits
unique, secure ten digits that are recognized by an electronic system located at the pump.
These electronic devices enable automatic charging of fuel purchases to a designate credit
or check card. All these are at no direct or indirect cost to consumers).

In India, where many shoppers are highly relationship oriented, personalization of

the consumer experience could offer potential for differentiation and maintaining loyalty.
Consumers attach significant importance to the “experience” within the premises in terms
of quick service, attendant disposition and overall ambience in choosing their petrol
pumps. Most have a stronger loyalty to the specific station than the petroleum brand.
Developing a brand offering for the ‘trust seeker’ with a promise of “We make you feel
special” could be a powerful strategy as long as the retailer is able to ensure consistency
of delivery across locations and over time. An experience based differentiation strategy
could be particularly relevant to existing petroleum retailers in India, who would benefit
from strengthening of their bond with the existing consumer franchise, thereby increasing
the barriers to entry for new players.

Key success factors in service based differentiation strategies:

≈ Ensure quality of the human interface through people selection, training
and development.
≈ Ensure consistency of service delivery across locations and over time.
≈ Systemize the consumer experience delivery process.
≈ Establish service recovery procedures.
≈ Use technology to enable better consumer experience.
≈ Personalize the experience.

59
 Service related
features

Personalized Consumer
experience
Speed of service
Product related Attendant
features disposition Brand
Station Ambience building
Quality ? linked to
Quantity ? customer
Location maturity

Fig 21: Successful brand-building strategies will evolve from “product” related features to “service” related features
Source: AT Kearney

6.5) QUALITY & QUANTITY BASED DIFFERENTIATION

Customer are still cynical about Q&Q, however they would like to take it for
granted that the fuel provided to them is of utmost quality and perfect quantity. A large
base of ‘trust seeker’ segment exists who would be loyal to a company for a long time if
they are satisfied with the Quality and quantity provided to them. Challenges are
organization wide implementation of checks & balances and communication of the same
to customers. Companies are coming out with various anti-adulteration measures to give
the customers the best quality of fuel.

60
 Terminals Transportation Retail outlet Consumer

Comprehensive sealing Accurate preset premix

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

Remote diagnostics of
key components in
dispensing units

Fig 22 : Q & Q – A systems Approach

One recent example of how seriously companies are working in this matter is the
‘Revolutionary Marker System to eliminate adulteration of motor fuels’. The new
generation marker system will also ensure quality to customers of diesel and petrol. The
adulteration of diesel and petrol with marker-blended kerosene would immediately show-
up when tested using a simple kit through a simple visual check. The oil industry has now
become vigilant against the unscrupulous-habitual adulterators so that best products and
services are provided to the consumers.

The new marker system being introduced for the first time by the Oil Industry in
alignment with the international practices is expected to curb to a large extent auto fuel
adulteration using kerosene. Adulteration in auto fuels is essentially driven by the huge
price difference between auto fuels like petrol & diesel and potential adulterants like
kerosene, Naphtha and other industrial aromatic solvents. In the first phase, the marker
will be introduced in the entire quantity of kerosene that is supplied by Oil Marketing
Companies (OMCs). Based on examination by Petroleum Planning & Analysis Cell
along with Oil Marketing Companies, the marker system developed by M/s Authentix
was found to meet the various characteristics and requirements identified by the Oil
Industry. The dosing of markers in kerosene will now be carried out at Oil
Terminals/Depots of OMCs.

61
 The revolutionary marker will provide a new thrust to the oil companies, which
have been facing the scourge of adulteration for a long time now. Field trials using the
marker were initially conducted successfully by the oil industry, after which it is now
slated for an all-India launch. All kerosene supplied by OMCs will now be marked at the
Terminals/Depots of the oil companies. In the first instance, test kits will be provided to
the field officers of OMCs to enable them to check for adulteration of auto fuels during
their inspections. The tests are simple and it is possible to visually detect even small
traces of kerosene e.g. 1% in auto fuels using a simple but highly accurate and effective
test kit.

Speaking about other measures to check adulteration Shri Murli Deora informed
that the Petroleum Ministry has been taking several steps to check adulteration of auto
fuels. Periodic monitoring undertaken by the OMCs in conjunction with the State
Government authorities and the tracking of Tank Trucks through Global Positioning
System are some of the recent initiatives. The Oil Marketing Companies have also
launched automated facilities in their retail outlets with tank level sensors and digital
dispensers connected to a server that monitors that quantity of the product stored and
dispensed through the nozzles. With the help of cutting edge technology, the oil
companies now control the entire supply chain from Oil Terminals to Retail Outlets. The
various IT-enabled initiatives are therefore aimed at securing product transfer between
the supply locations and petrol stations. It covers the entire retail outlet forecourt & back
office operations, including monitoring through electronic gauges, temperature and
density measurement through sensors, besides dispenser unit controls that are linked to an
automatic bill printing facility. The nefarious elements, which indulge in adulteration,
need to be tackled by efficient coordination with the policing authorities at both the
Centre and state Government levels.

6.6) NETWORK PLANNING

62
 An optimized network is needed with enhanced capital productivity, high
throughput per RO & high market effectiveness. Network planning is required to
maximize the returns from the existing retail infrastructure and to plan future investments
and other changes that maintain or improve that return." By:

 Implementation of Strategic Plans

 Acquisition/rationalisation/rebuild/conversion
 Improved decision making
 Improving competitive advantage
 Managing change

Market types COCO CODO DOCO DODO

Metro
ale
De

CODO DODO
Operations

Semi-Urban
Rural
any

COCO DOCO
mp
Co

Highways
Company
Dealer
Ownership Evolution of
When dealer not petroleum retailing
ready to sell outlet through
Impeccable quality Advantages of Prevent poaching Supermarkets in
control Company Reduce entry barriers for metros
Prevent poaching in operations like small dealers in semi- Independent dealers in
highly competitive standardization of urban/ highways semi-urban, Rural
environment customer Reduce operating costs in areas with
Price control experience semi-urban/ highways relationship selling

Fig 23: Different retailing models to set up network across different markets
Source: AT Kearney

The journey of network planning starts with site classification, competition

assessment (no.of competitors in a particular area), individual site strategy depending on
the kind of consumers coming in, proposal evaluation working on financial, technical,
marketing and economic feasibility of a proposed plan, network optimization
(COCO,CODO,DODO,DOCO,etc. procurement, etc.), performance measurement with
regular and sudden audits. The strategy for each location, ranging from investment to
disposal is driven by this analysis.

63
 The retail strategy must govern the entire network planning process. The main
issues to be considered include maximizing volume, profitability, control, non-fuel
activities, optimization - (operational improvements), and investment required. Network
planning tools involve people, information, communication techniques, benchmarking
techniques, performance potential of the employees and the site selected, economic
evaluation of the proposal, implementation of the plan, audit and evaluation. To sum it
up, continual development and integration is the key.

Various locations have different effects on the volume of fuel sold at a petro retail
outlet. Some of them are encapsulated below:

LOCATION ATTRIBUTE INFLUENCE ON VOLUME

Carriageway barrier none Negative

Depth of plot of land Positive
Number of gensets and tractors in trade area Low Negative
Number of gensets and tractors in trade area None Negative
Households in trade area Medium or better Positive
Income Profile in trade area High Positive
Internet Competition Medium or better Positive
Relative competition Positive
Nearby_market Positive
Percentage of Traffic 3 Wheelers Negative
QSR Competition High Negative
Shop Competition Medium or better Positive
Speed_60_to 90km Negative
Speed_under_30km Positive
State_Border nearby Positive
Tax_Disadvantage Negative
Truck Hours Restricted pm Negative

64
Truck_Restriction (yes/no) Positive
Work Based Cars in trade area Medium Negative
Work Based Cars in trade area Medium or better Positive

6.7) SUPPLY CHAIN OPTIMIZATION

The main focus here is the least cost of placement with no stock outs. For this the
companies use various supply chain tools like, complex demand forecasting models,
automated inventory monitoring, scheduling tools, tanker capacity utilization tools .
vehicle tracking system/Telematics, integrated supply chain solutions, end to end Q&Q
implementation, etc.

Supply chain starts before physical distribution. It involves procuring the right
inputs (raw materials, components and capital equipment), converting them efficiently
into finished products, and dispatching them to final destinations. The supply chain view
sees markets as destination points, and amounts to a linear view of the flow. A broader
view sees a company at the center of a value network that includes its suppliers and its
suppliers’ suppliers and its immediate customers and their end customers. The company
should first think of the target market and then design the supply chain backward from
that point.

The following strategic and competitive areas can be used to their full advantage
if a supply chain management system is properly implemented :
 Fulfillment – “ Ensuring the right quantity of parts for production or products for sale
arrive at the right time.” This is enabled through efficient communication, ensuring
that orders be placed with the appropriate time available to be filled.
 Logistics – “Keeping the cost of transporting materials as low as possible consistent
with safe and reliable delivery.” Here the supply chain enables a company to have
constant contact with its distribution team. Efficient vehicle tracking systems have
been developed by companies in this respect.
 Production – “Ensuring production lines function smoothly because high-quality

65
 parts are available when needed.” Production can run smoothly as a result of
fulfillment and logistics being implemented correctly.
 Revenue and Profit – “Ensuring no sales are lost because shelves are empty.”
Managing the supply chain improves a company’s flexibility to respond to unforeseen
changes in demand and supply.
 Costs - “Keeping the cost of purchased parts and products at acceptable levels.”
Supply chain management reduces costs by increasing inventory turnover on the shop
floor and in the warehouse.
 Cooperation – “Cooperation among supply chain partners ensures mutual success.”
Collaborative planning, forecasting and replenishment (CPFR) is a longer-term
commitment, joint work on quality, and support by the buyer of the supplier’s
managerial, technological and capacity development. This relationship allows a
company to have access to current, reliable information, obtain lower inventory
levels, cut lead times, enhance product quality, improve forecasting accuracy, and
ultimately improve customer service and overall profits.

Fig 24: Determining optimal order quantity

Source: “Marketing Management” by Philip Kotler

66
 Increase
Pipeline Cheapest and most efficient
Transport Transportation mechanism

Automated
Implement Fuel
SCM Improved Dispensing
Solution Operational
efficiencies
Improves cost and operational
Integrated supply chain Efficiencies at the retail outlets
Management solution from
crude buying to product
procurement.

Fig 25: Operational efficiencies initiatives

Source: AT Kearney

6.8) USING INFORMATION TECHNOLOGY AS KEY ENABLER

Oil and gas is a global, cost-competitive business. Technology investment

priorities in the industry have been to improve exploration, oil field recovery and refinery
operations. Due to increased system complexity and demands, threats of terrorism and
security breaches — not to risks.

Information management is a crucial issue for oil and gas companies. For
instance, seismic data of a 20 square-mile survey for an exploration company can easily
generate 800 GB of data. The amount of data that is being stored and the duration it is
kept online are growing rapidly, but the resources to manage it are not. This presents a
considerable challenge to companies striving to exploit information for competitive
advantage and storage professionals tasked with storing, managing, and protecting that
data.

67
 Oil Retail
Customer
company outlet

Monitoring & control Automatic reconciliation Assurance of Q & Q

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

Fig 26: Using IT in different areas of the petroretail sector

Source: AT Kearney

One recent example of how IT has helped the oil companies to service the
customers better is “Cashless Transactions for Convenience Retailing”. These provide
convenient payment methods using smart card/magstripe technology. These provide
improved efficiency, effectiveness and better control. This is a stepping stone in market
initiatives towards better market share with loyalty marketing. The companies are trying
to take advantage of innovative technologies like sms,etc.

DRIVER CARD Pool Drivers

Corporate Cars

Both Cards Used For Each

Transaction
Signature Or PIN No.
VEHICLE CARD Security / Reduce Abuse

Fig 27: Dual card concept

Source: Cardtrend Petrol payment marketing solution.

68
 Drive Drive Drive
r FLEET r FLEET r FLEET

7002841 310009 000033 7002841 310009 000033 7002841 310009 000033

JABATAN PERDANA MENTERI JABATAN PERDANA MENTERI JABATAN PERDANA MENTERI
Awg Osman Kassim Awg Osman Kassim Awg Osman Kassim

Fig 28: Single Cards Concept

Source: Cardtrend Petrol payment marketing solution.

HOW A PETROCARD OR A FLEET CARD WORKS:

Petrol Station
Card Management System Host

69
Steps:
 Customer fuels vehicle and wishes to pay
 Cashier enters sale details
 Fleet/Cash card presented to card reader terminal.
 Fleet/Cash card swiped for transaction authorization (Vehicle Card swiped for
verification, if applicable)
 Cardholder signs charge slip (or PIN based)
 Card Terminal stores details of transaction
 Transaction details upload to backend for posting

Other emerging trends in forecourt retailing enabled with the help of IT include
Automated dispending units, Smart dispensing unit offering merchandise, promoting
store sales,etc., additive Injection System integrated with Dispensers, Autonomous
Robotic fueling Station, Payment by Touch –“Bio Pay” (The technology enables the
payment for transaction by the “touch of finger”.), Aggregation of Payment options
-Magnetic Stripe card, Smart Card or RFID Card can be accepted by single terminal
which may be fitted in Dispenser or as a standalone unit (OPT), Paying from Home
–“iFuel” Kiosk, Internet based Payment system, RFID Tags–Radio Frequency
Identification Tags, used for communication between Dispenser and Customer. (Hand-
Held Key Fobs-The tag provides customer’s validation by waiving it near Dispenser’s
bezel, Vehicle Mounted Tags–These Tags are mounted on the vehicle. The vehicle
information Box, when arrives in the vicinity of Dispenser’s Tag, downloads relevant
information to Dispenser Vehicle), Wireless automatic fuelling, Increased Flexibility
of Payment -Cash Acceptor integrated with Dispenser,etc.

Fig 29: Cash acceptor integrated

With dispenser

70
 7) CHALLENGES FACED BY OIL MARKETING COMPANIES

The last few years have seen several developments in India’s petroleum sector
that continues to make a transition from a fully controlled industry to one that is driven
entirely by market forces. However, the highly sensitive nature of the industry and the
potential impact of a fully decontrolled price regime on the various stakeholders have
resulted in a situation where the industry is buffeted by a host of conflicting forces. For
instance, while refining margins remain buoyant, fetching large profits for the stand-
alone refineries, spiralling crude prices and the inability of OMCs to increase retail prices
in proportion to the rise in crude prices imply that the marketing sides of the business
have started incurring large losses. The GoI has been taking several steps, albeit piece-
meal, to ensure that such losses are shared among the various stakeholders, but this in its
turn points to a high degree of policy or regulatory risks for the industry. Simultaneously,
the industry also has to contend with emerging challenges like exposure to volatility in
international refining margins, increase in competitive pressures from new entrants,
surplus in petroleum products in the domestic market, and risk of substitution for certain
petroleum products.

7.1) PROFITABILITY OF RETAIL OUTLETS

Growing competition in the retail market has prompted the OMCs to aggressively
expand their retail networks. While this strategy has acted as a protective factor against
competitive pressures, it has also resulted in a sharp decline in the per pump throughput.
The latter is a key factor determining the viability of any retail outlet, given the low
margins (gross margin of around 1.75%) in the automobile fuel dispensing business.
Lower pump throughput and consequently lower profitability, along with higher working
capital requirements (because of the sharp rise in fuel prices), have adversely affected the
viability of the retail business, especially for new entrants. 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.

71
 Pre Deregulation Post Deregulation

Operating Exp + Cap charge

Station Opening
Margin

Station Closing
Operating Expenses

Time
Fig 30: Station opening and closing margins: Classical Theory

Pre Deregulation Post Deregulation

Revenue Expense + Cap charge Station Opening

M
A
R
G
I
N
S Revenue Expenditure Station Closing

2002 2004 2006

Fig 31: Station Opening and Closing Margins: India Story

72
 No. of ROs
35000

30000 27150
22940 31643
25000
Growth in 20000
18239 18848 19809

no. of ROs 15000

10000

5000

0
FY01 FY02 FY03 FY04 FY05 FY06

Throughput
250
201 192 189
200 166
149
150 128
KL

Throughput 100

50

0
FY01 FY02 FY03 FY04 FY05 FY06

Fig 32: Reality of Petroleum Retail in India

The reason behind rapid increase in retail outlets:

 One company adds new outlets and gains market share.
 Others respond by opening new outlets to regain market share.
 Net result, overall volumes remain almost the same.
 Volume per outlet (PPT –Per pump throughput) drastically falls.

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

100

50

0
FY01 FY02 FY03 FY04 FY05 FY06 FY07
Fig 33: Projected decrease in the volume per retail outlet.

73
 Even if 60% of retail outlets 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.

Throughput of ROs
60%

50% 50%

40%
% of ROs

30% 20%

20% 15%
Unprofitable 8%
5%
10% Borderline Profitable 2%

0%
50 100 150 250 350 >350
Volume in KL
Fig 34: Throughput of ROs
To offset the pressure on margins, some of these outlets have gone in for non-
merchandise sales, the profits from which have however not been on the expected lines.
Besides, the increasing availability of CNG in major cities is also having an impact on the
automobile fuel retail business. 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. 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. OMCs may have to revise dealer margins upwards, which could again
impact the marketing margins given the constraints in revising consumer prices.

7.2) REGULATORY ENVIRONMENT

Consumer price has been linked to import parity. Oil marketing companies are
doing everything possible for improving their retail margins. Regulatory Body has been
set up. Companies are looking for accelerated Network Expansion and aggressive Brand

74
building by existing Players. Restructuring of Oil PSUs is going on. It has become
especially difficult for new players to enter the market because of various factors like:

 Proliferation of Network by Oil PSUs.

 High Land Cost in cities.
 Statutory approvals
 National Highways – New Guidelines.
 Technology up gradations.
 Competing Fuels – CNG/LPG.

Other challenges or in other words scope for growth for the oil companies include
transition from commodity to brand, increasing customer service expectations,
introducing new branding initiatives like Club HP, In & Out, Pure for Sure, Xtra
Care,etc., promoting more and more of branded fuels like BPCl’s Speed ,Hi-Speed
Diesel, HPCL’s Power and Turbojet, IOCL’s Xtra-Premium and Xtra Mile,etc.,
aggressive loyalty programs like petrocards, fleetcards, co-branded cards,etc., and
competitive pricing of branded fuels as normal fuel is till now priced by the government.
The companies are facing various problems like Price distortion which leads to
adulteration of petrol and diesel, Network planning dilemmas like Limiting pricing
discovery in spite of deregulation and non-uniform tax structure across states. The current
scenario also fails to provide a level playing field for the new entrants in the petrol retail
business.

60

50
% Market Share

40

30

20

10

0
2001-02 2002-03 2003-04 2004-05 2005-06 Ap-Dec'06
IOC Grp BPC HPC Others Linear (IOC Grp)
IOC includes AOD, IBP & IOC
Fig 35: Impact of new entrants on existing oil companies (others include pvt cos. like Ril, Shell,Essar,etc. )

75
Source: Ficci
Reasons for decline in retail sales growth:

 Increasing fuel efficiency of vehicles

 Improved road conditions
 Introduction of alternate fuels like CNG
 Reduced average running of personal vehicles due to multiple vehicles ownership
per family
 Improved public transport – introduction of Metro in Delhi
 Increasing use of higher capacity trucks for carrying goods reducing per km/per
litre fuel consumption

7.3) MANAGING TECHNOLOGY

One main challenge for these oil companies is managing the technology which
they have employed at their retail outlets. Especially it is a challenge in India because of
the pathetic power arrangements in most states here. As the quality of power supply is so
poor, so the oil companies have to put in extra investments for the DG sets that have to be
maintained by them throughout to cater to the customer as well as manage their own
automated systems.

Then network expansion is an opportunity as well as a threat for these companies

as a lot of factors come into play while expanding their network. The companies have to
think about the feasibility and viability of setting up a retail outlet in a particular area
depending on the demand-supply situation in that area and various other issues like
governmental interventions, policies, taxes and tariff structure, and the competitors acting
in the area. This also becomes a problem because of the skewed centers of consumption
in India where in two areas normally don’t have the same demand-supply scenario.

The above and many factors thus hamper in the companies’ journey towards
enhancing their capabilities and their commitment towards their customers, their

76
employees, government and to the country as a whole. It is again difficult to motivate the
employees with respect to award of performance based compensation because of the
volatile margins of these companies themselves which acts in constraining compensation.
The training costs are also increased which adds to the extra investment. The training is
essential for the staff to manage and efficiently and effectively operate the automated
systems at the retail outlets. This requires a high turnover of staff who can handle
automation.

Although it is important to manage the entire supply chain, it is a difficult task.

Nowadays automated systems and technologies have helped the companies a lot in
maintaining efficient and effective communication but still managing these systems is
another challenge and requires additional investment and skilled manpower.

7.4) THREAT OF THE SUPERMARKETS

This is not that important from the Indian point of view but is a challenge faced
by oil companies in other countries. In countries like US, UK,etc., supermarkets also sell
fuel along with other merchandise. Compared to the pure fuel retailers, these
supermarkets are much better placed to serve the customers because of being ubiquitous.
These supermarkets are thus eating up the share of the pure fuel retailers.

One big advantage to the supermarkets is that they have low site operating costs
as it shared by the supermarket expenses. They provide exemplary customer service
standards much better than the pure fuel retailers as they are in the business of hospitality
from a long period. The supermarkets also provide host of value added services much
more the pure fuel retailers to the customers thus attracting them to these sites. It is also
possible for companies to introduce many possible cross loyalty programs.

The various benefits or value added services provided by supermarkets which are
not all provided by pure fuel retailers include:
 Wider availability of twenty-four hour opening,

77
  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

One example of how supermarkets have taken off business from the oil
companies and independent retailers is from UK. 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 consequences:

 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.

The above are a few challenges which the oil companies have been facing or will be
facing in the near future if they don’t work on the solutions from now on.

78
8) COMPARISON OF INDIAN OMCs

Here is a year wise analysis of the three Indian Oil marketing companies (OMCs).
How these companies have been faring in the last years and analyzing which company is
better in terms of market sales, gross profit and retail network.

MARKET SALES OF OMCs YEARWISE (MT)

2001-02 2002-03 2003-04 2004-05 2005-06

IOCL 47.17 46.46 46.81 48.86 47.52
BPCL 19.15 19.86 20.37 21.03 21.63
HPCL 18.02 18.84 19.53 20.09 19.48

Table 1: Comparison of market sales of the three OMCs from 2001-02 to 2005-06

Market Sales
60
50
40
Mkt sales(MT) 30
20
10
0
02 03 04 05 06
0 01- 0 02- 0 03- 0 04- 0 05-
2 2 2 2 2
Years
IOCL BPCL HPCL

Fig 36 : Comparison of market sales of the three OMCs from 2001-02 to 2005-06

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 GROSS PROFIT (Rs. Crores)

2001-02 2002-03 2003-04 2004-05 2005-06

IOCL 7533 10863 12013 8722 9931

BPCL 2114.4 2720.4 3301.6 2092.2 1422.6

HPCL 2046.69 3139.06 3642.66 2381.83 1134.07

Table 2: Comparison of the gross profit earned by the three OMCs from 2001-02 to 2005-06

Gross Profit

14000
12000
10000
Gross Profit (Rs. 8000
Crores) 6000
4000
2000
0
02 03 04 05 06
01- 02- 03- 04- 05-
20 20 20 20 20
Years

IOCL BPCL HPCL

Fig 37: Comparison of the gross profit earned by the three OMCs from 2001-02 to 2005-06

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 RETAIL OUTLET NETWORK

2001-02 2002-03 2003-04 2004-05 2005-06

IOCL 7870 8034 9138 10228 11754

BPCL 4711 4854 5530 6426 7332

HPCL 4729 4863 5502 6667 7313

Table 3 : Comparison of no. of retail outlets of the three OMCs from 2001-02 to 2005-06

RETAIL NETWORK

12000
10000
8000
No. of ROs 6000
4000
2000
0
20 20 20 20 20
01 02 03 04 05
-0 2 -0 3 -0 4 -0 5 -0 6

YEARS

IOCL BPCL HPCL

Fig 38: Comparison of no. of retail outlets of the three OMCs from 2001-02 to 2005-06

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 Studies show that although IOCL is much ahead in terms of retail outlet network
but still BPCL stands out when it comes to market sales. IOCL is better placed having a
good gross profit but that’s just because of the large network and handling bigger
volumes.

BPCL is clearly the winner in the Indian petroleum retail sector due to a variety of
factors including better customer service, branded fuels (it was the first to launch branded
fuel in India), and other value added services it provides to its customers. One winning
strategy was to launch its "new generation" high performance petrol called "Speed". By
way of this maiden endeavour, within the Oil marketing sector in India, Bharat Petroleum
has successfully initiated the concept of branding to a trade that was, until now, largely a
commodity business. Bharat Petroleum's efforts have all along been to build a superior
understanding of customer needs and relentlessly work towards fulfilling these needs.
Enhanced Fuel Proposition movement displays the 'Pure for Sure' signage very
prominently at the Outlet. Retail Outlets have been equipped with state-of- the-art
modern infrastructure, including the Multi Product Dispensers to pre-set price and
quantity of fuel and Electronic Air Gauges facilitating precise inflation of tyres.
Attractive Canopies are suitably designed to provide shelter and adequate lighting of the
forecourt at most Retail Outlets.

On the Non-Fuel front, Bharat Petroleum has introduced the Errand Mall concept
successfully at select markets. Called the 'In & Out' , these malls offer the customer a
broad range of facilities and brands to choose from. ATM's, Cybercafe, Courier services,
Laundry, Photo Studio, Music, Fast Food, Greeting Cards, Courier Services, Bill
Payments, Movies / Entertainment Tickets, etc. have made Bharat Petroleum's Retail
Outlets a happening place and indeed an rewarding experience for motorists. To make
life more convenient and rewarding for customers, Bharat Petroleum has introduced the
'Petro Card™' for individual customers and the 'SmartFleet Card' for fleet owners.
Using the Petro Card entitles the customer to PetroMiles under the PetroBonus rewards
programme. Bharat Petroleum has also pioneered the concept of convenience stores at
select petrol pumps that operate under the name 'Bazaar'. These Bazaars provide a wide

82
range of convenience items and fast foods to customers in a clean, air-conditioned and
friendly environment.

Thus we come to the conclusion that BPCL through its various value added
services and its branding strategies has emerged as the market leader out of the three oil
marketing companies in India.

83
9) CASE STUDIES

9.1) EFKON IN NATIONWIDE FUEL PAYMENT & LOYALTY

PROJECT OF HINDUSTAN PETROLEUM CORPORATION IN INDIA

EFKON AG - a multinational company based out of Graz, Austria, is a world

leading provider of Smart Card based multi-application Transportation Payment
Solutions and Active Infrared Communication Systems globally. EFKON provides
cutting edge solutions for electronic toll collection and enforcement systems, smart card
payment systems, and central clearing house operations.

EXECUTIVE SUMMARY

Hindustan Petroleum Corporation Ltd. (HPCL) is the second largest oil

marketing company in India and is a Government of India Undertaking. HPCL runs 4500
retail outlets in across India. Few years back HPCL embarked on a program to roll out
smart card based retail and fleet loyalty products using e-payments. ICICI Bank, India’s
second largest bank was chosen to do cash management, sales and banking operations for
the project. HPCL & ICICI Bank chose Efkon as the technology provider for the project.
The project includes three different programs, one targeted at retail customers (HP
Smart1) and one targeted at fleet owners (Drive Track) and third is credit fleet card
integrated into the credit management host of ICICI Bank (Drive Smart).

HISTORY OF THE PROJECT

To execute the project set-up a joint venture in India: I-Pay Clearing Services (P)
Ltd. Efkon owns 74% of IPay and control the management of the company. The project
was set-up in record time of 3 months from the date of signing of the ‘Application
Service Provider’ agreement with ICICI Bank. The project at its inception targeted to
capture 300K customers and approx 1500 retail outlets in the first 3 years. However, the
project in its first years of operation became extremely popular and successful with
customers. As a result of extremely stable backend system which could be easily

84
upgraded for increased volumes I-Pay was able to scale-up operations in-line with the
fast growth in customer and transaction numbers. Within the first 3 years the customer
base has crossed 1050K. Today the project covers every major city and highway in the
country and has spread across 2500 retail outlets of HPCL.

PROJECT BRIEFS:

Till date EFKON AG, via I-Pay Clearing Services (P) Ltd. has executed 4 key
projects for HPCL via ICICI Bank Ltd. The following section provides a brief overview
of the projects:

Smart1 Program (e-Purse for Private Customers)

HPCL envisaged a fuel loyalty program for retail customers aimed at providing
loyalty benefits for vehicle owners primarily the urban population. Giving multiple
options of enrollment like over the counter cards (without visual zone personalization)
and bulk orders besides the normal application based enrollment process enabled easy
penetration and acceptance of the product by the urban masses. Once enrolled into the
program the card owner can go to any of the 2500+ HPCL fuel outlets, load the money in
the ePurse of the card and make purchases pertaining to Fuel, lubes, services etc. Smart 1
program is also supported by ancillary third party organizations like TOP GEAR which
provide services like free towing in case of break down, and attending any vehicle
problems in case of a break down for example free towing, fuel, parts failure etc. for any
reason on the highway. Thus the vehicle owner can rest assured that once enrolled into
the program he need not worry about maintenance and upkeep of this vehicle. The
following are the key highlights of the project :

 600,000+ cards issued till date

 2,500+ outlets deployed
 Multi-application system (Fuel, Toll)

85
  Pan India Central Clearing house system enables settlement of >15K M INR
worth of transactions annually.
 Complete card lifecycle management processes like enrollment and issuance,
card load re-load, fuel rate table transfer, blacklisting, blocking/unblocking
and replacement are inbuilt into the program
 Web based MIS tool for account administration
 Enables HPCL to track and trace lifetime value of the customer,
understanding consumption patterns across geographies,
 Generates additional float for ICICI Bank

Drive Track Program (e-Purse for Fleet Customers)

HPCL being a fuel retailing company wanted to create a loyalty program that
would enable targeting the next ig group of customers who were high volume low
frequency purchasers viz. the fleet operators unlike the Smart1 program wherein the
customer profile is usually characterized with low volume high frequency of Usage.
EFKON lent its support to this program after thorough understanding of ground realities
and designed a robust complete system for HPCL. The issues faced by Fleet Operators in
the traditional over-the-counter, cash based transactions methods were: Ascertaining the
true cost of trips in light of consumption of fuel, toll, repairs and en-route expenses, large
amount of cash carried by the driver, tracking and tracing the location of the vehicle,
stopping mal-practices and pilferage, big lead times in case of emergencies as there was
no mechanism of transferring funds to the driver in absence of two way communication.
EFKON designed a system that addresses all the above key problems. The following are
the key highlights of the project:

 ePurse on the card enable the fleet operators to pre-load the card with cash
equivalent amount to buy fuel, pay for services etc. at the petrol/gas station/
groceries on the highway
 Remote re-load option to remotely transfer cash on the card in case of
emergencies

86
  An inbuilt mechanism of tracing point to point movements of the vehicles
 700,000+ cards issued till date
 2,500+ outlets deployed
 Pan India Central Clearing house system enables settlement of >15K M INR
worth of transactions annually.
 Complete card lifecycle management processes like enrollment and issuance,
card load re-load, fuel rate table transfer, blacklisting, blocking/unblocking
and replacement are inbuilt into the program.
 Web based MIS tool for account administration
 Enables fleet owners to ascertain the running cost of their fleets.

Drive Smart Program (Credit Card for Fleet Customers)

ICICI Bank provides comprehensive range of financial products to vehicle/Fleet

owners across India. Being a forward thinking bank, ICICI conceptualized a system
wherein credit could be extended to large fleet operators based on their credit worthiness
with the bank. EFKON was again chosen as a worthy partner to enable ICICI Bank to be
in good stead with the visions of the bank. EFKON accordingly designed a system called
“Drive Smart” program which enabled extension of credit purchases to fleet operators.
The following are the key highlights of the project:

 100,000+ cards issued till date

 2.500+ outlets deployed
 Multi-application system (Fuel, Toll)
 An inbuilt mechanism of tracing point to point movements of the vehicles
 Pan India Central Clearing house system enables settlement of >5K M INR
worth of transactions annually.
 Complete card lifecycle management processes like enrollment and issuance,
card load re-load, fuel rate table transfer, blacklisting, blocking/unblocking
and replacement are inbuilt into the program

87
  Web based MIS tool for account administration
A recent project for HPCL called eFuel Controller project enables customers to pay via
cash, credit card or debit card option along with loyalty card option thereby giving
tremendous flexibility to the end customers.

Efkon Scope of Work

I-Pay has played the role of an Application Service Provider & System Integrator
for the project. The entire software has been designed and deployed by Efkon and
integrated into the front-end equipment. The major scope of the project is:

 Design & development of the clearing house, terminal and network software.
 Set-up of a nation-wide network on a Virtual Private Network (VPN)
backbone.
 Set-up of the clearing house host and deployment of the same.
 Development of Front-end Terminal embedded software.
 Design & Development of Contact-less smart card readers.
 Deployment of terminals and smart card readers.
 Integration of smart card management host with the ICICI Bank’s host Vision
Plus.
 Set-up of Operations centre to handle:
• Smart card personalisation bureau.
• Despatch management.
• Network management.
• Card data management and transaction management.
• Help desk.
• Customer call centre.

Execution of the project

Challenges

88
 The major challenge Efkon was to develop in a short time a customized and future
upgradeable clearing house software. Further, it was the first experience for Efkon to
provide ASP services. Efkon had always been a projects company and this was its first
experience at being a technology service provider. A large organisation had to be built in
Austria & India to enable the operations. Efkon took major business risks by investing in
the software development without assured returns. Much of the returns were dependent
on the success of the program and the stability of the clearing house host. In both cases
Efkon came out with flying colors. The system today has multi application capabilities
based on global platform specifications. In addition the contact less terminal readers were
developed by EFKON. The multi tier architecture with so called “hubs” as terminal
concentrators supports fully offline capabilities.

Execution

The project was implemented through cross country teams who worked extremely
closely to achieve the goals of the customer. The fast ramp-up of the project is a proof of
the robustness of Efkon technology and quality. Today over a million+ customers have
been issued smart cards under these projects.

89
9.2) CLASSIFYING SITES AS VOLUME OR PROFIT DRIVERS
Source: www.kssg.com

ConocoPhillips, a multinational oil company, markets petroleum products through

approximately 14,300 outlets in 44 US States, including approximately 330 owned and
operated.sites. The Phoenix market is densely populated with a number of major
competitors including Chevron, Texaco and Mobil, low cost retailers such as Arco and
Diamond Shamrock and a number of “Big Box” retailers such as Albertsons and
Safeway. The market is fiercely competitive and can include more than 100 gas stations
within a 3 to 5 mile radius. In recent times, QuikTrip (a low price, high volume outlet)
also entered the market.

The Challenge

How to analyze sites to understand their relative price-volume sensitivity and use
the findings to apply appropriate pricing tactics? To avoid trying to grow volumes at sites
with low price-volume sensitivity that may be better suited to a profit-oriented strategy?
Raising prices will increase gross profit but have a negative impact on volume (assuming
costs remain constant). Conversely, reducing prices will increase volume but could have
a negative effect on gross profit. However, individual sites will exhibit different levels of
volume or profit change for a given price move. The challenge was therefore to:

 understand the extent to which volume or gross profit at a particular site

changes in response to a price move;
 classify the site as a volume-driver (higher price-volume sensitivity and
greater volume response) or profitdriver (lower price-volume sensitivity)
 apply appropriate pricing tactics to maximize gross profit for given
network volume targets.

90
 The study involved the pricing of 38 gas stations and analysis of volume and
gross profit performance.

The Solution

The measurement of site sensitivity was paramount to the study and was
monitored closely by the ConocoPhillips team. During the initial set-up of the PriceNet
system the sell-out volumes, own retails and competitor retails are used to establish these
price-volume sensitivities by site and by grade. The sensitivities then provide a number of
key insights to the market:

- main competitor(s) and competitor rankings

- site and individual grade price sensitivity
- classification of a site as volume or profit driving

Using these sensitivities KSS helped ConocoPhillips redefine a pricing strategy

that included changing key competitor definitions at 20 of the 38 sites in the study and
applying tactics appropriate to site classification of volume or profit driver.

The Benefits

Figure 1 below highlights the five most price-sensitive sites and the five least
price-sensitive sites from the Phoenix market. The results clearly illustrate that highly
price-sensitive sites can support tactics to increase volume (market share) while
maintaining gross profit. In this case, a 0.55c decrease in price relative to competition
results in a volume increase of around 40% and a relatively small, almost negligible
change in gross profit. The sites with low price-sensitivity can support tactics to increase
gross profit while maintaining market share. A 0.5c increase in price relative to
competition results in a very small change in volume and an increase in gross profit of
8%.

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 Fig 39: Site sensitivity comparison

In a market where price changes are becoming more frequent and competition more
fierce, it is important manage your price position ensuring you maximize your volume
and gross profit potential. Working in this manner will clarify the markets in which you
price and help validate and, in many cases, refine your pricing strategy. Understanding
the sites as profit drivers or volume drivers would enable the oil companies to review
their pricing strategy and make more intelligent decisions on how to price.”

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10) CONCLUSION & RECOMMENDATIONS

Retailing is the most active and attractive sector of the last decade. While the
retailing industry itself has been present through history in our country, it is only the
recent past that has witnessed so much dynamism. It's the latest bandwagon that has
witnessed hordes of players leaping onto it. While international retail store chains have
caught the fancy of many travelers abroad, the action was missing from the Indian
business scene, at least till recently. The emergence of retailing in India has more to do
with the increasing purchasing power of buyers, specially post- liberalisation, increase in
product variety, and the increasing economies of scale, with the aid of modern supply and
distribution management solutions.

A definition of retailing is essential in order to be in a position to assess the

impact of retailing and its future potential. The current retailing revolution has been
provided an impetus from multiple sources. These `revolutionaries' include many
conventional stores upgrading themselves to modern retailing, companies in competitive
environments entering the market directly to ensure exclusive visibility for their products
and professional chain stores coming up to meet the need of the manufacturers who do
not fall into either of the above categories. Attractiveness, accessibility and affordability
seem to be the key offerings of the retailing chain.

Retailing is a technology-intensive industry. Successful retailers today work

closely with their vendors to predict consumer demand, shorten lead times, reduce
inventory holding and thereby, save cost. Wal-Mart pioneered the concept of building a
competitive advantage through distribution and information systems in the retailing
industry. They introduced two innovative logistics techniques - cross-docking and
electronic data interchange. Today, online systems link point-of-sales terminals to the
main office where detailed analyses on sales by item, classification, stores or vendor are
carried out online. Besides vendors, the focus of the retailing sector is to develop the link
with the consumer. `Data Warehousing' is an established concept in the advanced nations.
With the help of `database retailing', information on existing and potential customers is

93
tracked. Besides knowing what was purchased and by whom, information on softer issues
such as demographics and psychographics is captured.

FIVE PRINCIPLES TO CEMENT CUSTOMER TRUST:

T - Truth
Trust and solid relationships are built on telling the truth. Companies must maintain this
principle both with internal and external customers. It is imperative that this value is
represented in everything a company does. We have seen how the lack of solid ethics can
crumble even the largest of companies.
R - Responsibility
Trust is built when everyone within an organization realizes what their responsibilities
are and that they are held accountable for them. Choose to schedule reviews quarterly for
every member of the company to make sure they are aware of their responsibilities. Take
ownership of mistakes and be diligent to find ways to make corrections.
U - Unselfishness
Trust is built when employees give of their time and talent in the workplace and do it,
unselfishly. Customers appreciate the employee who goes out of their way to satisfy the
customer. Customers don't appreciate hearing how badly the employee wants to go home,
or how they didn't get a break, or how awful their schedule is.
S - Security
Trust is built on a feeling of security. Good lighting in the parking lot and store entrance,
fitting rooms with doors that lock, employees that handle ringing up a sale with accuracy,
and alarm systems that are visible are all ways to make the customer feel safe in your
place of business. Employees want to feel a sense of job security and that they are
appreciated for the job they do.
T - Teamwork
Trust is built when everyone within the organization feels a sense of ownership. How
well do your employees work together? Are they willing to go out of their way to help
each other out? Do the managers roll up their sleeves to help when the workload is
overwhelming? Is there a reward system in place that encourages employees to want to

94
excel? Most importantly, are there cheerleaders within the organization to keep the
momentum going when times are tough?

We are at a time when gaining a customers' trust is critical. It is a daily process,

on purpose. It is a time to maximize potential, ethically and to deal with conflict and
problems, with credibility.

The petroleum retailers are also not left behind. Forecourt retailing is yet to
emerge in a big way in India. But with renewed thrust from the oil companies, the
concept is poised for the next stage of evolution. The concept of forecourt retailing at
petrol stations is not new. It began in the 1980s when British Petroleum launched its first
convenience store. In India, where consumer interface was recognised as a key factor, the
concept was taken up in the late 1990s by Indian Oil Corporation, which started its multi-
purpose distribution centres at petrol pumps in semi-urban and rural areas. The concept
has been in vogue ever since. But recently it shot into limelight with oil companies trying
to milk this revenue stream for more moolah.

The oil marketing companies need to clearly identify customer needs and
establish a strong corporate brand targeting select customer bases. The companies need to
drive product and service offerings at retail outlets based on identified customer needs.
They should develop cost-effective retail outlets, upgrade existing assets for better
throughput and customer service. They should orient their distribution pattern and
logistics in tune with demand in target markets and develop superior franchisee selection
and training systems along with appropriate risk-reward mechanisms to drive
performance.

In this respect, the oil companies have been coming up continuously with various
initiatives to differentiate themselves from other competitors and attract customers. They
have come up with various loyalty programs, cash card payment solutions, convenience
stores, ancillary services, food outlets, various other value added service at the retail
outlets to give the customers value for their money. Although the above matter to a large

95
extent in bringing people to a retail outlet, the main drivers include convenient location,
branded fuels and assurance of quality and quantity. Thus the companies should look for
network expansion, supply chain optimization, steps towards anti adulteration measures
and aggressive branding strategies,etc. to give the consumers the best they can.

Focus on cherry-picking high through-put sites

Water-thin margins
Match ‘local’ cost structures, especially capex
No cookie-cutter approach – deploy formats ranging
from ‘bells and whistles’ to ‘stripped down
versions’
Divest unprofitable sites

Regulatory Ensure adequate local talent and senior

uncertainties management attention on regulatory
management

Introduce dealer management as a core

Fragmented channel function – develop integrated package of
structure sticks and carrots
Explore master-franchising

Unique consumer Tailor value proposition to local needs/tastes

characteristics

Nascent non-fuel Look at non-fuel not as an add-on but as a

retail core part of the retail opportunity e.g.,
build destination proportions

Fig 40: Winning in Emerging Markets: Some preliminary ideas

Source: Ficci

OilCos have made sporadic attempts at exploring non fuel retail(NFR)

opportunities in India – Car Wash, ATMs, Co Branded Credit Cards, Cyber Cafes,
Convenience Stores, Food Outlets, etc. Though one-off success stories have been
reported no cohesive strategy has emerged as yet on the NFR front. With the third largest
distribution network ( after post offices and FMCG outlets ) there is a lot of untapped
potential left for exploring in this arena. The next few years should see all Oil Marketing
Companies experimenting in this field.

96
 The scope of offering NFR services is at the retail outlets is enormous to say the
least. It has to become ‘Multidimensional’. Some activities which must be seriously
explored –
 Bill Collection Centres/Courier Dropboxes ( Cities )
 Product Sourcing Centres - warehouses( For Retailers )
 Food Courts/Rest Houses – ( Highway )
 Fertilizers/Pesticides/Seeds/AgriTools/Insurance/Agri-Loans–collection
centers/warehouses ( Rural Outlets )
 Real estate – Banks / Vehicle distributors
 The target should be to generate 5% of the revenues to start with from
these activities and gradually increasing the share to 20%
 Sweat the assets and services to the maximum

The domestic players in the downstream petroleum sector have seen several emerging
challenges in the recent times, the most important being the regulatory risks arising from
an inability to raise retail prices. Increasing competition from new entrants, surplus
situation in the domestic market and exposure to volatile, though currently buoyant,
refining margins are also set to fundamentally change the landscape for the sector
participants. While PSU oil companies still enjoy several sustainable competitive
advantages, the success of their upstream and downstream diversification initiatives are
likely to have a critical bearing on their prospects, going forward.

Ultimately,

“It’s the customer who will emerge as the winner. The company who identifies its
customers and his needs and provides satisfactory services will emerge as the leader”

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11) REFERENCES

11.1) BOOKS & RESEARCH PAPERS

1) Battacharya, D K, Research Methodology, Excel Books, 1st edition

2) Berman,Barry and R. Evans, Joel. “Promotional Strategy”, Retail Management –
Strategic Approach, 9th ed. Prentice Hall of India, New Delhi
3) Coughlan,Anne T.; Enderson, Erin; Stern, Loius W.; and El-Ansary, Edel I.
(2003) “Retailing”, Marketing Channels 6th ed., Prentice Hall of India Pvt. Ltd.,
New Delhi, pp. 390-431.
4) Dr. Varshney, R.L. and Dr. Gupta, S.L. Marketing Management – An Indian
Perspective, 18th ed, Sultan Chand & Sons, New Delhi,pp. 859-93.
5) Kotler, Philip; Keller, Kevin Marketing Management , PEARSON Education,12th
edition
6) Strategic Shift in Indian Downstream Sector, by AT Kearney
7) Issues in Deregulation of the oil & gas sector, By RK Narang, Ardhendu Sen, and
Leena Srivastava (TERI, New Delhi).
8) Indian Oil & Gas Sector: An update on performance trends, ICRA
9) HP solutions for the oil and gas industry, by Hewlett Packard
10) IOCL Annual report 2005-06
11) BPCL Annual report 2005-06
12) HPCL Annual report 2005-06
13) IBP Annual report 2005-06
14) ‘Petro Retailing’, Study Material, University of Petroleum & Energy Studies

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11.2) INTERNET LINKS

1) www.infraline.com
2) www.energyinstt.org.uk
3) www.imagesretail.com
4) www.businessworld.in
5) www.iea.com
6) www.pwc.com
7) www.petrotech2007.com
8) www.eretailbiz.com
9) www.shell.com
10) www.atkearney.com
11) www.ficci.com
12) www.ibef.org
13) www.iocl.com
14) www.bharatpetroleum.com
15) www.ril.com
16) www.hindustanpetroleum.com
17) www.en.wikipedia.org
18) www.indiaonestop.com
19) www.retail-leaders.org
20) www.zeenews.com
21) www.efkon.com
22) www.retaildesigndiva.com
23) www.ft.com
24) www.findarticles.com
25) www.fai.com
26) www.automation.com
27) www.petroleumbazaar.com
28) www.ndtv.com

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29) www.goldmansachs.com
30) www.forbes.com
31) www.inrnews.com
32) www.ernstandyoung.com
33) www.prweb.com
34) www.npnweb.com
35) www.kssg.com
36) www.timesofindia.indiatimes.com
37) www.rediff.com
38) www.google.com
39) www.dogpile.com
40) www.answers.com
41) www.thehindubusinessline.com
42) www.domain-b.com
43) www.fuel4arts.com
44) www.eMarketer.com
45) www.hpcl.com
46) www.marketingprofs.com
47) www.mercermc.com
48) www.startups.co.uk
49) www.theeconomictimes.com
50) www.thehindu.com
51) www.tribuneindia.com
52) www.tutor2u.net

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