White Paper

On

Why Private Players are not opening new retail outlets even after having the
license in their hands

Written by
AMIT GODIYAL
Abstract

India presents a dichotomous downstream oil industry with three national downstream oil companies (BPCL,
IOCL, HPCL) having high market shares in the domestic retailing segment are competing today with these
two private companies (Reliance & Essar) initially which lead to the lure more Private players in the market
to invest in this segment like Shell & BP who are also trying to tap into this market. Entry of the private
players was a way back during the year 2001-02 where they grabbed the petrol & diesel market share
abruptly. Since then a sudden surge in the prices led the government of that time to regulate the retail
market step taken by the Indian government led these companies to close their outlets prominently. Once
again after the deregulation companies have restarted their closed outlets & now are not fully fled confident
enough whether to go with this market based pricing system given by the Indian government and to open
up more & more retail outlets & this time their competitors are ready with their intense strategies to tackle
the strategies to be taken by these Private players this time. This paper focuses on the key factors which are
prohibiting Private players to look down upon prior to investing in new retail outlets. The reason why they
are not investing in opening up new retail outlets even after getting licenses from the government also. This
paper also throws light on the India downstream market continuous demand which is increasing
continuously leading to our surge in the demand of the petroleum refined products more and more in the
market. This can be said as the reason why Private players are getting attractive towards this segment.
On the other side of it India has a very low per capita consumption of oil as compared to the developed
countries of the world. One of the areas where these Private players have not tapped into the downstream
segment is lubricant would be the next step for these Private players to tap this market alongside with retail
outlet segment in India.
Introduction
The Indian oil sector has historically been a regulated & dominated by Government undertakings. However,
as the market developed & Government loosening its control on the market, new private sector players
made their presence in the segment. The marketing of most petroleum products was completely controlled
by the government through the above corporations until the early 1990s.
In the context of soaring crude prices in the year recent past, there exists a non-level playing field amongst
Public Sector and Private Sector Oil Companies in the Indian Petroleum Retail Marketing sector. The
Government of India(GOI) has decided to provide subsidies to Public Sector Petroleum Retail companies.
The private sector oil companies were being passed on with the benefit of subsidy for being a Private player
in year 2002. To compensate the losses incurred by these Private players (RIL, Essar) increased the price of
Diesel over the rates offered by PSU, who were enjoying the subsidy benefits of the government. This
increase in price when being passed on to the customers led to reduce in dealer commission which created
a huge price differential between Private players & OMCs. India being a very price conscious market which
resulted in affecting the revenues & operations of these Private players. Thus at last resulted in closing down
the ROs operations and forced them to shut their ROs till the time when market gets deregulated again to
its initial period. We can say that in this market where the end products are homogenous could be only sold
by promoting Brand management and value proposition just like these Private players did while entering for
the first time in this market segment their value proposition was assured quality and quantity (Q&Q) backed
with top-of-the-line service at its outlets with advanced fuel dispensing systems & well trained employees in
their outlets.

Initial Deregulation era-Pre APM era

The development of petrol-retail sector in India has witnessed three distinct phases:
a) Period of dominance of multinational companies.
b) Advent of public sector, its growth in co-existence with these transactional companies.
c) Marketing by the wholly government-owned companies and the fulfilment of socio-economic objectives.
At the time of independence, the marketing and retailing of petroleum products was in the hands of private
companies like Caltex, Esso, Shell, etc. Later the government gradually exercised control through Public
Sector Companies.
The second phase started with actions taken in pursuance of the Industrial Policy Resolution, 1956 to
promote growth of the vital petroleum sector under the state control. Eventually, Indian Oil Corporation
(IOC) was formed in 1959, IBP was acquired in 1970, and HPC came into existence in 1974 and BPC in 1976.
In the third phase, the experience gained by the government during the second phase and the socio-
economic factors encouraged it to go ahead for acquiring the assets of all the multinational companies
operating in the country. In 1981, the entire oil industry was truly in the government fold. A new era of
planned development in consonance with national priorities under the overall direction of the government
thus began in the oil sector. From the state of cutthroat competition in marketing and distribution, the PSUs
had to quickly adapt to the changed scenario. The assets of oil companies in terms of infrastructure facilities
were now the national assets. The important area of concern was their optimum utilization.
Administered Pricing Mechanism Era in Petro-retailing

Until the year 1939, there were no controls on the pricing of petroleum products by the market forces. This
period between 1939 and 1948 gave the liberty to these govt oil companies to maintained themselves with
a pool of major Valued added stock with them without having the intervention by government. In 1948, first
attempt was made to regulate prices following a certain procedure which was that, realization of oil
companies would be done to the import parity price of finished goods, plus excise duties/ local taxes/dealer
margins and agreed marketing margins of each of the refineries. If any excess realization was found it would
be surrendered to the Government. In 1976, the Oil Pricing Committee (OPC) recommended that the import
parity principle should be discontinued as about 90 per cent of the total demand of POL products was met
by indigenous production and no major shortfall was seen. The OPC therefore suggested that the domestic
cost of production should be the determining factor for pricing of petroleum products. One of the important
drawbacks of the import parity pricing formula was that the indigenous cost of production was totally
overlooked while determining producer prices. With the administration of pricing of products by the
government, the retention mechanism also came to be known as the Administered Pricing Mechanism or
APM.
The APM worked effectively for two decades, started misbalancing when it was subjected to joint pressures
of spiralling of demand and global oil prices rising sharply, oil pool deficit rose to alarming levels, cross
subsidization resulted in distortion in the consumer prices, adulteration and misuse of subsidies increased,
there was no incentive to improve efficiency & transparency with assured returns. In such situation, the GOI
initiated a phases era of reforms in the oil industry by forming different committees which resulted the
same i.e. dismantling of APM. In November 1997, the government decided to dismantle the APM in the
hydrocarbon sector with effect from the April 1st, 2002.

Era After APM Dismantled-Entry of Private participants

India deregulated the pricing mechanism for retail petroleum after dismantling the APM (Administered price
mechanism) in 2002, which enabled new players to enter into this market. The entry of new players like
Reliance, Shell, Essar etc. at that time was projected to increase the number of stations from existing 19,000
to over 30,000 within 4-5 years of deregulation. Over the time this increase in number of fuel stations has
reduced on an average throughput per station, and total fuel volumes per player. This is because the growth
in the vehicle population over the years is annually around 10% as against growth of around 60% in the
number of fuel stations. With a market determined pricing mechanism, prices will have to be
lowered, thus reducing margins from fuel products. In such scenario, the petroleum retailers will need to
develop differentiated value propositions which is what Private tapped into, to improve revenues they
adopted customer focused approach by building strong brand equity. Like, RIL started aggressively adding
retail outlets and was able to gain 10 % market share in Diesel in 2005-06 by their fleet based loyalty card
and strategically located highway retail outlets. Crude oil prices rose internationally in 2006 and the
government insulated the Indian consumers from the price rise by subsidising the NOCs to sell petrol, diesel
and LPG at lower prices and the private players were not accorded this subsidy thereby resulting in the
slowdown of private oil company’s expansion in the domestic market. The phase of subsidies on automotive
fuels lasted for approximately 5 years after which petrol was deregulated in the year 2010 followed by
Diesel in the year 2014. The period of 6 years saw huge addition of retail outlets by NOCs as there was a
spurt in the demand for automotive fuels in India. The private refineries started producing high quality Euro
IV petrol and ultra-low sulphur diesel at that time in order to cater to the export markets of Europe and USA.
Thus, through by exporting these private oil companies were able to deal with the slowdown in retail sales
of petroleum products after 2006 by exporting petroleum products to such markets. For instance, RIL even
converted its second refinery into an export oriented unit and earned more than 60 percent of its revenue
in value terms from exports. Whereas these national oil companies accounts about 80 % of the Indian
market share but in terms of export accounts only 10% of it which became a pointy of differentiation
between these private players & national oil companies.
India’s fuel retailing landscape is undergoing a structural shift with the re-entry of private players. In fact,
private fuel retailers are expected to rapidly corner 12-15% of the market by 2020-21, in terms of retail
outlet share, from a mere 1% in 2009-10. The share in volume terms is projected to be higher at 13-16% by
2020-21, with the addition of 6,000-8,000 outlets by private players, from 4-5% in FY16. This will inevitably
impact the throughput per outlet. To better compete, existing players are being forced to reinvent their
business models. The one divergent trend between private and public players will be the targeted customer
base. While private players are expected to target high throughput regions and expand particularly in
highways segment, public sector fuel retailers are expected to focus to underpenetrated rural areas, apart
from defending their share on highway business.
Margins will experience stress amid this rapidly expansionary phase. For private players, margins are
expected to get impacted as they open outlets at greater distances from existing depots/ refineries, thus
increasing the cost of logistics. The marketing margins for public sector fuel retailers are expected to decline
as well, but to a relatively lower extent as compared to private players, as they will expand in rural areas and
adopt dynamic pricing strategies to prevent erosion of profits.
Despite the challenges, the industry is projected to be on a strong footing in the medium term because of
growing car and two-wheeler penetration and growth in road freight movement

To drive revenues and margins, the retailers were attracting new customers to increase their market share
in their existing fuel retailing business. The other additional value addition segment which was discovered at
that time was Non-fuel products, which is still not that much well exploited through where retailers can earn
more margins & revenues by offering additional services to their customers under a single roof like
convenience store, atm, washing services offer them higher margins compared to petroleum products,
which would enable them to sustain themselves, especially during times when oil prices are high. The
contribution of non-fuel earnings to the total earnings is 39 % and 35% in USA & France. In India its
contribution is less than 2% of the total fuel earnings as of today. However, retiling in the rural market is still
not well exploited by both Private players & OMCs. Which is possibly the next area where both players
would compete in the coming years.

PESTLE Analysis of Indian Downstream Sector

Political Effects
Crude oil & its prices are the most politicalised topic in India as many governments over the entire history
have been ruled in & out by the people, just by notifying only that they will reduce the oil prices they gain
the parliament seat while governments which are already working if they are not able to reduce the oil
prices they are being discarded by the people. Different political parties use this as their political agenda to
win elections & to run the nation’s government. Any amount of change in the prices of crude oil leads India
to both direct and indirect impact as being a net crude importer economy. It also gets impacted by changes
made by the OPEC countries who are the principal producers of the crude oil that is used worldwide. After
deregulating of petrol & diesel market in India gives that clear cut indication of government itself to other
economies of the world that pricing in India would be based on the market based dynamics i.e. demand &
supply. NDA our present government has been bestowed with a very well fortune with this as when they
came into power prices of crude oil started declining led to increase in their popularity among the people to
become most favourable party to be winning 2019 elections. Earlier to this government we haven’t seen any
full-fledged ruling party we have seen mostly government to be formed as a coalition which didn’t allowed
market to decide price on its own of these oil products but now this government being with full majority in
the centre have taken well decisions regarding to the Indian downstream sector allowing fully transparency
in their policies & regulatory framework. But with the coming of 2019 elections all the private & national oil
companies would be focusing on which party to be ruling out for the next 5 yrs so this is the possible one
reason why private players are not opening out these outlets to its full operations. They are looking to
secure their investment by watching out the political stability of the country then only to invest in this
capital intensive industry.

Economic effects
Demand and supply is balanced by the global oil inventories. But in case of India we already are short of
having excess crude oil productions as we are not able to meet our rising demand which is increasingly
continuously. Our demands are rising significantly which is leading us to increase our crude oil imports as
around 80 % we already are importing to meet our demand and sooner or later it will rise to 90% also. Our
oil production which is constant over the past years is also favouring more import if oil. This increase in the
production & consumption of oil is creating a huge gap which can be fulfilled only through by taking certain
corrective measures so as which can reduce our crude oil dependence as this increase in crude oil imports
leads us to more increase in trade deficit which are facing currently very much. So government have to take
certain measures by which our dependence on oil could be either reduced by shifting this demand to other
mode or by increasing our domestic crude oil production. Our economy which is increasing drastically has
been predicted to be world’s third largest economy surpassing japan by 2025 which is also an positive sign
as middle class family in India which holds a major share in the entire demography their income is rising
steadily which is a positive sign to these private companies that market is going to open up & more & more
demand for the fuel is going to be there providing a chance to these private companies to tap this boost in
the income levels of the society with their significant crude oil products. These companies if are not going to
invest in India they are going to lose high on a key market which has a potential to increase their business
which would be a point where companies would not want to lose out of it. Private Companies would
definitely like to tap this market again by applying a new strategy to gaining new customers again in this
segment. In the same segment they would like to try the lubricants market to be sold in their retail outlets
which would increase they revenues & will provide them a new market within this fuel retail segment.

Social effects
India being surpassing china in terms of populations is a advantage in this perspective & with that having
about 65 % of the population aged between 18-35yrs is also an advantage for us but for that we need to
have more & more employment opportunities to be there available in the market which can only happen
when new business fields are explored one of them is his fuel retail outlets where these private players can
help the people socially meet their rising demand through their opening out of their new retail outlets.
Having some well trained personnel is what every company wants which is why company like reliance when
trained their people well they were able to sell more as compared to their competitors through by having a
well versed communication with the customers this can be seen as an example as the role of having some
well skilled & well trained personnel which these companies would eagerly look out while opening their
outlets. In the past we have seen the same phenomenon when reliance entered this segment they focused
on training of their workers for handling their customers more politely & efficiently which helped them to
achieve a strategic edge over these national oil companies but as market got regulated in 2006 these well
trained workers were left with no option other than to work in these national oil companies which took the
advantage of these employees & regained their lost market share and to some extent for the first time they
were able to see the difference in their earlier customer service given by their earlier service representative
& these new hired workers of reliance.

Technological effects
It is well versed with us that still today we lack in having advanced technologies in our country which are
there in the developed economies of the world. When these technologies become obsolete in these
markets we start onto using them. Same goes into this fuel retailing technology field also only we have seen
entry of these private players in the market gave a pace in having a new technology of fuel retailing in India
which was not there when we all were dependent on these national oil companies. These private players
with their entry brought into the new advanced & efficient technologies through by which average filling
time & efficiency of the fuel dispensing was increased significantly. There was a much higher less time being
used while filling out with these retail stations as compared with national oil company’s stations. Today
where the world is entirely dependent exclusively on technology, and exercises such as the drilling of oil is
also requiring high levels of it. At need to be understood by us that being as a new emerging economy of the
world we have to switch or exposed to these new emerging technologies otherwise we will lag behind far
away from other countries. Like new & new technologies are coming in the process of drilling deep into the
ground and fetch the oil. The oil companies also need to ensure that proper equipment are put in place to
avoid things such a soil spillage which can be hazardous to the environment and also cause losses. Investing
in new Technologies would definitely increase their cost but on looking down it is effective in terms of cost,
benefit & security. As we have seen in the past that these private players when entered into the fuel
retailing business went with advanced fuel dispensing machines which were helping them in reducing the
customer lead time in filling & they were able to entertain many customers at a time as compared to these
national oil company’s outlets which were having old outdated fuel dispensing machines installed in their
stations.

Environmental effects
We have seen for from the past few years that emerging economies like India & china are facing serious
issues of very high air pollution as air in these countries demand for the consumption of crude oil is
increasing consistently which we have witnessed from past ten years which is ultimately leading to increase
in the rise in the air pollution as more & more air is getting polluted every sec in these countries so to have a
continued growth with the less air pollution is the challenge for these economies which can be achieved by
these countries by refining their refined oil products with having parts per million of sulphur content to be
very low like we can see that in Europe they have Euro vi & vii norms which are ongoing right now planned
to be implemented within a year their ppm content of sulphur have gone down to 10-15 ppm whereas we in
India have just now implemented Bharat stage iv norms which is very less as compared to these countries.
For having this type of fuel we need to modify our refineries more & more with new technologies through
which we can reduce the sulphur content in our fuel that is being used in the vehicles commonly being used
in India. Refineries owned by private players are having one of the advanced technologies but that too is
very less in no as these private players are not having refineries as much as these national oil companies are
having. Most of our refineries owned by national oil companies are having an outdated technology which
are producing very high ppm of fuel oils those need to be firstly implemented with change in the technology
then then other refineries which are currently working technologies in them needs to be upgraded with the
latest one through by which they can refined any crude of the world following with the norms of the
environment by providing cleaner fuel in the country. This will automatically help us in reducing the rise in
the air pollution levels in the country. This opens a way out for these private players to invest more into
building new refineries with having new cutting edge technologies which can process very sour to very light
crude with same sulphur content in it.

Legal effects
The legal framework is the one which no company wants themselves to get tied up same goes with these
private players they are looking for having a proper transparent & effective policies & guidelines which
would promote them to invest more into this fuel retail segment. This is one of the key reason why these
private players are still having doubt in their back of the mind whether to invest in fuel retailing business or
not because these questions have been supported by the previous years of this segment having a history to
high regulation to deregulation. Private companies are in a position of uncertainty that if tomorrow prices of
crude oil get high again to $130-$140/bbl what is the surety that government won’t again give price subsidy
to these national oil companies stating that protecting its domestic consumer from price inflation hit. In this
situation these private oil companies would again be left with closing down their retail operations again until
the market gets into in-situ stage.

Conclusion
Thus by conclusion we would like to highlight few points which these companies should definitely look into
while reinvesting again in this segment.

1)India is a growing economy it demand is & will rise sharply with the passage of time so to fuel the need of
the economy one of the main engine drivers is energy which will be required largely & customers would turn
up to those retail stations which would provide them quick, easy, hassle free fuelling systems with a
competitive pricing compared to which is prevailing in the market.

2)Private companies should mitigate their risk & exposure to that risk by exploiting other segments also of
the fuel retailing like entering into (air turbine fuel, lubricants, grease) segment so that sudden change in
any government policy or pricing won’t have drastic effect on the revenues of these companies.

3)Private companies can also diversify their risk by establishing themselves as an integrated company
whereby exploring out oil & gas within the country & outside the country.

4)They should look out with promoting a non-branded fuel retail outlet which is quite common in countries
like in US where the dealer can buy fuel from any refining company & sell in his own outlet depending on
the margins he gets from different companies. This method would be very much appropriate when comes
to retailing of fuel in rural places of India because as we know that after the demand from cities is
accomplished next market which is untapped by any companies would be rural market where still a lot of
work needs to be done.

5)In India natural gas market is in nascent stage so this is another market where demand is coming slowly &
slowly due to shortage of gas stations companies in the Metro cities should target this as the upcoming new
ongoing transition stage from oil to natural gas(CNG).
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