Ushering in a Retail Revolution
PRIMER TO THE OIL INDUSTRY
Before getting into the Case, it will be useful for students to understand the oil industry. Hence, a Primer is provided.
The Origin of Oil
Oil1 is said to be formed from the remains of animals and plants that lived several millions of years ago in a marine environment. Over several thousands, even millions, of years, these remains were slowly covered by layers of sand and silt deposited by natural elements like the wind and rivers. Extreme heat and pressure played a major role in aiding these remains transform themselves into what today has become black gold, that is, crude oil (Figure 2.1).
The origin of crude oil is indicated by the word ‘petroleum’ itself. The word petra means ‘rock’; hence, petroleum literally means ‘rock oil’.
Figure 2.1 Petroleum and Natural Gas Formation
The Petroleum Value Chain
The petroleum business comprises three broad segments:
- The ‘upstream segment’ comprises exploration for and production of crude oil.
- The so-called ‘midstream segment’ comprises the refining of crude oil and its transportation. Refining involves the conversion of crude oil into usable products such as petrol, diesel, kerosene, liquefied petroleum gas (LPG), naphtha and aviation turbine fuel (ATF); and the transportation of crude oil can be done through ships or pipelines.
- ‘Oil marketing or retailing’ is the segment where the product is finally sold to the customer. This is generally done through company-owned outlets or dealers through petrol pumps or LPG/kerosene dealers.
The first process in the crude oil value chain is exploration, when the oil has to be found in quantities that are sufficient enough to be commercially recoverable. It is this stage that is generally considered the riskiest, for finding oil is becoming tougher and tougher. Today, companies have to venture into hitherto unexplored or untapped areas such as the cold Arctic.
If crude oil is found in commercially viable quantities, the reserves are estimated and the oil field is subsequently developed. Classification of oil reserves is generally done as follows:2
- 1P reserves, where 1P stands for ‘proved’ reserves: This is defined as the quantity of energy sources estimated with reasonable certainty, from the analysis of geologic and engineering data, to be recoverable from well-established or known reservoirs with the existing equipments and under the existing operating conditions.
- 2P reserves, comprising proved plus ‘probable’ reserves: This is defined as the estimated quantity of energy source (such as coal, gas or oil) which, based on geologic and engineering evidence supporting proved energy reserves, can reasonably be expected to exist and recoverable with presently available technology at an economically viable cost.
- 3P reserves, comprising proved plus probable plus ‘possible’ reserves.
It generally takes over five years from discovery to production. A large production facility sees massive activity with the oil being ready for export to refinery after processing on site and removal of basic impurities and water.
Crude oil may be transported via pipelines, through trucks, ships, railway wagons, etc., with pipelines generally being considered the cheapest mode of transportation. The refining process it self involves three steps:
- Fractional distillation, that involves the separation of constituents according to their molecular weights and relative boiling points in a distillation column
- Cracking, that is the application of heat and pressure in the presence of a catalyst that converts the lower-value, heavier molecules to lighter, higher-value ones
- Treatment of products so produced
The end process of refining converts the crude oil into a number of usable petroleum products, such as the following:
Figure 2.2 Distillation in Refining Process
Note: A 42-gallon barrel of crude oil yields between 44 and 45 gallons of petroleum products.
These products are then transported to the centres of consumption. Each product has a different use. It is some of these constituents, petrol and diesel, that your automobile runs on! In India, kerosene is used for heating and lighting purposes. LPG is stored in cylinders and is used for cooking.
Bitumen is used in the making of roads, whereas ATF is used as a fuel in aircraft.
Thus, the customer’s primary association with an oil company is generally only at the final stage, that is, when they visit the petrol or gas station and fill up the tanks of their automobiles with petrol or diesel, or asks for an LPG cylinder or lubricants.
Types of Crude Oil
Each variety of crude oil found in different places is a little different. Oil is generally classified into the following two categories based on the sulphur content:
- ‘Sweet’ crude oil, that contains low amounts of sulphur
- ‘sour’ crude oil, that contains higher amounts of sulphur
Another common classification is based on the weight of molecules and resistance to flow, or viscosity, of oils:
- ‘Light’ crude oil, that flows relatively freely
- ‘Heavy’ crude oil, that demonstrates resistance to flow
The American Petroleum Institute (API) helps classify different crude oils into various grades.
Understanding the Oil Market
The Middle Eastern countries have plenty of reserves of crude oil. Saudi Arabia has the largest, with Iran, Iraq, Libya, etc. also having substantial reserves. Saudi Arabia has the largest oil field in the world, called Ghawar. In addition, Russia, Venezuela and a few other countries also hold large reserves. In recent years, large reserves have also been found in the pre-salt areas off the Brazilian coast (see Table 2.1).
Saudi Arabia is the world’s largest producer and exporter of crude oil. Russia is another big producer and exporter, with massive reserves (see Table 2.4).
The United States is also one of the largest producers of crude oil; but it is also the largest consumer, using as many as ∼20 million barrels a day (see Table 2.2), which is a little less than one-fourth of the world’s total consumption of oil. This means the United States is also the largest importer of crude oil (see Table 2.3).4
|8||United Arab Emirates||3,046|
In September 1960, five countries, namely, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela (some of the largest oil producers in the world) came together to form what came to be called the Organization of the Petroleum Exporting Countries (OPEC).
These countries were later joined by Qatar (1961), Indonesia (1962), Socialist People’s Libyan Arab Jamahiriya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975) and Angola (2007).9
Today, OPEC supplies close to 40 per cent of the world’s total oil demand of approximately 85 million barrels a day and controls approximately three-quarters of the world’s total proven reserves of oil, as Figure 2.3 indicates.
The way OPEC works is that it aims at influencing price levels by setting a production quota for all its members, except Iraq. Each member country is expected to adhere to the quota, but the track record of compliance with OPEC quotas is mixed. An OPEC member-country may choose to decrease output in line with a decrease in its production quota by restricting the production of the oil companies operating within its borders. For example, when oil prices fell sharply as the economic crisis took hold recently, OPEC removed as much as 4 million barrels from the world market.
Within the OPEC, Saudi Arabia is known as a ‘swing producer’ as it is one of the few countries that has sufficient spare capacity to be able to almost single-handedly influence the world supply and, hence, price of oil.
Some analysts blame the OPEC for being at least partially responsible for the two major oil price shocks—1973 and—1979 which were triggered by the Arab oil embargo and the outbreak of the Iranian Revolution, respectively.
The governments and government-owned firms today control the majority of both current production (more than 52 per cent in 2007) and proven reserves (88 per cent in 2007), thus exerting a significant influence on oil markets. Oil has thus become a tool of both diplomacy and foreign policy.
Some large government-owned or government-controlled companies are the following:
- PDVSA of Venezuela
- Petrobras of Brazil
- Statoil of Norway
- Pemex of Mexico
- Saudi Aramco
On the other hand, there are also several large non-government companies, especially American and European ones, such as the following:
Figure 2.3 Distribution of Reserves
Source: PFC Energy, 2008.
The share of total production of all the major producers is given in Figure 2.4. As can be seen, Saudi Aramco is the ‘big daddy’ and produces as much as 12 per cent of the world’s total production by itself.
Figure 2.4 Distribution of Total Oil Production by Company
Source: Petroleum Intelligence Weekly, (Vol XLVII, No. 48), 1 December 2008.
1Total oil production includes crude oil, natural gas liquids, and condensates.
2Includes smaller companies outside of the top 50 producers.
The Indian Scenario
India is one of the largest consumers and importers of crude oil. The year ending March 2010 saw the country purchase close to 160 million tonnes of crude oil from abroad; the figure is only expected to increase going forward due to the growth of the economy and increased refining capacity being brought on stream. In fact, the country may emerge as the third largest importer of crude oil in just a couple of years.10
The International Energy Agency has estimated that energy consumption in India is expected to rise to 833 million tonnes of oil equivalent in the next two decades.11 Major sources of Indian imports are Saudi Arabia, Kuwait, Malaysia, Algeria, etc.
In India, some of the major companies are owned or controlled by the government. These are as follows:
- Oil and Natural Gas Corporation (ONGC)
- Indian Oil Corporation (IOC)
- Hindustan Petroleum Corporation Ltd.
- Bharat Petroleum Corporation Limited (BPCL)
- Oil India Ltd.
- Gas Authority of India Ltd. (GAIL, India)
But there are also private sector players, mainly the following:
- Reliance Industries Ltd.
- Essar Oil Ltd.
Governmental action is generally considered to have considerable importance in the dynamics of the oil market. This is through the promulgation of regulations pertaining to the oil and gas sector as well as the tax structures and royalty rates payable to the government. This is in addition to the usage of oil as a tool in diplomatic efforts, as previously mentioned. The world is currently witnessing governments trying to maintain a strong hold over, or at least influence, the oil and gas sector. Russia is a prime example, and India is no exception to the rule.
Given that India has little oil reserves of her own, as a result of which she has emerged a major importer, the concept of achieving energy security has become increasingly important. This is detailed in the article ‘Achieving energy security’ by Sidharth Balakrishna from The Hindu Business Line, December 2007:
The recent hardening of oil prices close to a stratospheric $100 a barrel has once again drawn attention to a pressing issue—India’s energy security. The country’s import dependence on oil is likely to increase further from an already high figure of approximately 73 per cent.
All this while domestic crude oil production has been practically stagnant at around 33 million tonnes a year for the last several years. The government realizes the importance of the issue but seems to be able to do precious little to alleviate it.
The two pillars of the traditional approach adopted by our policy makers and their drawbacks are outlined below:
Domestic public sector oil companies, particularly ONGC Videsh, have been encouraged to take equity stakes in producing oil and gas fields abroad or acquire acreages in areas with high oil potential from which the produce can be shipped or piped to India.
Exploration efforts within the country have been given a boost through the New Exploration and Licensing Policy, with six rounds having been conducted so far and Production Sharing Contracts signed with companies winning bids for exploration acreages. The auction process has also resulted in revenues flowing to the exchequer.
However, both these have suffered certain drawbacks. As far as the first pillar is concerned, oil and gas is typically found in areas that seem to be affected by extreme geopolitical instability such as Iraq, Iran and Nigeria. Many commentators have pointed out that acquiring acreages in such areas does not provide any ‘security’ as contracts are difficult to enforce and goalposts are shifted at the drop of a hat as political regimes change. Furthermore, competition with other countries, particularly China, in the acquisition of oil fields has pushed up costs of acquisition and, hence, decreased potential returns.
Promoting growth of domestic production thus appears to be a better idea. However, despite news of some domestic companies making large ‘finds’, subsequent testing has proved their claims to be tall ones (with the possible exception of Reliance Industries’ KG Basin find). Further, the big foreign oil companies that India had hoped to attract, including Exxon Mobil, Shell, Chevron, Total, etc., showed by and large less than satisfactory interest in India’s hydrocarbon potential.
In such a scenario, the government’s policy needs to be supplemented by the following additional measures:
The hydrocarbon recovery factor of fields in India, particularly those operated by ONGC, has been found to be extremely low at 26–28 per cent. This needs to be rapidly improved to global standards of 40 per cent and higher.
Special fiscal terms need to be offered to operators willing to take higher risks in exploring ultra-deep water and frontier basins. India still has large swathes of unexplored territory and a large find could be around the corner in deep water areas, provided firms are ready to explore these areas.
It has often been stated that a vibrant petroleum industry needs the presence of both large and small firms. Whereas large firms deploy the latest technology, smaller ones are willing to take more risks. The success of Cairn in Rajasthan illustrates this theory.
Alternative and non-conventional sources of energy need to be probed. These include the development of coal bed methane, nuclear, wind and solar energy as commercial energy sources. The nuclear deal with the United States must be seen as a step forward in the achievement of energy security, the politics surrounding it notwithstanding.
India has virtually no domestic provider of services associated with oil exploration activity. A reduction of import dependence on this at least would be a step forward.
Regulation of the upstream sector needs to be in competent and professional hands, with the regulator being able to coax the best out of industry participants. At present, the staffing of the Directorate General of Hydrocarbons, the de facto regulator, consists mainly of ONGC and Oil India personnel, rather than regulatory experts.
Progress on the aforementioned points should help us move forward in the quest to supply energy to India’s rapidly growing economy. One thing is sure: We need to act quickly on this issue!
BACKGROUND: THE HISTORY OF BPCL
The history of BPCL can be traced back to the 1950s, when shortly after independence the government of India decided to establish an oil refinery in Bombay, along with the Burmah Shell Group of companies on 15 December 1951. The company so formed in 1952 was called the Burmah Shell Refineries Ltd. The refinery with a capacity of 2.2 million tonnes per annum, which was then the largest in India, was brought on stream at the end of January 1955.12
However, the Government of India, in 1976, subsequently decided to nationalize all major petroleum assets in the country, which led to the passing of the Burmah–Shell (Acquisition of Undertaking in India) Bill. After its acquisition by the government, the company was christened as ‘Bharat Refineries Ltd’. Among other things, the company achieved the distinction of becoming the first Indian company to retail LPG as a domestic cooking fuel to residential households.
In August 1977, the company’s name was changed again, and it is now called Bharat Petroleum Corporation Ltd. (BPCL). The company’s refinery was the first refinery to process the newly found crude oil from Bombay High.
The 1990s saw plenty of action, with BPCL inking marketing contracts with IBP, Madras Refineries Ltd. and Cochin Refineries Ltd. Another highlight of the early 1990s was the disinvestment of the company, in which the government reduced its stake by 30 per cent, placing the shares with financial institutions and mutual funds. The share price opened at a record high amongst all public sector firms, at Rs. 1,275.
In 1993, BPCL decided to strengthen its position in the growing lubricants market and looked towards its old partner, Royal Dutch Shell. This was probably because the company’s market share in lubricants, perhaps the most profitable product in the oil retail market, was relatively low this could be partially traced to the fact that BPCL was dependent on other oil firms for the base oil needed to make lubricants.
Bharat Shell Ltd. (BSL) was formed to retail Shell-branded lubricants in the market. By the end of the century, BPCL emerged as India’s second-largest oil company in terms of market share and was termed a ‘Navratna’, one of the then nine jewels in the government’s crown. Such a status gave the management of the firm a degree of autonomy that was not available to other firms; the company could make some decisions without needing the government’s approval at each stage.
BPCL’s own crown jewel was the Mumbai refinery, Maharashtra. It consistently operated at a capacity utilization well above its nameplate capacity. Strategically located, it was able to obtain crude oil from both domestic sources, notably the Bombay High fields, as well as the oil-rich Persian Gulf states.
The company’s refining capacity received a major boost when the Indian government decided to transfer its shareholding in Kochi Refineries Ltd. (KRL), Kerala, which had a refining capacity of 7.5 million tonnes per annum. The company subsequently acquired a substantial stake in Numaligarh Refineries, Assam, which had a capacity of 3 million tonnes. The company also wished to expand through the greenfield route, and chose a location at Bina in Madhya Pradesh to establish a 6 million tonnes per annum refinery. However, this refinery was delayed due to one reason or the other, but is finally slated to commence its operations in early 2011.
Today, Bina refinery, Madhya Pradesh, constructed at a cost of more than Rs. 110 billion, has an initial capacity of 6 million tonnes per annum, whereas the ones in Mumbai and Kochi have capacities of 12 and 10 million tonnes per annum, respectively. 13 All combined, the total refinery capacity is in excess of 30 million tonnes per annum.
To meet its refining requirements, the company sources crude oil from a number of countries. It is expected that Saudi Arabia will continue to be BPCL’s largest crude supplier in the near future, and the company also sources from the following countries:
- Algeria (1.2 million tonnes were sourced in 2010)
- Malaysia (2,50,000 tonnes were sourced in 2010)
- Iran (2,50,000 tonnes were sourced in 2010)
In the retail market, BPCL is second only to its sister public-sector firm, the IOC. Retail sales contributed close to 60 per cent of BPCL’s turnover (2010), meaning that it was an important focus area for the firm. A notable feature of its outlets was that a high percentage of its retail outlets were company-owned or leased—this gave BPCL the flexibility and ability to embark on its subsequent branding exercise.
The company has also made inroads into the exploration segment, through its subsidiary Bharat Petro Resources Ltd. (BPRL). It currently has a participating interest in 27 blocks (as of September 2010) in several countries including India, Australia, Brazil, East Timor, Indonesia, Mozambique and the United Kingdom,15 and remains on the lookout for future opportunities.
The challenge for a petroleum company such as BPCL was to gain market share in a market that does not allow easy differentiation of the core product, that is, petroleum fuels. After all, crude oil looks and feels the same irrespective of who sells it. It also has no ‘packaging’ in the true sense of the term; in fact, most consumers do not actually see the product as it flows directly from the nozzle of the pump into the automobile tank.
In such a situation, the issues faced by BPCL were as follows:
- How could the company reach out to the consumer and create ‘connect’?
- How could the company increase its market share in such a market? The IOC was dominating the market, and how could BPCL make inroads into the market leader’s share? After all, why would an ordinary consumer prefer to fill his or her automobile tank at a BPCL petrol station rather than one of its competitors?
Table 2.5 State-wise and Company-wise Retail Outlets
After providing the aforementioned information, the faculty is requested to initiate a discussion in class and help the students in resolving the issues.
CASE RESOLUTION: USHERING IN A REVOLUTION IN FUEL RETAIL
The face of Petrol Pumps has changed considerably in India over the last few years. Earlier, these used to be simple facilities with rudimentary infrastructure—the customer was just expected to fill up his tank with petrol (an attendant would provide this service), pay the bill and drive away. In most cases, no other service was provided, except for the sale of automobile consumables (lubricants, battery water and the like) and customers did not have a consistent experience—at times the attendants were rude, not in full uniform etc. In short, fuel retailers appeared to possess a rather indifferent approach towards customer service.
This seems a far cry from the situation today. The petrol pumps of virtually all the players in the market, including the Public Sector companies such as Indian Oil, HPCL and BPCL, as well as those of the private sector retailers, such as Reliance Industries Ltd, Essar, Shell, etc., are now branded outlets which offer a number of services to the consumer. The attendants provide certain services free to the consumer such as checking the levels of engine oil, coolant, etc., wiping the windscreen, checking tyre pressure and filling air if necessary, etc. In addition, many petrol pumps have convenience stores and other retail outlets attached to them where consumers can purchase items of daily consumption such as biscuits, soft drinks, tea, coffee and other similar items usually found in departments stores. Such outlets are separately branded by the oil marketing firms, under the name ‘Convenio’ by Indian Oil, ‘In & Out’ by BPCL, ‘A1’ by Reliance Industries Ltd, etc. The situation has thus changed from indifference towards customer service to being customer-focused. So much so that many petrol pumps have automated teller machines (ATMs) of banks within their compound; some even have coffee shops and other such outlets of retail chains.
The attendants today are smartly dressed, and the outlet is generally well lighted and provides a welcoming ambience.
This is a win-win situation for both the owners of petrol pumps and the consumer. The consumer is provided a much better experience, efficient and quick service, and can even purchase items for which they would otherwise have to go to a department store. The dealers too are happy with an additional revenue stream as they are paid a rent for the use of their premises.
This virtual revolution in the fuel retail market did not take place overnight. It was pioneered by the government-owned BPCL, which received wide acclaim for its efforts. This case study outlines how the revolution came about. It provides a classic example of how even a standard and virtually similar product, that is, fuel, can be differentiated and branded in the eyes of the customer.
The company realized that while the product, that is, petroleum itself, was difficult to differentiate, what could be done was to differentiate the experience that the customers had when they visited a BPCL petroleum outlet. The company could conceivably provide the customer an enhanced service level, or provide them certain amenities or services that them would not get at the outlets of any of the other players in the market.
Another fact was that globally, add-on services provided oil retailers with additional revenue-earning opportunities and accounted for a substantial portion of petrol pump margins. An advantage that petroleum outlets had was their location: The outlets were often located on prime lands in the heart of cities. Plus, they had what could be called a ‘captive audience’: If a consumer had to stop at a petrol pump, why should not they use the time to purchase other commodities as well? As a result, at the global level, quite often, margin on non-fuel products accounted for a higher share than the margins on petroleum products.
The BPCL took its early and tentative steps through surveys aimed at identifying the needs of consumers at retail outlets. Some were sceptical of these surveys since many Indian consumers had not been to developed countries, and thus, perhaps, did not have the imagination to articulate what all services could be provided. Nevertheless, a couple of points that the surveys did reveal were the following:
- Consumers did want additional services at petroleum outlets. At the least, they wished for reliable and accurate air gauges.
- There was a need for convenience articulated by some, especially in the method and speed with which payment could be made.
- Some consumers did indeed indicate a willingness to make additional non-fuel purchases at pump stations. Most notably, they said that given the hot Indian summer, it would be good to be able to purchase soft drinks at these outlets.
The BPCL decided to work out strategies and tactics to address these needs. The company worked out an arrangement with Apollo Tyres to install reliable tyre gauges at their outlets. Similarly, an agreement was worked out with PepsiCo, to make the company’s soft drinks available at the outlets. The latter initiative was clearly a win-win for both companies.
With an aim to address the consumer’s stated need for convenience in making payments, BPCL hit on the idea of using co-branded credit cards. It achieved a first, becoming the first oil company in India to issue a co-branded credit card in August 1995. The card, co-branded with BOBCARDS, was initially launched only in a few cities. Realizing that many automobile owners ask their chauffeurs to fill up fuel, the two companies allowed vehicle owners to authorize their drivers to make fuel purchases on the card.
The use of such cards was not without its set of challenges. The experience of dealers with the ‘petrocards’ that had been issued by oil companies earlier was far from inspiring. This was mainly due to the long delays in the payments actually reaching the dealers; the oil-marketing companies took some time to first collect the card slips from the dealers and then issue the payments. So BPCL hit upon the novel idea of handing out pre-embossed slips to cardholders. The pump attendant now did not have to swipe the card and the slips through the embossing machine. The charge slips were collected on the same day they were used and deposited with Bank of Baroda. The bank, too, did not create any bottlenecks—the requisite payments for each dealer were issued almost immediately. The co-branded card was thus a prime example of superior cooperation among participating entities.
However, implementation of just marketing initiatives would not be sufficient. Given its legacy and current status of being a public sector unit, clearly the organizational structure would also need to be revamped to reflect the new focus at the customer end.
The company was accordingly restructured into a corporate centre, six strategic business units (SBUs) and shared services and entities, based primarily on the philosophy of greater customer focus.17 These six SBUs were as follows:
- The retail outlet business
- LPG dealerships
- Sales to the Industrial & Commercial Segment
- Lubricants business
- Aviation business and sale of ATF
The new structure meant that the company’s managers were responsible for definite segments and specific customers. Responsibilities could thus be diffused and bureaucracy reduced, besides speeding up decision making. This was also done through devolution of decision making, where sales officers could also take certain decisions.
The restructuring exercise was ultimately aimed at bringing the company closer to its customers. One of the methods used was to reduce the territorial area served by each office; the company’s 22 divisional offices were replaced by 61 branches, each encompassing a smaller area.
But ultimately for the change to become truly effective, it needed to trickle down right to the point-of-sale location, that is, the retail outlet. The company first identified over 1,200 petroleum stations that were critical to the company’s plans. These were based on strategic location, sales turnover and other factors. A special team was appointed with the specific objective of acquiring these outlets.
The next step involved modernising and sprucing up these newly acquired stations. Realising the potential of retailing non-fuel items at these locations, the company pioneered a range of convenience stores, known simply by the name ‘Bazaar’. The company was sensitive to consumer feedback. For example, they realized that many customers shopped in the period between 8 p.m. and 11 p.m., since that was the time they were driving back from work. In order to be successful, the retail outlets would thus need to remain open at this time.
In addition, the company adapted its product mix at these outlets to suit the tastes of the consumer. Slow-moving items were de-emphasized, whereas fast-moving ones were given more prominence. Items of impulse purchase, such as, for example, confectionary, chocolates and soft drinks, were made readily available.
The Bazaar stores gave way to the In&Out outlets in the company’s scheme for expansion. As the name suggested, these were places where the customer could walk ‘in’, make a few quick purchases and then walk ‘out’. Meanwhile, the pump attendants would clean the windscreen of the car and provide other required services. The customer could get routine maintenance checks done without any cost. The company gradually took its new outlets beyond metro cities, to the tier-II and tier-III towns of India.
Not content to rest with this initiative, the company took its ideas forward. The prime location of the fuel retail outlets also provided the opportunity to earn rental incomes through the establishment of other retail outlets on the premises. A large McDonald’s outlet was set up near the Mathura refinery on the busy Delhi Agra highway. The model that BPCL adopted was to charge a McDonald’s outlet a percentage share of its sales, besides a fixed rent. The location was well chosen, for several foreign tourists travelled down the highway to visit the Taj Mahal, and would be happy to see the familiar sight of the golden arches. Even Indian tourists, hoping for a quick bite while on the journey, would conceivably stop here.
Several other companies were tapped. These were financial institutions that set up ATMs and money transfer facilities; courier companies; retailers of music, greeting cards, movie tickets; etc. These tie-ups were not limited to just retailing at petrol pumps, but were also implemented in other spheres. For example, the company tied up with Nirlep, the well-known manufacturer of non-stick cookware. Nirlep’s products, such as frying pans and kadais were marketed directly to consumers’ households by the LPG-cylinder-refill personnel who paid visits.18
Another tie-up was initiated with Ion Exchange, the makers of ZeroB water purifiers within the city of Mumbai. This involved a customer being provided with coupons to avail of ZeroB products whenever they purchased BPCL’s high-octane petrol branded as ‘speed’.19
The In&Out stores remained open from early in the morning to late in the night. Even when other retail establishments had long shut, the consumer could drive into a petrol pump, fill up the tank and make necessary purchases for their daily needs. Some of these outlets went so far as to offer Internet-browsing facilities. The establishment of low-cost airlines provided another opportunity as people could now even book tickets at these petroleum outlets.
Today, the company is planning to build on these initiatives and expand its fuel retail outlets with food courts, cinema halls, etc. The BPCL tied up with Cinemata, a film distribution unit of Sony Entertainment Television, in 2007 to pilot these cinema halls at outlets located along highways. Each cinema hall will have a seating capacity of 150–200, and the films in digital format would be beamed at fuel stations.
It was reported that a company official stated the following: ‘Cinema halls will help us boost our non-fuel revenues. We are doing a survey in some markets where we would like to expand this format. So far, our pilot outlets in Gujarat are working well. The occupancy at the theatres is good and the internal rate of return is around 15 per cent.’20
Subsequent consumer research also identified another consumer need—the need for ‘pure,’ unadulterated fuel. This is important in a country where adulteration is rampant in some areas; most notably the subsidy provided on kerosene meant that large volumes of it were used to adulterate diesel. The fear in the minds of consumers of receiving adulterated fuel, which could damage their vehicle engines besides resulting in lower mileage, provided an opportunity to the company to differentiate its product based on the levels of purity dispensed by the fuel pump. Accordingly, BPCL came up with its ‘Pure for Sure’ (PFS) retail campaign. The company’s Web site has this to say: ‘We recognized the customer need for pure quality and correct quantity of fuel for their vehicles and launched the flagship initiative of Pure for Sure (PFS) offering the guarantee of pure quality and correct quantity of fuel to our customers. The petrol pumps displaying a prominent Pure for Sure signage have become landmark destinations as the movement has gained momentum across our Retail Network’21 (Source: BPCL website, http://www.bharatpetroleum.com/).
In order to gain credibility, BPCL appointed a third-party agency, TÜV SÜD South Asia, to audit and certify their retail outlets, based on a standard exclusively developed for the campaign. These standards were jointly developed by the agency and BPCL, by customizing generic quality system requirements. The third-party agency is responsible for suggesting areas of improvement to BPCL, carrying out re-audits wherever necessary to ensure strict adherence to the auditing standard by every retail outlet and issuance of certificates to outlets that pass the test.22
Another initiative was what came to be known as ‘GHAR’ (refer to the annexures for more details). This was implemented on national and state highways and was branded as One Stop Truck cum Tourist Shops (OSTS/OSTTS). These large outlets, spread over as much as 3–5 acres, offered a food court for tourists and a dhaba for truckers, a dormitory with beds, a large number of parking slots, a vehicle wash facility, laundry and tailoring establishments, bathing facilities and dedicated toilets. Some of the outlets even offered an amphitheatre for entertainment, healthcare centres, facilities for self-cooking, etc.
Customer loyalty was targeted through the issue of petrocards for automobile owners and SmartFleet for the owners of fleets of vehicles. The petrocard helped the customer obtain a certain number of points or ‘petromiles’ with each purchase, which could be redeemed for rewards. In addition, being a member of the programme entitled consumers to receive special offers from the company’s partners, special invites for films or passes to sporting events, etc.
As a result of the initiatives taken by BPCL and other oil companies, fuel was no longer seen as an undif-ferentiated product. Consumers now had a choice—which fuel pump to go to fill up their tanks. Especially with the Pure for Sure campaign, BPCL succeeded in creating a space for itself in the consumer’s mind. Consumers started trusting the quality and quantity of fuel being dispensed from BPCL outlets. It was reported that at least some consumers preferred to go to a BPCL outlet, even if there was another outlet of a competing supplier closer to their homes.
News reports and the company’s annual report state that its non-fuel sales-based format has made BPCL the largest non-fuel revenue generator in the oil industry, as well as one of the leading retail networks in the country. The company claims that its network of 235 In&Out stores is the largest organized convenience retailing proposition in the country, recording a sales turnover of Rs. 1.46 billion.23
The company is planning to further expand its fuel retail outlets with food courts, cinema halls and provision stores in the states of Haryana, Andhra Pradesh, Punjab and Tamil Nadu.
More importantly, the company reportedly views this sales format (fuel outlets supported by allied retail business) as both more profitable than pure fuel sales and one that is likely to see substantial growth. It was reported that during the last financial year, BPCL’s allied retail business grew by 18 per cent, far higher than sales of fuel-based products.24
The feedback to its food courts (the Ghar Dhaba) is reportedly favourable, and the outlets see significant footfalls at both the trucker and motorist dining areas.
Today, there are 332 ATMs located at BPCL outlets, and the ‘In&Out e-Traveller’ that offers e-ticketing or e-booking services for rail travel, air travel and hotel accommodation is presently available at 190 outlets.25
FOR FURTHER DISCUSSION
The BPCL still faces considerable challenges in the market. These are encapsulated as follows:
- The last few years have been marked by the entry of new private players in the fuel retail market. How will BPCL cope with the possible loss of market share resulting from the entry of these players?
- Related to the aforementioned point, although BPCL found success in differentiating itself in terms of service standards and the like, the strategy adopted by the company was not unique, that is, others could replicate the same model and indeed they do. In fact, the service offered by other players exceeds the ones offered by the company, according to some. In such a scenario, what could the company do?
- Try and think about the future strategy for BPCL in the context of the following:
- Recent initiatives by the Government to deregulate fuel prices
- The possible increase in competition in the industry.
After brainstorming on this topic for some time, read section ‘The Road Ahead’ based on newspaper articles and a published interview with the ex-chairman and managing director (CMD) of BPCL.
THE ROAD AHEAD
Indications of BPCL’s future strategy can be found in recent press reports, including an interview with the then CMD of BPCL, Ashok Sinha.26 He was reportedly asked as to what the future holds for the company, especially in the context of the country’s need for energy security. He replied that for the company to help the country achieve its objectives vis-à-vis energy security, it was important for the company to be financially strong and profitable. This was because the profits would be used for investments.
He provided an illustration stating that if demand for petroleum products continued to grow at an approximate rate of 7 per cent each year, it meant that over a 5-year period, demand would increase by close to 50 per cent. To meet the new demand levels, substantial investments would have to be made across the petroleum value chain, in exploration, refining and processing, storage, transportation, and sales and distribution.
A further commitment came from the new chairman, S. Radhakrishnan, who is reported to have stated that BPCL plans to invest as much as Rs. 500 billion over the next five years in refinery expansion, overseas acquisitions of oil and gas acreages abroad, and for establishing power plants.27 This will include investments across its refineries in Kochi, Mumbai and Numaligarh, as well as the new one in Bina. The company’s exploration-focused subsidiary, Bharat Petro Resources Ltd. (BPRL), will look for new acquisition opportunities in countries across the world, besides India.
There are also some reports that the company is planning a new refinery in Allahabad in Uttar Pradesh, to be in place by 2020. Along with the refinery expansions at Mumbai, Kochi, Bina and Numaligarh, BPCL would thus double its current refinery capacity to 60 million tonnes per year by 2020. By 2015–16, BPCL is reportedly targeting 45 million tonnes per year and a market share of 33 per cent under its ‘Project Dream Plan’.28
All this can be done only if the company remains financially strong and hence the need to address the subsidy issue and under-recoveries with respect to petroleum fuels.
In the context of the recent deregulation of petroleum prices, Ashok Sinha reportedly stated that there would be a change from the then-prevalent ‘fixed price’ scenario. Illustrating his point by drawing a parallel with lubricants, he said some amount of volatility can be expected in prices of raw materials, but the consumer doesn’t see it immediately, since the price change in final prices is not immediate.
Commenting on the entry of private players to the market, Ashok Sinha reportedly felt that it was inevitable the market share of public sector unit (PSU) retailers would come down by some extent, but market dynamics would determine the extent.
He, however, negated a question that PSU companies would also face pressure from their dealers moving away: ‘That is not going to be a major issue. India is large enough and you do not need to kind of grab each-others part’. He also reminded the interviewer that land is generally leased out to the dealers and, hence, if they left they would not be able to take away the retail outlet itself. Plus, there were existing agreements with the dealers.
Regarding the retaining of employees, Ashok Sinha was a trifle less sanguine; but he reportedly stated the following: ‘The last two years has taught people a lot of things. We have seen that people did go but you would be surprised how many of them wanted to come back’. He also stated that motivation is an important factor and it is about being ‘able to challenge the people, give them something new to do’, and the company had an advantage here in that ‘[i]f you look back over the last 5 years or 6 years continuously we have had one project or the other going. So people get charged’.
Providing an indication of the company’s future strategy, the then CMD stated that over the next couple of decades, ‘Bharat Petroleum will be globally an integrated oil and gas player. That is where it is heading for currently’.
Regarding product mix, Ashok Sinha stated that there were some peculiarities with regard to gas in that it was less easy to move as compared to oil and that it was usually found in areas that were set apart from demand centres, necessitating transportation. However, he admitted that gas would gradually replace liquid fuels, but only to an extent.
New investments, besides the ones in the company’s conventional businesses of exploration, refining, transportation, etc., could also come in power generation and renewables. The company reportedly plans to achieve a target of jatropha plantation over an area of 1 million acres of marginal land over the next 10–15 years.29
Meanwhile, an article in the Deccan Herald30 stated that the recent changes in the petroleum sector with respect to deregulation could see the following:
- Dynamic pricing strategies
- Bulk discounts offered to large consumers
- Retail consumers being rewarded for their loyalty
- Efficiency improvements being undertaken
- Growth of private players
Some of the possibilities are that the prices may see much greater volatility and may change on a regular basis. The market for ATFs already exhibits this trend. The deregulation could also result in new and innovative marketing strategies that may benefit consumers.
Just like in modern department-store-based retail, companies may offer discounts or promotional schemes to attract consumers, based on factors such as the location of the pump, presence of competition nearby, the time of the day and prevalent stock holdings.
News about such offers may be communicated through global positioning system (GPS)-enabled mobile handsets to the target consumer.
Another possibility is that in order to increase the sales volumes, fuel retailers may offer bulk discounts to large consumers, especially firms that operate a fleet of buses or trucks, for example. Retailers may also get increasingly aggressive in selling their branded fuels, with special additives to enhance efficiency.
Consumers may also see an extension of loyalty schemes. This case study has already mentioned the use of petrocards and other such loyalty schemes; such initiatives may be extended and made more attractive. Even more likely is that service standards at fuel pumps would be improved further, with consumers benefiting from free or discounted cleaning services, checks, replacements, etc.
Competition in the market is also likely to result in better efficiency standards across the value chain. One is likely to see increased efforts to curb wastage and pilferage, and investments in reducing losses due to evaporation of fuels and internal consumption in refineries.
Of course, private firms will benefit, since they had to earlier compete in the absence of a level playing field where public sector fuel retailers were compensated for the under-recoveries, but not their private sector counterparts. Deregulation would mean an even playing field for them. In this context, the private sector companies that also have large refineries (such as Reliance Industries Ltd. at Jamnagar in Gujarat and Essar Oil at Vadinar, also in Gujarat) will probably have an advantage. (The readers can also read the article ‘Fuel price hike: Who are the real beneficiaries?’ by the author of this case study, from www.indianoilandgas.com, June 2010.)
So the government has finally taken the plunge and hiked the prices of petrol, diesel, LPG and kerosene, in spite of expectations that only the prices of petrol would be increased due to the currently prevalent high inflation rate. Hiking the prices of kerosene and LPG is considered politically sensitive; the move to increase their prices by significant amounts has indeed caught many by surprise.
More than the actual increase in prices, it is the fact that petrol prices have been freed from the administrative fiat of the government and the indication that diesel may also be de-controlled in the future that makes the decision a real game-changer for the industry (should the move not be rolled back, that is).
For this means that the oil-marketing companies (OMCs) that have been struggling for a number of years now and have been saddled with the burden of under-recoveries have finally found some of their concerns addressed. This is likely to mean a surge in their stock prices in the days to come. Or so it seems. For the real gainers are not the government-owned PSU refiner-marketing firms, but the private firms such as Reliance and Essar. For in spite of establishing well over a thousand retail outlets each, these private firms could not grow their business owing to the fact that they were not compensated for their losses, unlike the government firms. When they did price petrol and diesel at the same prices as the PSU OMCs, both Essar and Reliance have been quite successful and have captured close to a 15 per cent share in the market within a very short time. Most motorists and truck drivers operating their vehicles on the highways prefer to tank up at the outlets of such companies due to their superior service and apparently better quality of fuels that are dispensed.
Incidentally, Shell, which has reportedly offered a few of its petrol retail outlets for sale just a few days back June 2010, must now be having second thoughts! Will they scrap the proposed sale in the wake of the government’s decision on prices?
And so, the future is actually not as rosy for the PSU OMCs as it may appear at first glance. They shall now probably have to compete tooth and nail with the private sector firms. Although they do possess some advantages in terms of their presence in favourable locations in the metro cities, it is clear that they shall have to streamline their operations and become more efficient. One is likely to see competition in terms of price and quality in the days ahead. In that sense, the government’s decision is a major long-term positive for consumers, a fact that the government itself has shied away from highlighting, not wanting to highlight the perceived difference between the services and fuel quality between its own public sector firms and the private ones.
How much market share the private sector firms are able to corner if diesel prices are also completely deregulated provides for interesting speculation. Besides Reliance, Essar and Shell, will more players enter the market? There have been reports of some oil companies belonging to the oil-rich Gulf States being interested. Should competition intensify what will the future hold for PSU retailers? Will we see them eventually struggle, as Indian Airlines is currently doing and BSNL may well do in the future?
A second positive result of this decision will be on PSU upstream companies such as ONGC and OIL. They shall have to compensate the OMCs by smaller amounts as the overall subsidy burden decreases. Combined with the recent decision to increase administered pricing mechanism (APM) gas prices, the CMDs of ONGC and OIL must be happy individuals today.
All in all, the petroleum sector is clearly witnessing significant changes at the moment. How the future will pan out for the industry participants is now a matter of interesting conjecture.31
Summary of BPCL’s Recent Initiatives
Strategy Development BPCL states that strategy development at the corporate level aims to achieve better focus on the new organizational structure, besides facilitating SBUs in developing their respective strategies that lead to an integrated corporate strategy.
The company mentions that a business planning process has been implemented that performs the following:
- Provides opportunities for SBUs to pursue their goals in consonance with the corporate vision.
- Continuously monitors trends and identifies strategic opportunities for future growth.
Brand Management In today’s competitive scenario, BPCL recognizes the need for strong brands. Accordingly, the brand management team endeavours to build and manage a strong brand image that reflects the company’s core values of being INCARE, that is, innovative, caring and reliable.
The focus is on continuously understanding customer behaviour, tracking their changing needs and expectations, and meeting these needs in the most cost-effective manner.
Research and Development BPCL has undertaken a number ofinitiatives for R&D. The company possesses R&D facilities at its refinery premises and the Product Application Development Centre in Sewree, Mumbai. A new state-of-the-art R&D centre is being established near Delhi, which will be organized around these core groups:
- Process and technology development
- Product application development
- Environmental engineering
- Technological edge
BPCL claims to be the first government-owned oil company to implement an enterprise resource planning (ERP) package. The implementation project was known as enterprise-wide transformation (ENTRANS), and it has been awarded the ‘SAP Star Implementation Award’.
The company mentions that the challenge of SAP implementation was to ensure that all the integrated elements (of the complex, multi-modular, integrated solutions that impact the entire work flow of the organisation) work seamlessly across the country, especially in remote locations.
Although providing online connectivity in these remote locations was a daunting task, it was successfully undertaken.
The company states that it is today ‘reaping the benefits of the integrated system in many areas of its operations. The early gains of implementation are in the areas of tracking customer receivables, monitoring credit management, inventory management, besides easing the operations in a large number of areas’ (Source: http://www.bharatpetroleum.com/, accessed Nov 2010). BPCL has also established one of the biggest centres of excellence in Asia to provide online support to end users, work towards continuous improvement in business processes and handle product upgrades.
With SAP as the information technology (IT) backbone, the future plans for the company include implementation of a customer relationship management solution. A large data warehouse project has also been implemented, which facilitates access to real-time accurate information across all company locations, thereby enabling management to take strategic and business decisions.32
Overview of BPCL’s Consumer Marketing Initiatives
Since 2002, BPCL has been retailing branded fuels, with names such as Speed, Hi-Speed Diesel and Speed 97. In fact, it was one of the pioneers as far as the introduction of premium fuel brands in the country is concerned. BPCL took a decision to introduce such specialized products in line with global trends and to keep pace with the technological advancements in the automobile industry.
The Speed brand of petrol contains multi-functional fuel additives; these prevent the formation of harmful deposits and help to clean existing deposits in the fuel tank. BPCL also introduced the high-end Speed 97, catering to the requirement of high-end vehicles. Similarly, to meet the growing needs of the diesel passenger car segment, the company introduced Hi-Speed Diesel, which is a blend of diesel and world-class multi-functional additives, which removes harmful deposits from all fuel metering systems and components. This also reduces the level of particulates and smoke, meaning the fuel is more environment friendly. It also provides longer engine life.
Retailing BPCL claims that it consciously works towards providing added value to its customers, both through its fuel outlets and through non-fuel initiatives. The company has, therefore, introduced several pioneering offerings in the Indian retail market.
Recognizing the strongly stated customer need for pure quality and correct quantity of fuel for their vehicles, BPCL launched the ‘Pure for Sure offering, guaranteeing pure quality and correct quantity of fuel to their customers. Its petrol pumps prominently display a ‘Pure for Sure’ signage; refer to the picture given here.
The company states on its Web site that it ‘now offers a robust and automated network of retail outlets, which leverage technology to deliver the assurance of quality and quantity promise, ensure integration of payment with fuelling and improves the service efficiency at the forecourt of the petrol pump’ (Source: http://www.bharatpetroleum.com/, accessed Nov 2010).
Loyalty The BPCL aims to share rewarding relationships with its customers, and building loyalty is a focus area. The company is credited with the launch of the first loyalty-cum-rewards programme, PetroBonus.
Equipped with smart card technology, the petrocard program aims to combine convenience in payment with an inbuilt rewards program. The idea is to reward the customer with petromiles every time they fill the tank.
Another programme on similar lines is the SmartFleet initiative, launched for Fleet Owners. The programme offers the fleet owner increased convenience; security; and other privileges such as cashless transactions, vehicle tracking, credit options, etc.
Customer Convenience BPCL also pioneered the concept of convenience stores. These stores were branded under the name In&Out, and today they are one of the largest networks of stores in the fuel retail market. They offer convenient timings and products at convenient locations for motorists. The products and services that are offered include convenience products, ATMs, money transfer facilities, courier services, launderettes, music, greeting cards, facilities for bill payments, movies/entertainment tickets, etc.
The stores also have partnerships with fast food destinations: McDonalds, Cafe Coffee Day, Subway, Pizza Hut, etc.
Vehicles Needs BPCL aims at providing service centre facilities through its vehicle-care (V-CARE) centres. These centres provide customers with reliable, transparent and affordable services, and have partnerships with Hero Honda and General Motors for being their authorized after-sales service centres.
For Truckers The company claims that it offers a ‘home away from home’ for truckers and tourists in the form of the ‘One Stop Truck cum Tourist Shop’ (OSTSs/OSTTSs) branded as GHAR.
These outlets are built on plot sizes ranging from 3 to 5 acres, and house dedicated and fully automated fuelling facilities.
The following facilities are offered in a GHAR outlet:
- Fuel related
- Fully automated Motor Spirit/high-speed diesel (HSD) fuelling
- Captive power generation
- Smart card customer care centre
- Secure and spacious parking.
- Vehicle wash facility
- Dhaba for truckers
- Food court for tourists
- Restroom (dormitory) with 30 beds for truckers
- Saloon, laundry, tailor and kirana shop
- Dedicated toilets for men, women and physically-handicapped individuals
- Houda facilities for truckers
- Bathing facilities
- Children’s play park
- Amphitheatre for entertainment
- Healthcare centre
- Sanjha chulha for self-cooking
Auto LPG: Introduction of LPG as Auto Fuel The use of LPG as an auto fuel was proposed as a pollution-control environment-friendly measure. BPCL claims to be the first oil company to take the initiative for setting up an auto LPG dispensing station and run vehicles on LPG as a pilot project in Delhi in October 1999. Today, it has over 70 auto LPG dispensing stations in various cities, and aims at expanding the network further.
Compressed Natural Gas Compressed natural gas (CNG) is a mixture of hydrocarbons, consisting primarily of CH4 or methane. Because of its low energy density, it is compressed to a pressure of 200–250 kg/cm2. The cost of running vehicles using CNG is much lower than that using petrol or diesel and, hence, CNG is becoming increasingly popular with automobile owners.
Commonly referred to as a ‘green, eco-friendly’ fuel because of its lead-free characteristics, CNG reduces harmful emissions and is non-corrosive, thus enhancing the life of spark plugs. Today, CNG is available in the cities of Delhi and Mumbai and there are a few stations in other cities as well. Government has plans to expand the use of CNG significantly in the country, by taking it to several other cities and also by mandating the conversion of public transport systems to CNG. Car manufacturers have been conducting tests on their vehicles, using LPG/CNG, both in dedicated and bi-fuel modes.33