Castrol the new FMCG player

We are in the process of witnessing a transitional shift in the oil & gas industry. With refining margins on the decline, refining & marketing (R&M) companies are focusing on the more lucrative marketing segment. With marketing of most products being regulated till 2002, the focus is on the deregulated products mainly lubricants. This industry is moving up the conventional value chain model, from being commodity based to a greater focus on brands.

The lubricant industry over the years has evolved from being a low margin commodity business to a more brand conscious, competitive and high margin business. As the marketing deregulation date comes closer, oil PSUs are strengthening their distribution network in order to be closer to the customer. With a greater focus on brands and distribution the lubricants industry seems to resemble its FMCG counterpart.

One company taking the lead in changing its business strategy is Castrol. However, it throws up issues on how these companies are to be valued. It has distinct similarities with a Nestle or P&G, those being:

• A greater focus on brand building, market segmentation and product differentiation. In fact Castrol has restructured its organisation structure based on market segments i.e. Consumer, Industrial, Commercial & Marine business.
• Ad spend has increased to 5%-6% of sales.
• Greater focus on distribution. Since it lacks access to conventional retail outlets available to the oil PSU's it is focusing on the bazaar sales, replicating the FMCG distribution model.
• Players are no more competing on price but trying to create competitiveness based on brands.
• It has high return ratio's (RoE, RoCE) similar to the FMCG business.

Thus, can one classify it as a pure FMCG company and to that extent there are certain dissimilarities. The lubricant industry has greater correlation with economy as a large part of the demand is linked to industrial and commercial use. Further, the consumer sales are a derived demand as purchases depend on vehicle usage. This is in contrast to FMCG products whose demand is spontaneous and satisfies a direct need. To that extent it also puts doubt on the distribution strategy of bazaar sales.

As the industry moves up the value chain it will de-link itself from being positioned as a generic product provider. But for it to completely resemble the FMCG one's guesses that it might have to change consumer-buying behaviour.