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Marketing holds the key

May 11, 2000

In the past, a good number of ideas have failed not because they weren't executed well, but because they weren't marketed well. Execution and marketing are distinct functions, and one feeds on the other for the success of the venture. This holds true even for the oil business, where marketing decides who grabs a larger share of the pie.

The oil business embodies two critical operations, refining of crude oil and marketing of petroleum products. Only a handful of companies are engaged in both refining and marketing of petroleum products viz. Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL). Others like Madras Refineries Ltd. (MRL), Cochin Refineries Ltd. (CRL), Reliance Petroleum Ltd. (RPL) and Bongaigoan Refineries Ltd. (BRL) function as pure refiners with no marketing activities. IBP is the only company that markets products with no exposure to the refining business.

Of the two, marketing is the bigger revenue generator, which explains why pure refiners (MRL, CRL, BRL) are making lesser money and can't wait to get their fingers in the marketing pie. In addition to selling diesel and gasoline at petrol pumps, marketing involves kerosene, aviation turbine fuel (ATF) and liquefied petroleum gas (LPG) dealerships. Though petrol pumps are perceived as the main cash cow, LPG and diesel dealerships are also a steady source of income. The LPG network in particular is critical as LPG is a high-growth product, expanding at 9 percent per annum. HPCL for instance, has shrewdly leveraged its LPG brand to corner 25 percent of the market, with a customer base running into a cool 7.7 m users.

Much like the LPG network, an extensive petrol pump network is equally crucial for steady cash flows. Petrol pumps outlets can either be owned or leased, although companies prefer to own them for obvious reasons. Companies like HPCL, BPCL and IOC have petrol pumps located in prime locations across several metros, where land is scarce and expensive. This acts as a huge entry barrier for competitors, which is why the latter are more interested in setting up their network in smaller towns and cities, where land is cheap and the competition thin. Of late, non-oil revenues from petrol pumps, termed as convenience stores, has become a steady source of income for oil companies. Revenues from convenience stores can be as high as 60-70 percent of total revenues from the petrol pump.

Pure refiners like RPL, MRL, CRL have realised the importance of the missing link (read marketing network) in their operations. This is a pointer to a shakeout in the Indian oil sector, where refiners (RPL, MRL, CRL) will align with marketing companies (HPCL, BPCL, IOC), so as to introduce a degree of integration in operations. There is already some talk of mergers between CRL/MRL and BPCL/IOC/HPCL. In any case, a lot of these companies have cross-holdings in each other, so a merger is more a question of when rather than if. Companies like RPL (capacity of 27 million tonnes per annum) seem to have resigned themselves to the fact they can never beat HPCL, BPCL and IOC in their marketing networks. That is why, in a if-you-can't-beat-them-join-them move, RPL has made a formal bid to acquire a stake in HPCL, BPCL and IBP. This way RPL is in fact investing in the marketing networks of these companies.

By the year 2002, the oil sector will be liberalised, and refiners have realised that time is not on their side. They will have to move fast to acquire/merge with a marketing company. Ultimately, it will be marketing and not refining that will dictate the fortunes of oil companies, and the players have accepted that. Another thing that they have had to accept is that if they don't move fast enough, someone most certainly will.

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