Energy

THE MEXICAN
RETAIL FUELSREVOLUTION
MEXICAN OIL DEREGULATION OPENS DOOR
FOR NEW FUELS MARKETERS AND RETAILERS

AUTHORS
Bob Orr, Partner
Karina Swette, Principal

THE MEXICAN
RETAILFUELSREVOLUTION
As Mexico deregulates its oil industry, it is opening the largest fuels marketing and retail
opportunity on the horizon.
For the first time, foreign companies will be allowed to own fuels assets, and companies can
sell fuel branded and sold by suppliers other than Pemex. The downstream will open to new
fuels marketers and new retail fuels offerings, changing the market landscape and the value
distribution among participants.
While most deregulation talk focuses on upstream, OliverWyman forecasts that significant
structural changes in the downstream fuels sector will create high-value opportunities
for companies willing to commit to the Mexican market and work through market
evolution challenges.
Mexican fuel consumption is forecast to grow by roughly 3 percent annually, a rate twice that
of global demand growth and at a higher rate than the top five fuel-consuming countries.
Fuel site throughputs are 30 percent higher than other mature markets, fuel prices are
20percent higher than in the US, and convenience store penetration is low, at roughly
50percent of fuel stations. OliverWyman estimates that by the turn of the decade, the
number of fuel sites could grow by more than 40 percent.
Fuels marketers and retailers should pay attention to Mexico. It is the sixth-largest consumer
of motor gasoline and diesel and one of the final developing markets to deregulate, allowing
foreign companies to import, own assets, and sell other fuel brands.

Copyright 2015 Oliver Wyman 2

ATTRACTIVE FUELS MARKET DYNAMICS

AND STRUCTURE
The Mexican downstream fuels market should be very attractive to newcomers and local
participants alike, driven by key fundamentals.

Strong growing consumption and increasing imports

High fuels site volumes
Price levels and structure that could create substantial margin
Fragmented wholesale and retail markets structure
Limited consumer choice, allowing new entrants to bring new offers

GROWING MARKET WITH HIGH LEVEL OF IMPORTS

Mexicans consume more than 750,000 barrels of gasoline per day, ranking the country sixth
in global market demand. Such demand growth will likely lead to an increasing reliance on
imports. With oil prices in the US dropping, US refiners that have access to cheap crude will
continue to increase fuels exports, and Mexico is their closest and largest import market.
Imports already account for 48 percent of Mexican fuel consumption, and Oliver Wyman
forecasts that will rise to as much as 60 percent of total consumption by 2020.
Exhibit 1: Mexico domestic gasoline consumption and imports
THOUSANDS OF BARRELS PER DAY, 20042020
1,200

Projection
Total consumption

2.2% CAGR
600

Total imports
60%
48%

9.2% CAGR

2004

2006

2008

2010

2012

2014

2016

2018

2020

Sources: Pemex, EIA, and Oliver Wyman Analysis

Copyright 2015 Oliver Wyman 3

HIGH FUELS SITE VOLUMES

The number of retail fuels stations in Mexico is controlled by the government and stands at
just over 10,000 sites. As demand has increased without a parallel growth in the number of
stations, Mexico now has one of the highest average volume throughputs per station in the
region and globally, at 5 million liters per station. Moreover, the average throughputs within
larger Mexican regional markets, including Mexico City, are more than 6million liters per
station, 50 percent higher than the average for neighboring US regions, creating attractive
site-level economics. In addition, several of these Mexican regional markets must use
imported fuels products exclusively, compounding the tension in supply-demand dynamics
and driving a potential structural change.
Exhibit 2: Average annual consumption per region of Mexico and throughput
MILLIONS OF LITERS, 2013, INCLUDING GASOLINE AND DIESEL

Mexico: 5.0
Germany: 4.5

6.0

Chile: 4.5
US: 3.3
5.9
4.4

4.2

3.8

Northeast

Central

South/
southeast

Northwest

Central/
west

25%

24%

18%

17%

16%

UK: 2.0
Italy: 1.6

Percent total volume in Mexico

Note: UK excludes supermarkets in average
Sources: Country government reports, Oliver Wyman analysis

Copyright 2015 Oliver Wyman 4

PRICING OPPORTUNITY
The Mexican government sets fuel prices and has steadily increased prices over time.
Historically, this meant that the Mexican government was subsidizing fuel prices. However,
that has reversed in recent years. In April 2012, gasoline prices in the US averaged $3.84
per gallon while the equivalent gallon of Pemex Magna in Mexico was $2.64. Thats a $1.19
difference. But with recent global crude prices dropping, the price per gallon in the US has
declined to $2.59, on average, while the pump price in Mexico has reached $3.11. Thats
20percent higher and creates arbitrage opportunities in certain regions.
Exhibit 3: Comparison of gasoline prices
INDEXED, 20052015 (2005 = 100)
300
53 cents-per-gallon
price premium

250
200

Pemex Magna
gasoline

150

US regular
conventional
retail gasoline
price

100
119 cents-per-gallon
price savings

50
Jan
2005

Jul
2006

Jan
2008

Jul
2009

Jan
2011

Jul
2012

Jan
2014

Cushing, OK WTI
spot price FOB
Jul
2015

Sources: Pemex Magna unleaded (regular), Energy Information Administration; Oliver Wyman analysis

Copyright 2015 Oliver Wyman 5

FRAGMENTED MARKET WITH ALACK OF

CONSUMER CHOICE
With only Pemex branded fuel and stations allowed in Mexico, the competition and
investment has been much more limited than in other markets. This has left the consumer
offer relatively weak, as evidenced by the low penetration and variety of convenience stores.
Only half of Mexican stations have convenience stores compared with around 80 percent in
other markets.
Exhibit 4: Convenience store penetration in gas stations
NUMBER OF STATIONS WITH CONVENIENCE STORES
5%
18%

20%
35%

45%

95%
82%

80%
65%

55%

Without
convenience
store6.0
With
convenience
store

0%
Mexico

US

Germany

UK

Poland

Sources: CBRE Market View European Petroleum Retail Sector, US Census Bureau; Oliver Wyman analysis

Copyright 2015 Oliver Wyman 6

Mexico is a highly fragmented fuels market. More than 5,000 franchisees operate only one
or two sites, making organic improvement in offerings challenging. There are fewer non-fuel
services than in similar markets, and many facilities lack the cleanliness and security desired
by customers. Even the largest franchisees operate fewer than 300 stations, making scale
operations a challenge.
But that has not restricted the development of grass-roots efforts to meet consumer
demand. The largest franchisees have developed their own offers including loyalty
programs, fleet cards, and fresh food offerings, proof that the Mexican consumer is looking
for expanded choices.
Exhibit 5: Improving consumer choice
Franchisee groups are developing their own customer offerings.
OXXO GAS

Widely known convenience stores: Oxxo

Fuel is just one retail product in the array
Alliance for automobiles service: Zona Akron
System of tradable coupons: Billetigas
Increasing volume of fuel commercialized despite
market saturation

PETRO 7
Consolidated branding in the country
Convenience store in some stations: 7-Eleven
Alliance for automobile service: Zona Akron
System of tradable coupons: Petro Tickets
Rewards program: Payback
Rechargeable prepaid card

CORPO GAS

ORSAN

Large number of gas stations in Mexico

Express service for automobiles
Convenience stores: Go Mart
Fast-food chain restaurant: Subway
Loyalty program: Puntada
Card system for fleets: Tanque Lleno

Fast-growing brand recognition in Mexico

Known for accepting multiple payment methods
Express billing through a bar code in key ring
Loyalty program: IR Frequent Customer
Card for fleets: Ultra Gas
Coupons system: Vale ORSAN

ECO GASOLINERAS

HIDROSINA

Second-largest player in Baja California

Widely experienced in fuel distribution
Fuel delivery commercial and industrial customers:
Eco Transportes
Card system for fleets: Enercard
Insurance for Mexico and US: Mr. Agente
Local soccer team stores: Tijuana Xolos

CANTELLI

GASMART

Leader in the southern region

Wide array of additional services includes hotels,
groceries, convenience stores, automobile services,
motorhome parking
Coffee shop: The Italian Coffee
No loyalty or rewards program

Second-largest player in Mexico City

No branded convenience stores
Fuel coupons and prepaid cards
Rewards in Club Premier and AeroMexico miles
Corporate cards for organizations: Hidrosina
Microchips for vehicle identification: Hidrotag

Main business is convenience stores

Rewards in Club Premier and AeroMexico miles
Utilities payment offer: Gasmart+cargas
Banking in some stations: Banamex aqui
Purchasable electronic coupons
Card system for fleets: GasmartCard

Copyright 2015 Oliver Wyman 7

OPPORTUNITIES OPEN
WITH REGULATORY CHANGES
Deregulation laws were passed in 2013 and 2014, and Mexican regulators are implementing
plans to relax control of the market in the next few years, impacting all areas of the energy
value chain.
For downstream activities, the law establishes a permit regime regulated by the Ministry
of Energy (SENER) for petroleum treatment and refining and the import and export of
petroleum products. The Energy Regulatory Commission (CRE) provides permits for
crude oil, petroleum products, and petrochemicals, transportation, storage, distribution,
compression, liquefaction, decompression, regasification, marketing and retail sale of crude
oil, petroleum products and petrochemicals, along with integrated pipeline transportation
and storage systems.
The regulatory changes are occurring in phases.
Exhibit 6: Mexican energy regulatory changes
PERMITS TO TRANSPORT,
STORE, AND DISTRIBUTE

PERMITS TO OWN AND

OPERATE RETAIL STATIONS

PERMITS TO IMPORT
AND EXPORT FUEL

RETAIL PRICES OPEN AND

MARKET FULLY OPENS

2015

2016

2017

2018

IMPLICATIONS
New fuels distribution and
logistics entrants
New investments
in infrastructure

New fuels brands

New store brands
New retail participants

New fuels brands

New supply partnerships
with local franchises
New fuels
trading participants

Wholesale and retail

fuels competition based
on pricing
Potential low-price
fuels offerings

Sources: Pemex and Oliver Wyman analysis

Investing in the Mexican fuels market comes with risk. Several details about the regulations
are not clear, such as how and when permits will be awarded, if foreign companies will be
allowed to buy existing assets, or how the number of retail stores will be regulated. Further,
it is not clear how regulators will determine fuel prices during the transition period or how
prices will change. Itis essential for participants and investors to stay closely connected
tochanges and build flexible strategies.

Copyright 2015 Oliver Wyman 8

PARTICIPATION OPTIONS
Companies can pursue a range of options to participate in the downstream fuels market in
Mexico, from full ownership and operation of assets within key segments of the value chain,
to partnerships and joint ventures, to strong, brand-based sales agreements.
Market dynamics will continue to evolve, with consolidation of current players and new
sites and concepts from market entrants. Existing local fuels and convenience retailers will
continue to grow and consolidate, with larger companies speeding up the pace of buying
smaller operators. Entrants and local participants will build new fuels sites and probably test
hypermarket and grocery fueling offers.
A range of foreign refiners, fuels distributors, marketers, and retailers will build and buy
stores, and form partnerships, bringing new consumer offerings in fuel and convenience.
Exhibit 7: Entry options
SUPPLY AND IMPORTS

Sale of branded or unbranded fuel

To existing franchisees, new retail
owners, other foreign entrants,
and Pemex.
New entrants are already developing
partnerships with larger franchisees.
New suppliers and importers must
gain access through controlled
import terminals or focus on border
market zones.

TRANSPORTATION, STORAGE
AND DISTRIBUTION
Foreign pipeline companies may
extend or build and operate new
products pipelines across the northern
Mexico border.
Foreign companies may also purchase,
build or operate products pipelines,
terminals, and other logistics operations
to more efficiently distribute and
store fuels.

FUELS MARKETING AND RETAIL

Leverage advantaged fuels supply position to sell

directly to local Mexican distributors and retailers.
Leverage existing fuels brand to establish
branded supply agreements and partnerships
with retailers.
Leverage existing retail fuel and store offers and
brands to grow and gain value in partnership
with local retailers.
Acquire existing assets, networks, and retailers to
establish base for growth.
Build new assets and new offers to capture value
from consumer choice.

Given the regulatory changes and attractive market dynamics, the Mexican fuels market
represents a once-in-a-generation opportunity for bold strategies to shape the market and
for companies with strong fuels capabilities, offers, and the desire to grow value.

Copyright 2015 Oliver Wyman 9

STRATEGIC CONSIDERATIONS FOR MEXICAN

FUELSMARKET PARTICIPATION
When considering whether to participate in the deregulated Mexican downstream market,
companies should ask themselves several critical questions.
How much in refined products am I exporting today that already ends up in Mexico (or
other parts of Latin America)? Will those exports be sustained or grow?
How could I take better advantage of my products that already flow from the Gulf of
Mexico, the West Coast, or over the border into northern Mexico?
How much would I benefit from securing future product placement and capturing more
value in the fuels chain?
In what part of the value chain can my offer, capabilities, and assets differentiate
themselves and create value, given the level of Mexico market development?
Should I invest in new assets or create partnerships to secure supply and placement?
What are my current relationships? How should I work with local partners? Pemex?
Government agencies? Franchisees? Other oil and gas companies?
What parts of my retail offering will fulfill the needs of Mexican consumers, and how
should I adapt?
How do I prepare for the theft that continue to increase in several parts of the
value chain?
How much am I willing to invest? What is my risk tolerance? What am I leaving on the
table if I dont participate?
How do I build flexibility into my strategy as regulations evolve?

Copyright 2015 Oliver Wyman 10

ABOUT OLIVER WYMAN

Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 26 countries, Oliver Wyman combines deep
industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firms
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ABOUT OUR ENERGY PRACTICE
Oliver Wymans energy practice helps companies address strategic and operational challenges through proven, results-oriented
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For more information on this report, please contact:

BOB ORR
Partner
Houston
713-276-2187
bob.orr@oliverwyman.com
KARINA SWETTE
Principal
karina.swette@oliverwyman.com

This report was designed by Lech Ozimkiewicz and edited by Elizabeth Souder.

www.oliverwyman.com

Copyright 2015 Oliver Wyman

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