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Marketing of petroleum products: An overview - Views on News from Equitymaster
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  • Oct 9, 2006

    Marketing of petroleum products: An overview

    Marketing of petroleum products is set to witness a paradigm shift. Post deregulation of the sector, private players are entitled to open new outlets provided they fulfill certain investment condition. Ever increasing need and expectations of the customer is changing the operational economics of the retail outlet. Consumers are demanding more convenience in the form of comfort, product options and fleet-monitoring services. While retail outlets are heeding to them and revamping their operations by offering better visual identity, fuel branding, value added services offering to the vehicles moving into the outlet, issuing petro cards, fleet monitoring services and providing one-stop shop for consumers. In this write up we analyse the operational economics of a retail outlet and different marketing models.

    Classification of retail outlets

    Type 'A' sites

    • 'A' sites are outlets where the land is owned or leased by the OMCs (Oil Marketing Companies).

    • Building and equipment are also owned or leased by OMCs

    • Usually these outlets are COCO (company owned company operated outlets).

    • These have significantly increased over the past few years

    • These outlets offer the largest degree of control over the retail operations.

    • Offer best facilities and are at premium areas.

    • Average cost of building a new outlet is Rs 45 m; cost is on the higher side due to favorable location and premium offerings at the outlets.

    • These sites are situated at places where throughput is expected to be higher.

    Type 'B' sites

    • Dealers at these sites own or lease the land and building, however they leaseback the same to the OMCs.

    • Equipment is owned by the OMCs.

    Type 'C' sites

    • Dealers own or lease the land and building

    • OMCs own the equipment

    • Cost ranges up to Rs 1 m

    Type 'C1' sites

    • Dealers own or lease the land, building and equipments.

    Market segment analysis
    The marketing segment can be segregated into four major categories classified based on the throughput per outlet and the offering needs at the location.

    Rural segment This segment has a lower throughput per outlet. The major demand at these outlets is for diesel, as the same is required for running pump sets for agricultural purposes. The sale of petrol is lower at these outlets due to lower number of vehicles in the rural areas, combined with the problem of adulteration. An added advantage from rural sales is potential revenue being generated from non-fuel businesses (in the form of seeds, fertilizers and tractor parts). The cost of establishing such outlets ranges between 0.5m to 1 m. The penetration in segment is very low. Sensing the opportunity, major OMCs like IOC, HPCL and BPCL are venturing into the segment on a large scale. Companies also use mobile moving vans in the rural areas so as to cover a wider geographical area. Dealer Owned Dealer Operated (DODO) model seems to be the best fit here as it reduces the overhead cost and the chance of significant penetration in these areas by private players is fairly limited for next few years.

    Semi-Urban segment: The major demand at these outlets exists for petrol and diesel. The throughput per outlet in the segment is on the higher side compared to that of rural outlets. The services required are also on the lower side, as the customers in the segment are less savvy compared to urban customers. The suitable marketing model for the segment is Dealer Owned Dealer Operated outlets (DOCO) or the Company Owned Dealer Operated outlets. The choice here is based on case-to-case basis for every outlet.

    Metro segment The segment is characterized by high thruput per outlet for petrol and diesel. The value added services needs in the segment are in the form of car wash, air checks, premium and branded fuel in addition to better visual identity. COCO model is best suited for the urban segment so as to prevent the dealer poaching coupled with fulfilling the requirements of the savvy customer. However, with pre-existing dealers operating in the urban areas, the scope for establishment of new outlets is fairly limited. Thus the possibility of having Dealer Owned Company Operated (DOCO) outlets exists in the segment it at all an opportunity is sensed.

    Highway Segment: Fleet operators and transporters are the major users of the highway segment. The throughput per outlet at these outlets is on the higher end (particularly for the diesel). The throughput to the extent of 4-5 times the average industry throughput makes up for the higher capital required to open such outlets. The non-fuel revenues at these outlets are comparative on the higher side as these outlets provide one-stop shop along with fleet management services in the form of single billing, repair facilities and other conveniences to the drivers. Also, offerings such as ATMs and food courts augment non-fuel revenues from the segment. The COCO (Company Owned Company Operated) model is most suitable here due to increased value added services required along with complexities of operation in the form of synergies with other outlets for single billing facility.

    Conclusion The determination of the marketing model depends on a number of factors including geographical location, local tax rates, throughput and proximity of competitors in addition to offerings needed by the customers. During the pre-liberalization period, OMCs had exclusivity in sales of retail fuel, thus the Dealer Owned Dealer Operated (DODO) model worked well. However, with deregulation and changing customer needs, COCO model has its inherent benefits. Thus, the whole process of model determination is to increase the throughput per outlet and thereby sales and reducing the overhead cost of maintenance and running of the outlets.



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