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A STUDY OF NON FUEL RETAILING IN INDIAN

PETROLEUM INDUSTRY POST LIBERALISATION

Dissertation Project Report


Submitted in partial fulfillment of the requirements for the
Award of the degree of

Master of Business Administration


(Oil and Gas)

By
ARVIND DWIVEDI

Under the guidance of


Prof. Atul Razdan

University of Petroleum and Energy Studies,


Dehradun
2009

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


ACKNOWLEDGEMENT

First and foremost, I would like to express gratitude to my Institution, University of Petroleum
& Energy Studies for providing me a magnificent opportunity in the form of this dissertation to
work and learn.

I would like to express gratitude to Prof. Atul Razdan for sharing the journey of
conceptualizing and developing all the ideas. He stood in times of difficulty and despite of his
busy schedule devoted a major chunk of his time towards this project. He has been a part of all
the activities and duly guided the project to its destination. I am indebted for his endeavours in
making this project a success. He has truly fulfilled his role as a guide.

I would also like to acknowledge the help and support extended by all my friends whose names
could not be mentioned here. They all have been very co-operative and provided impetus to
this project. Without their help this project would not have reached its destination. I express my
gratitude for their suggestions and help they extended to this project.

I will not miss the opportunity of expressing thankfulness towards all my teachers and the
faculty of University of Petroleum & Energy Studies for sharing their knowledge, which
provided necessary ingredients to this project.

In the end, I want to thank Mr. Bill Gates and his Microsoft Corp. for MS Word and MS
PowerPoint. Without them this report would not have been in its present form.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


CONTENTS

KEY TERMS………………………………………………………………………………………………………………………..1

EXECUTIVE SUMMARY……………………………………………………………………………………………………...2

RESEARCH OBJECTIVES……………………………………………………………………………………………………..4

RESEARCH METHODOLOGY……………………………………………………………………………………………….6

FINDINGS
CHAPTER 1 Background of Indian Petroleum Industry………………………………………………………………….…7

1.1 Historical Background.……………………………………………………………………………………………………7

1.2 Structure of Indian Petroleum Industry…………………………………………………………………………..8

1.3 Petroleum Companies in India….……………………………………………………………………………………11

1.4 Energy Consumption in India………………………………………………………………………………………….13

1.5Energy & Economy………………………………………………………………………………………………………….14

1.5.1 Contribution of Oil Companies to Exchequer………………………..……………………….16

CHAPTER 2 Changes in Indian Petroleum Industry……………………………………………………………………….19

2.1 Why did Government go for liberalization of economy?.................................................19

2.2 Development of Indian petroleum industry …………………………………….……………………………19

2.2.1 Options for Development ……………………………………………………………………………..20

2.2.2 Important Developments……………………………………………………………………………….21

2.2.2.1 Developments Pre- Liberalisation…………………………………………………………21


2.2.2.2 Developments Post Liberalisation………………………………………………………..22
CHAPTER 3 Importance of Non Fuel Retailing…………………………………………………………………….…………27

3.1 Winds of Change.…………………………………………………………………………………………………………..27

3.1.1 Callous Competitive Environment………………..………………………………………………..27

3.1.2 Mounting Expectations of Consumer…….…….…………………………………..……………28

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


3.1.3 Call for Alternate Sources of Revenue……………………………………………………………28
3.1.4 Shift in Branding (From Outlet to Corporate)……………………………………………….29
3.1.5 Emergence of Non-Fuel Services As a Major Activity at Retail Outlets………..29
3.1.6 Competition on price……………………………………………………………………………………29
3.1.7 Alternate sources of revenues……………………………………………….......................30
3.2 India versus world (U.S.)................................................................................................31

3.3 Key Issues and Imperatives for the Industry………………………………………………………………..32

CHAPTER 4 Non Fuel Retailing Initiatives……………………………………………………………….………………..37

4.1 Retail in India………………………………………………………………………………………………………………….37


4.1.1 What Is Retailing?.................................................................................................................37
4.1.2 Scenario of Retailing in India…………………………………………………………………………………………….37
4.1.2.1 Key Challenges……………………………………………………………………………………………………….37
4.1.2.2 Present Indian Scenario………………………………………………………………………………………….39
4.1.3 Traditional Retail in India……………………………………………………………………………………………………39
4.1.4 Indian Retail is Changing Gears…………………………………………………………………………………………40
4.2 Non Fuel Retailing…………………………………………………………………………………………………………..42
4.3 India as a Non Fuel Retailing Destination………………………………………………………………………..44
4.4 Options for Non-Fuel Offerings……………………………………………………………………………………….47
4.4.1 ATM……………………………………………………………………………………………………………………………….47
4.4.2 Quick care point……………………………………………………………………………………………………………..47
4.4.3 Windscreen cleaning facility……………………………………………………………………………………………48
4.4.4 Free health check-up……………………………………………………………………………………………………..48
4.4.5 INDE-PAY……………………………………………………………………………………………………………………….48
4.4.6 Vending Machine of Coffee and Coca-Cola…………………………………………………………………….52
4.4.7 Pay Phone………………………………………………………………………………………………………………………52
4.4.8 Other Necessary Amenities……………………………………………………………………………………………52
4.5 Non Fuel Initiatives of Indian PSU’S……………………………………………………………………………53
4.5.1 Indian Oil Corporation Limited (IOCL)…………………………………………………………………………….53

4.5.2 Bharat Petroleum Corporation Limited (BPCL)……………………………………………………………….55

4.5.3 Hindustan Petroleum Corporation Limited (HPCL)……………………………………………….57

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

Bibliography.……………………….…………………………………………………………………………………………….……..69

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


KEY TERMS

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

Retailing: Retailing is the set of activities that markets products or services to final consumers
for their own personal or household use whereas Retailer is someone who cuts off or sheds a
small piece from something

Liberalization: Liberalization refers to a relaxation of previous government restrictions, usually


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

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


EXECUTIVE SUMMARY

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


EXECUTIVE SUMMARY

The Indian retail industry can be segmented in different segments viz. cosmetics, footwear,
sanitary products, entertainment etc. The downstream petroleum retailing is one of the largest
segments of the Indian retail industry and the petro-retail sector is one of the most organized
sectors of the retail industry.

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

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


RESEARCH OBJECTIVES

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


RESEARCH OBJECTIVES

• To Study the Background of Petroleum Industry in India

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

• To Identify the Specific Changes in Petroleum Industry Post Liberalization

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

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


Companies in India

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

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

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


RESEARCH METHODOLOGY

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


RESEARCH METHODOLOGY

Research Design: Descriptive

The topic characterizes following things

1. Information needed is defined only loosely.


2. Research process is structured but flexible.
3. Sample is small and not completely representative.
4. Analysis of secondary data is qualitative.
The major part of the research is an exploratory research design. Some portions follow the
descriptive design criteria.

This type of research design is generally followed by further exploratory or conclusive


research.

Sources of Data:

1. Secondary data: a) Research reports on Non Fuel Retailing.


b) Performance and strategy reports of petroleum companies.
c) Articles on Non Fuel retailing.
d) White papers on non fuel retailing
e) Newspaper articles on non-fuel business
f) Online journals.

Limitations

- Limited samples taken for interview.


- It is a study of only state run corporations and does not include private players.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


FINDINGS

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


CHAPTER 1

Background of Indian Petroleum


Industry

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


1.1 Historical Background of Indian Petroleum Industry1

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

Components of Primary Energy Consumption2

1.4% 5.2%

7.8%

30.1% Natural
Gas
Oil
55.5%

India’s Primary Energy Consumption (million barrels of Equivalent)

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


1.2 Structure of Indian Petroleum Industry3

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

The Indian Petroleum


Sector

Oil & Gas Refining & Natural Gas GAIL


Exploration Marketing Distribution Gujarat Gas

ONGC, OIL

CPCL, RPL, IBP IOC, BPC, HPC


BRPL, NRL,

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

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

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

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

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


and natural gas, import and export of crude oil and products, refining, distribution, marketing,
and conservation of petroleum products.

The three key organizations under the control of MoP&NG are the Directorate General of
Hydrocarbons, the Oil Co-ordination Committee (OCC) and the Oil Industry Development
Board (OIDB).

Oil Co-ordination Committee was setup in 1975 to:

1. Allocation of indigenous and imported crude oil to the refineries


2. Planning for imports, transportation requirements and storage infrastructure, based on
short-term estimates for supply/demand
3. Determine the product mix of refineries
4. Organize a monthly industry co-ordination meetings and supply plan meetings to
resolve problems, work out supply plans and maximize product yields
5. Administering the pricing mechanism for controlled petroleum products
6. Monitoring the oil pool account
7. Co-ordinating marketing functions;
8. Monitoring the performance of the industry so as to achieve optimality.

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

The role of PPAC is:

• to analyze the trends in the international oil markets and domestic prices
• evaluate and forecaste import and export trends of petroleum
• to maintain an information database and communication system to deal with emergencies
and unforeseen circumstances.

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

The Directorate General of Hydrocarbons was set up in April 1993. It is an independent


regulatory body and supervises the activities of companies in the upstream oil & gas sector. It
also looks after the oilfield development for sound engineering practices.

The New Exploration Licensing Policy brought in by Government is an invitation letter to


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

1.3 The Petroleum Companies in India4

The Indian oil refining sector has 10 companies:

• Indian Oil Corporation Limited (IOC) and its two subsidiaries, Chennai Petroleum
Corporation Limited (earlier Madras Refineries Limited.) and Bongaigaon Refinery
and Petrochemicals Limited (BRPL)

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


• Bharat Petroleum Corporation Limited (BPCL) and its two subsidiairies, Kochi
Refineries Limited (earlier Cochin Refineries Limited.) and Numaligarh Refineries
Limited (NRL)

• Hindustan Petroleum Corporation Limited (HPCL)

• ONGC

• Mangalore Refinery and Petrochemicals Limited (MRPL); and

• Reliance Petroleum Limited (RPL)--merged with parent Reliance Industries Ltd. (RIL)
with effect from April 1, 2001.

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

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

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

1.4 Energy Consumption in India5

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

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

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

Oil, gas, hydroelectricity, nuclear power and coal are the five constituents of primary energy. Oil
and gas account for 62.2% of the total world primary energy consumption. This figure is higher

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


at 64.8% for developed nations like the US. In India, coal is the principle source of energy
accounting for over 55% of the total primary energy consumption.

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

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

As in the case of per capita primary energy consumption, the per capita consumption of oil & gas
in India is also a low 117 kg against the world average of 925 kg. Thus, the growth in primary
energy consumption, the increasing share of oil & gas in the primary energy consumption, and
the low per capita consumption of oil & gas are indicative of an enormous potential for growth in
the demand for oil & gas in India.

1.5 Energy & Economy

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

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

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

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

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

1.5.1 Contribution of Oil Companies to Exchequer6

The petroleum, oil and lubricants (POL) segment has been an important contributor to the Indian
Exchequer (Central and State). The major components of the revenue contributed by the oil
companies are as follows:

• Crude Oil: Royalty of 20% of well-head value with a ceiling of Rs. 850/tonne; Cess of
Rs. 1800/tonne under the Oil Industries Development (OID) Act; Sales tax of 4%;
Custom duty of 10% on imported crude;

• Natural Gas: Royalty of 10% and sales tax varying from State to State;

• Petroleum Products: Custom Duty and Excise Duty. Sales tax on domestic sales.

• Corporate Taxes: At the rate of 35% of profit before tax; and

• Dividends: The contributions under this head are significant since the Government is a
major shareholder in most oil companies

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

Table 1.1: Government Holding in Public Sector Oil Companies

Oil Company Central Govt. Holding*


Oil and Natural Gas Corporation Ltd. (ONGC) 84.1%
Oil India Ltd. (OIL) 98.13%
Gas Authority of India Ltd. ( GAIL) 67.35%
Indian Oil Corporation Ltd. (IOC) 82.03%
Hindustan Petroleum Corporation Ltd. (HPCL) 51.01%
Bharat Petroleum Corporation Ltd. (BPCL) 66.2%
IBP Co. Ltd. (IBP) 26.00%

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


Table 1.2: Profits of PSUs (Rs. million)

1995-96 1996- 1997-98 1998-99 1999- 2000-


97 00 01
Profit after tax (All PSUs) 147630 161250 202790 225090 231342 284916
Profit after tax (Oil PSUs) 51547 55261 74207 86073 95698 117271
Share of Oil PSUs in PAT 35% 34% 37% 38% 41% 41%
Dividend (All PSUs) 22050 28365 36089 49316 54375 82599
Dividend (Oil PSUs) 6764 8127 10439 22112 25226 34485
Share of Oil PSUs in 31% 29% 29% 45% 46% 42%
Dividend

Figures are only for profit making PSUs Source: Public Enterprises Survey, 2000-
2001

Moreover, the excise and custom duty collections from the oil PSUs (as shown in the
following Table), show that the petroleum sector's share of the total contribution on this
account has averaged at a significant 20%. Thus, with one-fifth share of the national customs
and excise revenue collections, the petroleum sector plays a key role in the nation's economy.
CHAPTER 2

Changes in Indian Petroleum Industry

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


2.1 Why did Government go for liberalization of economy? 7

Government of India liberalized the economy in 1991, to liberate the ailing economy from
shackles of balance of payment crisis. Government asked World Bank & International
Monetary Fund (IMF) to bail out its ailing economy. A structural adjustment process (SAP)
was initiated across all sectors to accelerate and extend the liberalization process which earlier
had been instigated (at least in hydrocarbon sector). The main features of SAP for sectors
other than Hydrocarbons were:-

i) Privatization, and,
ii) Opening up of economy to foreign companies.

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

2.2 Development of Indian petroleum industry 8

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

(i) Premature phase from 1947 to 1969


In this phase, the government consolidated its control over the industry with Soviet
assistance
(ii) Consolidation phase from 1970 to 1989
During this period the US companies played dominant role replacing the Soviets
(iii) The Liberalization phase from 1991 onwards

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


2.2.1 Options for Development

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

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

i) seek assistance of a great power like Soviet Union,


ii) collaborate with a small country like Rumania
iii) explore the possibility of a government to government co-operation with other small
but neutral countries like Austria which had developed sufficient technical expertise in
petroleum industry by that time
iv) Try and develop the industry through self-help by employing technicians and bringing
necessary machinery from which ever source available.

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

In the early seventies, the government of India nationalized the refinery and marketing
facilities of three foreign oil companies. Burmah -Shell, a British company desperately tried to
stay in India even as minority partner to a joint venture with a national oil company . At that

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

2.2.2 Important Developments

2.2.2.1 Developments Pre- Liberalisation9

There were many important developments which took place during seventies and eighties,
which need to be mentioned here to understand the liberalization process of this industry.

i) With the increasing importance of offshore exploration, involvement of US companies


increased replacing the Soviets. In offshore exploration and exploitation, India was totally
dependent on American and other Western companies.

ii) In 1974, the government offered 7 million acres of Bay of Bengal to Natamas Carlsburg
Co. of USA and Kutch basin (Gujarat) to Readings and Bates, USA for offshore
exploration and production. It was mutually agreed that initially the foreign company
would have 61% share in the joint venture and the price of the crude if produced would be
based on Indonesian and Persian Gulf crude. The expenses would be recovered by means
of Cost Oil which would be 40% of the total crude. ONGC would take 65% of the
remaining crude and rest 35% would be taken by US Company. However, the ventures
were unsuccessful.

Till 1990, the government had invited four proposals for bidding. One noticeable feature
of the fourth round was that, Indian private companies (along with foreign partners) were
allowed to participate for the first time. As no major field were discovered by foreign
companies, the government over exploited the existing fields. At a time when the global
crude price was coming down, India’s crude production was increasing sharply from

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


10.51 MMTPA in 1980-81 to 34.00 MMTPA in 1989-90. The oil bearing wells were
'flogged to death'. As a consequence, production fell to 26.92 MMTPA in 1992-93.

iii) In 1980’s, the government allowed Indian private companies to enter into refining sector
as a joint venture partner with a public sector refining company. Reliance Industries Ltd
(RIL) was allowed to self build the largest refinery in the country. For refining
technology, the public sector refineries, during 1980s, were completely dependant on one
American company M/s Universal Oil Products (UOP).The technology could not be
absorbed because UOP did not transfer their technology to the refineries rather they leased
it to the refineries. The same technology was being leased to many refineries thereby
making no value addition to the industry.

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

2.2.2.2Developments Post Liberalisation

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

1] Refining:

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


In the downstream refining sector, presently, all the capacity of 57.4 MMT is with the public
sector and the refineries operate under administered pricing and retention margins. To meet
the projected growth in demand, the Government has issued letters of intent for capacity
expansion/new grassroot refineries both in the public and private sectors. These are expected
to add an additional capacity of about 64 MMT per annum as follows:-

i) Expansion of existing refineries in the public sector- 9.85 MMT

ii) New grassroot refineries in the public sector - 6.00 MMT

iii) New grassroot refineries in the private/joint sector. 48.00 MMT

It may be seen that there would still be a wide gap of about 30 MMT between the refining
capacity and demand by 2010.

2] Marketing:

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

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

ii) In September 1997, the government decided to dismantle Administrative Pricing


Mechanism (APM) in phased manner. By April, 2002 it was fully dismantled and prices of
petroleum products were determined on the basis of import parity system.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

The Administered Pricing Mechanism10

The APM had its roots in the early seventies when Shipping Corporation of India (SCI) took
loan from the World Bank to purchase oil carriers. The World Bank had then recommended a
'cost plus' pricing formula to SCI for freight calculation. The same principle in the name of
'retention concept' was introduced in 1976 for pricing of crude and petroleum products. The
price of indigenous crude was based on operating cost plus 15% post tax return on capital
employed. And oil refineries and marketing companies calculated the price of their products
on the basis of operating cost plus 12% post tax on net worth.

The other important component of APM - a complicated pricing formula is 'cross


subsidization mechanism' which enabled the Indian oil industry to establish its dominance in
the energy sector. Cross subsidized petroleum products competed with other energy sources
like coal, and penetrated into their domain. Thus, low priced kerosene had replaced vegetable
oil for illuminating lamps and coal for cooking, subsidized LPG has become an essential
household fuel, long distance trucks fed with cheap diesel easily competed with the railways
in freight movement and subsidized naphtha made the coal technology unviable for fertilizer
production.

This pricing policy backed with elaborate distribution system has made the entire economy
almost completely dependent on petroleum products. The 'retention concept' on the other hand

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

The economy had become dependent on petroleum and private parties were not happy with
12-15% assured return. They wanted more. Hence APM was dismantled in a phased manner.

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

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


CHAPTER 3

Importance of Non Fuel Retailing

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


3.1 Winds of Change 11

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

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

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

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

3.1.1 Callous Competitive Environment

The retail sector is destined to witness intense competition in future due to entry of the private
players. In the competitive scenario, whosoever will have adequate infrastructure for
transportation, storage and distribution will emerge as winner. With this game plan, the
existing as well as private oil companies are strengthening their retail network continuously.
3.1.2 Mounting Expectations of Consumer

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


With increasing competition in the retailing sector, today’s consumers are becoming more and
more demanding. The emergence of new psychographic segments in petro-retail market bears
the testimony to this fact. A closer look at these segments tells us what exactly a consumer is
looking for whenever he goes to a fuel station to purchase fuel.
A consumer tries to find-

 Quality & Quantity assurance


 Quick filling and efficient forecourt service
 Rewards for loyalty
 Premium fuels
 Cashless transactions
 Non-fuel services

3.1.3 Call for Alternate Sources of Revenue

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

These factors are-

 Increased pressures on margins


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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


3.1.4 Shift in Branding (From Outlet to Corporate)

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

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

3.1.5 Emergence of Non-Fuel Services As a Major Activity at Retail Outlets

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

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

3.1.6 Competition on price

Price until recently was not a differentiating factor in Indian market. Prices were controlled
and fixed by the Government making it same for all the companies. However, with private

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

3.1.7 Alternate sources of revenues

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


3.2 India versus world (U.S.) 12

Currently there are some stark differences in the Indian market when compared with the more
developed markets (here we have considered U.S. market)

Let us find the contrast of Indian petro retail sector to the U.S. petro retail.

Indian market US market

 Quality interpreted as ‘no  Quality interpreted as impact on


adulteration’ fuel efficiency and engine
performance
 Quantity interpreted as getting the  Quantity is not a parameter for
right amount of fuel, i.e. integrity consideration

 Price is not a differentiating  Price is a very important factor


factor

However, as the Indian market evolves,

• Parameters such as integrity of fuel quantity and purity would become hygiene factors
• Consumer needs will change and require changes to the value proposition being
offered

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


3.3 Key Issues and Imperatives for the Industry

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

Key Issues

• How to build a unique and sustainable competitive advantage?

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

Let us discuss each of the issues one by one:

 Building a unique and sustainable competitive advantage 13

Sustainable competitive advantage is the prolonged benefit of implementing some unique


value-creating strategy based on unique combination of internal
organizational resources and capabilities that cannot be replicated by competitors.

A sustainable advantage can be build up by following 5 strategies:

• Attracting New Customers And Capturing Share Of Their Wallet


Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun
1. An open evening

Providing refreshments and a free vehicle cleaning would attract customers. A local paper
can be used to promote the event (such as free check up camps, etc). Both retailer and
customer stand to gain, especially if a prize is there from supplier. Invite the paper people
to participate in publicity. Liaison with the paper to measure response, and ensure they are
in attendance with photographer for follow-up publicity.

2. Make outlet look inviting

Inviting outlet does not mean a total makeover - just rearranging furniture and creating an
interesting shop window will make a difference. Few new posters or branded displays will
also help.

3. Community Spirit

Local charities or community organizations such as the local Chamber of Commerce, Lions
Club, and Round Table, Women's Institute, school fetes or fairs - all will bring potential
new customers. A shop or counter can be set. Setting up shop does not have to be
expensive - it may be just a table with brochures and latest offers. A sponsorship to any of
these events can do wonders.

4. Use of Local Media

One should not forget local media - it can provide many PR opportunities. Local press
generally support businesses in the area, and its surprising what can develop from a small
advertisement. The trick is to not only consider the implications for the business, but also
remember to find and highlight the benefits for the third party.

5. Partnerships

All options should be kept open for potential partners, as they are also seeking to attract
new customers. This may be a local retail outlet, restaurant or supermarket. All of these are
excellent shop windows for joint promotion of events. Offer to provide a placement/staff
member in their environment on a trial basis to see if this attracts new customers and
simultaneously demonstrate that new customers can be attracted into their store in return.

6. Motivate the staff

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

Key Imperatives for Retailers14

 Develop in-depth consumer insight (Know the Consumer) and Building offerings
around the target consumer

Customer segmentation is an indispensable tool for performance improvement. Are we


selling to the right customers? Which segments should be the primary target of our
product-development efforts, sales and marketing activities? In which regions and
countries should we be competing? In which markets can we create differential value?
How should we differentially allocate our sales and marketing resource to various
segments?

To answer such questions, a management team must understand which customer segments
are most attractive in terms of size, profitability, and growth. They must also make an
honest assessment of their company’s capabilities to meet each segment’s needs relative to
the competition. Some segments “fit” a company better than others -- that is, the company
has greater ability to serve these segments in a way that is differentiated from competitors.
Some segments are more profitable, either because they generate higher revenues, because
they can be served at lower cost, or both. And some segments are growing faster.
Segments with high growth, high profitability, and sufficiently large revenue potential are
a company’s natural focus. But the company may also be able to adjust its value
proposition to serve high-growth customers that are not currently very profitable.

Effective segmentation can also reveal underexploited opportunities within the customer
base. By “de-averaging” customers and prospects, often a hidden pool of profit can be
found which could be more fully exploited. A great starting point for this sort of analysis

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

 Building a strong brand proposition15

Retailers will need to create offerings depending on the needs of the target segment, which
differentiate them from competitor
competitor.

Following are shown 8 parameters based on which differentiation can take place.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

Product related features Service related features

 Quality  Personalized Consumer experience

• Speed of service
 Quantity
• Attendant disposition
 Location
• Station Ambience

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


CHAPTER 4

Non Fuel Retailing Initiatives

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


4.1 Retail in India16
Indian retail industry is in a transition phase. It is moving from an unorganized sector to
becoming an organized sector. However, most of the retailing in our country is still
unorganized. The retail spread out in US and India has a very wide gap. Although retailing in
India is having an exponential growth, the road ahead is full of challenges.

4.1.1 What Is Retailing?

The word "Retail" has its origin from a French-Italian word.

“Retailing is the set of activities that markets products or services to final consumers for their
own personal or household use whereas Retailer is someone who cuts off or sheds a small
piece from something “

Retailers organize their availability on a relatively large scale and supply them to customers
on a relatively small scale. Retailer can be a Person or Agent or Agency or Company or
Organization, who is instrumental in supplying the Goods, Merchandise or Services to the
End User or end Consumer.

4.1.2 Scenario of Retailing in India

Retailing has been the most vigorous and eye-catching sector of last decade. Retailing
industry has been present since ages in our country; it is only recently that it has witnessed so
much vitality. The impetus to retailing in India has been due to the increased purchasing
power of buyers (especially post-liberalization), increase in product variety and availability,
and increase in economies of scale, with the aid of modern supply and distributions systems.
The retail sales are at their peak and new technologies are enhancing retail productivity.
Though there are many opportunities in retail business, still, retailers are facing numerous
challenges.

4.1.2.1 Key Challenges:

1) Location: "Right Place, Right choice"

Location is the most important and prime ingredient for any business that relies on customers.
It is typically the most important deliberation in a customers store choice. Location decisions
are inflexible because retailers have to either make sustainable investments to buy and

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


develop real estate or commit to long term lease. When formulating decision about where to
locate, the retailer must refer to the strategic plan:

* Investigate alternative trading areas.

* Determine the type of desirable store location

* Evaluate alternative specific store sites

2) Merchandise:

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

3) Pricing:

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

4) Target Audience:

"Consumer is the prime mover"

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


5) Scale of Operations:

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

4.1.2.2 Present Indian Scenario

* Unorganized market: Rs. 583,000 crores

* Organized market: Rs.5, 000 crores

* 5X growth in organized retailing between 2000 and 2005

* Over 4,000 new modern Outlets in the last 3 years

* Over 5,000,000 sq. ft. of mall space under development

* The top 3 modern retailers control over 750,000 sq. ft. of retail space

* Over 400,000 shoppers walk through their doors every week

* Growth in organized retailing on par with expectations and projections of the last 5 Years:
on course to touch Rs. 35,000 crores (US$ 7 Billion) or more by 2005-06

4.1.3 Traditional Retail in India17

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


Bargaining was the unwritten law of market. Educational qualification level of these retailers
was low. Hence, market was controlled by handful of distributors &/or Wholesalers. Virtually
there was only one format of retailing - mass retail. Retailer to consumer ratio was very low,
for all the categories without exception. Varity in terms of quality, Styles were on regional
basis, community based & in fact very low range was available at any given single place.

Impulsive buying or consumption was restricted to food, vegetables etc. Purchasing power of
Indian urban consumer was very low and that of Branded merchandise in categories like
Apparels, Cosmetics, Shoes, Watches, Beverages, Food, Jewellery, were slowly seeping into
the lifeline of Indian City folks. In the coming times, organized retailers will find it difficult to
strike balance with the unbranded retail market which is very huge.

4.1.4 Indian Retail is Changing Gears

1) First Gear: (Create awareness)

* New retailers driving awareness

* High degree of fragmentation

* Real estate groups starting retail chains

* Consumer expecting 'value for money' as core value

2) Second Gear: (Meet customer expectations) {Here lies Indian Retail Sector}

* Consumer-driven

* Emergence of pure retailers

* Retailers getting multi-location and multi-format

* Global retailers evincing interest in India

3) Third Gear: (Back end management)

* Category management

* Vendor partnership
Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun
* Stock turns

* Channel synchronization

* Consumer acquisition

* Customer relation's management

4) Fourth Gear: (Consolidation)

* Aggressive rollout

* Organized retail acquitting significant share

* Beginning of cross-border movement

* Mergers and acquisitions

Retailers need to invest much more in capturing more specific market. Intelligence as well as
real-time customer purchase behavior information is very important. The retailers also need to
make substantial investment in understanding/acquiring some advanced expertise in
developing more accurate and scientific demand forecasting models. They should also look
forward to re-engineering of product sourcing philosophies-aligned more towards
collaborative planning and replenishment. The existing small and medium independent
retailers should closely examine the changes that are taking place in their immediate vicinity.
They should also make some investments in improving the interiors of their respective
establishments so as to make shopping an enjoyable experience for the customer.

With retail marketplace changing shape and increase in competition, the potential for
improving retail productivity and reduction in cost would no longer create differentiation.
They will be replaced by value and relationships. It is important to note that these strategies
are not strictly independent of each other. Value is not just a function of price, quality and
service but also can be enhanced by Personalization and memorable experience. For winning
in the intense competition, it is critical to understand the target customer's definition of value
and make an offer, which not only delights the customers but is also difficult for competitors
to replicate.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


4.2 Non Fuel Retailing

Till a few years ago, petroleum retailing in India was a staid and dreary business. Cars, buses
and two wheelers drove in, got the vehicles fuelled, paid cash, and drove out. The
environment started changing when Shell did a makeover of some petrol pumps as part of the
economic reform process. Improved signage, use of credit cards, and carwashes soon became
an integral part of the petroleum retail outlets.

Earlier petrol stations were merely used for selling fuel; now they are quickly getting
converted into multi-facility joints. The idea, common enough in countries like Singapore and
Malaysia —is to buy fuel, and shop alongside. However, these pumps are either owned by
state-owned petroleum product companies like Indian oil, Bharat Petroleum and Hindustan
Petroleum or are run as franchises by private entrepreneurs with limited capital.

Indian Petroleum Industry has been witnessing a steady growth but the margin pressure has
increased. There has been a steady growth of 2.8% in the last five years (2002-07). The
desired impetus would be provided by enhanced economic activity.

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

Exxon Mobil • Loyalty Program – Speedpass


• Being rolled out in On-the-Run
convenience stores & some co-located
McDonald’s outlets
• 4.5 million subscribers
• Company believes the program results
in an average of 1.2 extra fillings per
month

Albertsons • Loyalty Program - Gas Rewards


• Offers shoppers cents-off-per-gallon
vouchers
• redeemable at AM/PM stores and 30
other Albertson’s supermarket fuel
sites
• More than 700 grocery items are tied
to discounts of 2- 20¢/gallon each for
purchases of up to 10 gallons made at
ARCO stations

Shell • Loyalty Program - Shell Escape


• Earn Escape points each time you
purchase products from the Select
Stores
• Redeem your favorite items with the
Escape points accumulated

Esso (Canada) • Loyalty Program - Esso Extra


(Canada)
• Offers customers opportunity to
accumulate points and enter contests,
which can then be used to pay for gas
or convenience items
• By joining Points.com, customers can
trade Esso Extra points with points,
miles or loyalty currencies from other
participating programs.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


4.3 India as a Non Fuel Retailing Destination

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

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

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

• 2nd Most attractive developing market

• 4th Largest economy after USA, China & Japan.

• 2nd Fastest growing economy in the world

• Would be 3rd largest economy in next 15 years

• 5th among the 30 emerging markets for retailers

• Largest young population in the world

• 300+ million middle class - the Real consumers

• Increased disposable Income

• Among top 10 FDI destinations

• Major tax reforms including implementation of VAT in progress

• Massive investment planned in infrastructure development in next 5 years

• Exponential growth is taking place in Retailing in India

• Organized Retail Only 3% but growing at 30%

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

• 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
IOCL 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

• 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
HPCL their outlets such as
 HP Speed Mart (Convenience Store)
 ATM’s
 Automatic Car Wash
 Commissioned India’s first public
access Internet kiosk

Launched convenience retail initiative under


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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


4.4 Options for Non-Fuel Offerings

To deliver the many conveniences and services, various oil marketing companies have
associated with leading brands and companies like ICICI Bank, Coca Cola India, Fed Ex,
Café Coffee Day, Western Union Money Transfer, US Pizza, Barista, Domino’s Pizza,
Skypak, etc.

The facilities on a particular outlet would depend upon the purchasing power of the people.
The facilities like Café Coffee Day, Barista, Domino’s Pizza, US pizza, Crossword, Skypak,
etc and other expensive outlets may not work everywhere. Apart from them there are many
other facilities which can be offered to draw more and more customers, thereby increasing
profitability and level of customer satisfaction.

Here, we will have a glimpse of some of the facilities which are expected by a customer and
can be offered to them on an outlet:

4.4.1 ATM (Automated Teller Machine or Any Time Money)

An ATM is the most expected facility at an outlet. Almost every customer now has a debit/
credit card and he/she expects an ATM at the outlet.

Benefits from implementing an ATM:-

a) Customer will get an additional facility along will fuel and it will help to draw more
customers.
b) Increase in revenues due to the lease rent from the bank.

A room 120 square feet is required to install an ATM which is a nominal expense. The company may
get rent in the range of Rs 8000 to Rs12, 000 per month depending upon the location.

4.4.2 Quick care point:-

A mechanic who can quickly give a service to the concern vehicle and also he can do the air
check. In the quick care point, various lubricants and coolant can be displayed with the

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


purpose of advertisements as well as enhancing customer awareness. The facility of tyre
puncture should also be offered. This will further enhance the revenue of company.

4.4.3 Windscreen cleaning facility:

A cleaning man can wipe the windscreen of four wheelers and front or body of the two-
wheelers while customer is getting his/her vehicle fuelled. This will augment the customer’s
perception of brand as well as organization. An extra attendant can serve for the role of
cleaner.

4.4.4 Free health check-up:

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

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

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

4.4.5 INDE-PAY

It is e- recharge machine which will provide a recharge of six different telecommunications


companies along with the railway reservations.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

 Recharge Vouchers (mobile top-ups)

 Flight tickets

 Rail tickets

 Utility Bill-Pay

 Cinema tickets

 Budget Hotels

 Contests

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

 Alternate revenue stream

 High ROI

 Major Value added services under one single terminal

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

 IRCTC authorized e-ticketing agent certificate

 Airline ticketing (IATA sub-agent license)

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

 Wireless POS – could be used in exhibitions/trade shows where merchants are


deprived of a phone line to connect their traditional POS

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

CURRENT FUTURE
SERVICES BRANDS
SERVICES SERVICES

BSNL, Reliance, Tata Indicom,


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

Railway Ticketing Indian Railways (IRCTC) 

All major domestic airlines: Indian,


Airline Ticketing 
Kingfisher, Deccan, Jet, Sahara etc

Non-Cash Bank Account


services
Leading banks - 

PCO Tata Indicom 

Bill Payment Leading utility companies 

All banks issuing


Card acceptance 
Mastercard/VISA

Movie Tickets Leading multiplexes - 

*Source: www.indepay.com

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


The revenue generated on the above mentioned value added services are as follows:

Prepaid Recharge – Mobile Around 3.5% of coupon (approx.)

Reliance – 2.5 to 3.5%

Tata – 3.15%

Idea – 2.5%

Vodafone – 2.5%

MTNL – 4%

BSNL – 4%

Prepaid Recharge – ITZ Cash card 1.5%

Prepaid Recharge – Dish TV, Tata Sky 5%, 3.5%

Airline Ticketing 3% of base fare

Railway Ticketing – Non AC Rs. 6/- per ticket

Railway Ticketing – AC Rs. 12/- per ticket

Bill payments Rs. 3/- per bill

Source: www.indepay.com

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

*Charges may vary depending upon location and service provider

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


4.4.6 Vending Machine of Coffee and Coca-Cola:-

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

4.4.7 Pay Phone:-

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

4.4.8 Other Necessary Amenities

Toilets:-

Neat and clean toilets facilities should be available for the customers.

Drinking Water:-

Purified drinking water facilities should be available to the customers. Depending upon the
climate hot or cold water can be provided.

 From the above suggested non-fuel product mix earning per square per month from the
above suggested non-fuel product mix:

Serial No Product-mix Earnings per sft per month in INR


A ATM 100
B Quick care point 485.71
C Coffee vending m/c 161.96
D Vegetable Shop 100
E Inde-pay 287
F Total 178.82

*Source: Feasibility report on non fuel offerings of HPCL

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


4.5 Non Fuel Initiatives of Indian PSU’S

4.5.1 Indian Oil Corporation Limited (IOCL) 19

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

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

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

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


In urban areas, the stores are in two sizes, 300 to 700 sq feet and 700 to 1,000 sq feet. They
are between 1,000 sq feet and 1,500 sq feet on highways.

IOCL has 108 Kisan Seva Kendras (KSKs), its low-cost petrol pumps that sell agriculture
inputs, equipment and daily essentials in rural areas. The company is planning to set up 2,500-
3,000 new such pumps by the end of 2010.

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

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

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


4.5.2 Bharat Petroleum Corporation Limited (BPCL) 20

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

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

In & Out stores have a wide range of services which include ATMs of leading Banks, Music
stores from Planet M and Music World, Beverages from Pepsi, Coffee and snacks from Cafe
Coffee Day and Coffee Day Xpress, and a variety of impulse buys including confectionery,
snacks, convenience foods, toiletries and select range of branded groceries and other FMCG
products through exclusive tie-ups with such FMCG majors like ITC, Cadbury and Frito-Lay.

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

The In &Out stores offer Western Union Money Transfer facilities in Mumbai. They also
offer prepaid mobile recharge cards and e-charging of mobiles. It also has music stores by the
name of Satellites and Unplugged from Planet M and Music World respectively at select
outlets for music cassettes and CDs.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

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

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


4.5.3 Hindustan Petroleum Corporation Limited (HPCL) 21

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

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

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

To deliver the many conveniences and services, HPCL has struck strategic alliances with
leading brands like Fed Ex, Coca Cola India, Western Union Money Transfer, ICICI Bank,
Café Coffee Day, Skypak, US Pizza, and many more. HPCL is also forging service specific
alliances with several automobile companies and OEMs like Tata Motors to jointly recognize
"Club HP" outlets, which will be authorized service centers for leading automobile brands.

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

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

• Vehicle Care - Each Club HP Mega and Max outlet is equipped with a service station.
In addition, the outlets also provide vehicle consumable and accessories, all under one
Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun
roof. More and more outlets will be progressively upgrade to authorized service
stations as part of our association with various vehicle manufacturers.

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

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

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

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

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

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

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

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


• Advantage HPCL

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

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

o Their dealers are imparted world class training.

o Joint promotions to FedEx customer base.

o World Class Value Added Service and convenience for their Customers.

• Advantage FedEx

o Access to HPCL extensive retail network

o Association with a leading brand in the country.

o Helps FedEx get closer to its customers

o Excellent Brand Coverage.

o Scope for Joint Promotions.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


CHAPTER 5

Real Estate Utilization

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

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

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

• Organized retailing is less than 3% of total retail whereas; it is 20% in China, 36% in
Brazil and about 50% in Malaysia.
• Organized retailing has forecasts to become 24% by 2010 in India
• Estimated at 12 Million retail outlets of which, 95% would be smaller than500 sq. feet
(estimated number of outlets in Brazil approx 1.1 Million and around 905, 000 in US)
• Lowest retail space per capita in the world at 2 sq. ft per capita.
• Early mover advantage still available due to huge untapped resources and facilities
Potential for high market capitalization
• Shifts in consumer expectations and buying behavior

5.2 Transportation Network


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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


Here is a highlight of the transportation infrastructure:

• India is observing speedy development of transportation infrastructure


• Second largest Road network in the world (3.34 million kilometers)
• Projects like EW and NS corridors and Golden Quadrilateral are expected to boost
movement of goods and people across country
• Average annual growth rate of vehicle ownership estimated at 10.16% over the last 5
years
• Urban local bodies are taking initiatives for road development
• Strengthening of road networks have increased movement of people and goods
• Increased movement along roads have opened retailing opportunities explicitly for
road users

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


5.3Emerging Retail Formats

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

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

• ‘Destination’ stop - USP


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

• Convenient short stops


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

• Short stops within urban areas


• Predominantly higher levels of passenger vehicle volumes
Urban Stop • Fuel dispensers, Convenience stores, ATMs, entertainment zones, book
and music stores, 24x7 chemists, eateries

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


5.3.1 Highway Stops

These retail outlets have been designed specifically for national and state highways. These
outlets cater specifically to the expectations of truck or transporter’s segment. They also cater
to the needs of long driving passenger vehicles.

Some of the examples of highway stops are: BPCL’s Ghar, IOCL’s Swagat, HPCL’s Club
HP,

Reliance’s A-1 Plaza.

All these outlets have facilities of eateries, ATM’s, rest houses, factory outlets of apparels,
cosmetics, confectionary shops, etc.

These outlets have been developed to tap the heavy traffic which prevails on the highways.
These outlets provide a one stop shop for all the commuters travelling on the highways. They
are huge in size and have all the modern amenities at customer’s disposal.

5.3.2 Sub Urban Stops

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

5.3.3 Urban Stops

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

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

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

Following are the Financials considered for the hypothetical case:

1. Land area for fuel retail outlet: 1.00 acres ( urban or sub urban stop)

2. Fuel operations: 0.65 acres (includes space for dispensers, tanks, office buildings,

electricity and generator rooms, etc)

3. Retail operations: 0.35 acres (vacant space or unutilized space which can be used for

non fuel operations such as ATM , convenience store or restaurants, etc)

4. Assumed FSI for retail development: 1.0 (FSI stands for Floor Space Index- ratio of

total floor space to total plot size. Here FSI indicates that total plot area is being used

for retail operations)

5. Built-up area for retail development: 15, 246 sq. ft.

6. Land cost: NIL (included in cost of fuel outlet i.e. while setting up fuel operations)

7. Construction cost: INR 1,200 per sq. ft.(average cost of construction in year 2006)

8. Total Construction Cost: INR 18,295,200

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


Achievable Pricing By Means Of Non Fuel Offerings

Suggested Product Area Rentals Annual


Mix
(In Square Feet) (INR per sq. ft. (INR)
per month)

ATM 150 60 108, 000

Convenient
4000 35 1,680, 000
Shopping

Fast Food 4000 30 1,440, 000

Entertainment
4000 20 960, 000
Zone

Others

(Factory Outlets, 3096 35 1300, 320


Book Stores,
Kiosks, etc)

Total 15, 246 5, 488, 320

The above hypothetical case clearly shows the kind of revenues which this kind of product
mix can contribute to the revenue stream of an outlet.

Such product mix will not only increase the revenue but will also enhance the brand
credibility, customer satisfaction and brand loyalty.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


CONCLUSION

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


CONCLUSION

“Is it the beginning of the end or the end of the beginning?”


Since last six years, when retailing was first thrown open in the petroleum sector, oil
companies are still struggling to grasp the changing dynamics of the retail sector.

The launch of non-fuel retailing in India with much ordeal by petroleum majors has not
impressed the Indian customers. The consumer off-take of groceries, fast-food, medicines, and
FMCG products at fuel stations has not met up the expectations of the oil marketing
companies.

Considering non-fuel retailing is a proven business model in many countries — in the US, for
instance, the petroleum sector sells the highest number of burgers — why are non-fuel sales
not even one per cent of total fuel sales? Have the Indian petro companies got it wrong or the
Indian consumer rejected the concept?

At first instance, it is about priority. The industry is still being designed. Mergers, entry of
private players, issues on branding and consolidation in the upstream and downstream sectors
have pushed non-fuel to the back-seat. The key to success lies in identifying and meeting
customer behavior patterns and changing demographics.

The Indian petro retail scenario is balanced steadily for a quantum leap. Global names are set
to speck the petro-retail landscape. At the same time, new and emerging retail formats will
drive the diversity of the fast-changing retail backdrop.

Organized Retail means 'Big Stores'- a common myth. Organized retailing is all about
"aggregating value" and what shape, size and configuration the interface to customer takes is
largely a function of offer and proposition. A growing population, a young workforce and
zooming consumer confidence will fuel the expansion of this sector. As organized retail in
rural India awaits the arrival of Reliance Retail, current majors like ITC, Godrej and DSCL
are expanding their retail operations by setting up more stores, entering new states and
offering newer product categories, giving a magnificent opportunity to oil majors for
increasing their revenues by means of strategic tie-ups.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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

As the petro-retail arena grows in size and competition increases, the possibility for improving
retail productivity and cutting costs is likely to decrease. Thus, it would become important for
retailers to create a unique position in the marketplace based on value, relationships or
experience.

At the same time, it is critical to understand the target customer's definition of value and make
an offer, which not only delights the customers but also is also difficult for competitors to
imitate.

For now, the existing players are expanding — cautiously. In a highly-competitive


environment, it remains to be seen who will crack the consumer riddle.

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


BIBLIOGRAPPHY

Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


BIBLIOGRAPHY

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Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun


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Arvind Dwivedi: University Of Petroleum & Energy Studies, Dehradun

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