CASCA%20Consulting,%20L.L.C.

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CASCA Consulting, L.L.C.

• Global Future of Petroleum Retail Marketing
  Implications for Asia and Specifically India
• Presentation at the DRMP Conference,
• New Delhi, India, April 27, 2002
• Franz B. Ehrhardt, CASCA Consulting, L.L.C.

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Contents

• Global Retail Markets
• State of Retail Marketing in Select Countries
• Key Influencing Factors that Drive Change
• Select Key Success Factors
• Retail Market Trend Prediction Techniques
• What to Expect Next in Global Trends
• Implications in Asia, Using India as Example

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Market Control
FREE MARKET
PARTLY CONTROLLED
Medium Growth
High Growth
Low Growth
FULL CONTROL MONOPOLY

• Emerging Markets
• (Agriculture) - Simplistic

Mature / Saturated Markets (Industrialization) -
Sophisticated
4
Market Comparisons
Variations in Focus and Emphasis
Low
High
Non-Fuel Income
Free Market
Controlled Market
5
Market Control
UK
Thailand
Germany
FREE MARKET
Canada
USA
Japan
Malaysia
Australia
Turkey
PARTLY CONTROLLED
Korea
China
India
Brazil
Medium Growth
High Growth
Low Growth
FULL CONTROL MONOPOLY
Vietnam
Mexico
Indonesia

• Emerging Markets
• (Agriculture) - Simplistic

Mature / Saturated Markets (Industrialization) -
Sophisticated
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Market Conditions Discussion Examples

• Technological Leader
• Scandinavian countries, some USA
• Sophisticated Profitable
• Belgium, Netherlands, UAE, Singapore
• Transitioning / Battlefield
• Japan, Thailand, Taiwan
• Sophisticated Marginal
• USA, UK, France, Germany, Australia
• Transitioning / Moderate
• Korea, Malaysia, Philippines, Pakistan,
  Argentina, Chile
• Emerging / Still Controlled
• Indonesia, Mexico, China, Vietnam

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Market Status Discussion Examples

• Single Monopoly
• Indonesia, Mexico, Myanmar
• Multi-Company Monopoly
• India, Vietnam, Korea
• Legally Open, but Actually Not
• Malaysia
• Fully Open with Legal Restrictions
• USA, Australia
• Fully Open without Restrictions
• Germany, Sweden, UK
• Recently Opened
• Eastern Europe, Japan, Taiwan
• Transitioning

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Benefits and Concerns/Issues Controlled Market
Examples

• CONCERNS (Oil company)
• Gap to world class standards
• Creates outdated facilities
• Low preparedness level for decontrol
• Huge investments required for decontrol
• Compliance with extensive bureaucracy

• BENEFITS (Oil company)
• Low capital requirements
• Low operation cost due to high unit volumes
• No promotion advertising expenses
• Secure channel for predictable product
  disposition
• Usually protected earnings

• CONCERNS (Motorist)
• Outdated facilities
• Low appearance appeal of stations
• Very few support services
• Very few new stations
• Long commute to find fuel
• Service standards usually low
• Frequent waiting times at station

• BENEFITS (Motorist)
• Very limited price swings
• Possible price subsidization

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Benefits and Concerns/IssuesFree Market
Examples

• BENEFITS (Oil company)
• Unrestricted access to the markets
• Flexibility for optimum asset utilization
• Minimal bureaucracy involvement
• Control of earnings destiny

• CONCERNS (Oil company)
• Constant need to maintain a strong competitive
  position
• Adequate reinvestment funds required

• BENEFITS (Motorist)
• Wide range of product and service choices
• Catering to highest standard of customer
  satisfaction
• Adequate number of convenient locations
• Competitive prices

• CONCERNS (Motorist)
• Higher incident of price changes and ranges

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Margin Level ExperienceFree Market
Margins per Unit
Low
High
Small
X Netherlands
X New Zealand
Australia X
Market Size
Germany X
X Thailand
X Japan
X USA
Large
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Global Retail Trends Free Markets
Time
Hi
Hi
Lo
Lo
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Market Transition
EXAMPLE USA Petroleum Retailing Facilities and
Services
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Market Transition
Unattended
Full Service
Self Service
Actual
Other Income
Industrialization

• Agriculture

New Manpower Solutions Required
Competition from Industry High Turnover Quality
Down Customer Dissatisfaction
Obligation to Create Jobs Low Labor Turnover High
Unemployment
Full Industrialization Manpower Cost Very
High Prohibitive for Entry Level
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Retail Unit Margin Pressure Factors
(Not by sequence or significance)
High
Aggressive (Independent) Competitors (Price)
C-Stores with Gasoline
Supermarkets with Fuel
CP Income
Inflation
Cost Reduction
Margins
Over-Building
Self Service
Co-Branding
Mergers
Rationalization
Joint Ventures/Mergers
Low
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Competitive Positioning
Lowest Cost Break - Even Thrust
High
Typical Emerging Market
Typical Mature Sophisticated Market
Cost Margin per Unit
Low
High
Low
Monthly Volume / Revenue
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Competitive Positioning
Lowest Cost Break - Even Thrust
High
Company A
Loss
Cost Margin per Unit
Company B
Company C
Marginal
Profitable
Company D Trendsetter e.g. Supermarkets
Low
High
Low
Monthly Volume / Revenue
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Competitive Positioning
Lowest Cost Break - Even Thrust
High
Low Vulnerability
High Vulnerability
Convenience Products
Services
Cost Margin per Unit
Operating Cost Increases
New Investment
Low
Monthly Volume / Revenue
High
Low
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Competitive Positioning
Lowest Cost Break - Even Thrust
High
Low Vulnerability
High Vulnerability
Company B
Company A
Cost Margin per Unit
Company C
Company D Trendsetter e.g. Supermarkets
Low
Monthly Volume / Revenue
High
Low
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Combination Options fora Fixed Income Level
Competitive Vulnerability Positioning
High
Margin (Price) per Unit
Low
Volume / Revenue
Low
High
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Combination Options fora Fixed Income Level
Competitive Vulnerability Positioning
High
1000 Units of Currency
Margin (Price) per Unit
Medium Vulnerability
Low Vulnerability
Low
Volume / Revenue
Low
High
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Business DevelopmentTrendline Life Cycle
100
Saturation
Earnings Reward
Innovate
Market Penetration
Enter
- 0 -
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Convenience Stores at StationsLife Cycle -
Example USA
100
1990 - 1995
Saturation
Earnings Reward
Maturity Segment
2000
Innovate
Market Penetration
Enter
1985 - 1990
Opportunity Window
Pioneer Risk
- 0 -
1980 - 1985
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High
High
Overbuilding
Margins
Station Population
Rationalization
Low
Low
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High
High
4-6 Points over C.O.C.
Overbuilding
2-3 Points over C.O.C.
Margins ROAE
Station Population
Cost of Capital
Rationalization
Loss
Low
Low
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Global Trend Predictionin Free Markets

• Further rationalization and decline in numbers of
  retail facilities
• Size and investment in individual facilities will
  continue to increase significantly
• Fierce competition will force operating cost much
  lower trendsetter will target a zero expense
  margin for fuels
• Mass merchandisers (e.g. super markets) are
  there to stay in the fuels business and will
  expand while heavily squeezing retail margins
• The majority of retail earnings will come from
  non-fuel activities, especially from convenience
  products and fast food items
• Macro and micro mergers of retail operations will
  result in lower break-even costs and heavily
  pressure those that do not act in response

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Global Trend Predictionin Free Markets (contd)

• Many long-term traditional fuels retailers will
  sell their networks
• Actual and quasi-unattended fuels operation will
  expand significantly
• With approaching C-store saturation, oil
  companies and traditional C-store operators will
  engage in fierce price battles
• Unleaded low aromatics gasoline and ultra-low
  sulfur diesel will be the norm
• Diesel will continue to play a strong, even
  growing role alongside gasoline automotive LPG
  will continue at a low but steady level
  automotive natural gas is likely to expand
  significantly methanol, ethanol, hydrogen
  electricity, etc., for the time being will find
  rather limited applications when not heavily
  subsidized
• Motor fuel availability will remain in a surplus
  position

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Global Trend Predictionin Free Markets (contd)

• Environmental soil, water, and air protection
  standards will be further tightened. Full vapor
  recovery (Stage I and II) will be required.
• Stricter safety standards will be legislated and
  enforced
• Smart credit and debit cards will dominate
  payment transactions
• Computer-based information and communication
  technology and the Internet will have a profound
  impact on fuel and convenience product marketing
  
• Lube change intervals will be constantly extended
• Specialized car services will continue to expand
  outside stations while retail facility-connected
  lubrication and repair service will give way to
  convenience product and other non-automotive
  services

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Implication onAsia and India

• The remaining Asian and Sub-Continent retail
  markets could require another 5-7 years until
  full decontrol
• Tremendous investments and training efforts will
  be required by national oil companies, their
  local partners, and foreign oil companies to
  elevate the respective networks to prevailing
  world standards
• The listed global trends will, over time, impact
  India and the rest of Asia as well
• Natural gas as automotive fuel will play a bigger
  role in India and the rest of Asia, then in other
  parts of the world
• Local and multinational joint ventures will be a
  preferred approach to retailing
• National oil companies will expand across borders

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Implication onAsia and India (contd)

• Traditional bureaucratic structures and
  approaches of national oil companies, and other
  companies operating in controlled markets will
  have to dramatically change and greatly increase
  their efficiency
• High unemployment in many countries will require
  the continuation of full retail service to ensure
  employment especially for of entry level labor
• Convenience-stores at fuels stations will rapidly
  penetrate the markets
• Oil companies and governments need to cooperate
  more effectively to eliminate product
  co-mingling, smuggling, and other manipulations
• Traditional powers of bureaucracy personnel over
  approval processes and the linked exploitations,
  are not likely to ease significantly, even after
  decontrol

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Key Concerns andIssues for India
Competition and Markets Structure

• New and non-traditional markets entrants will
  start in the market with Global Best Practices
  standards creating a substantial gap to the
  present operators
• Hypermarket and Mass-Merchandiser participation
  will be facilitated by the availability of
  adequate independent petroleum product supply,
  even alliance may occur
• Market participants are likely to be traditional
  majors (IOC, HPC, BPC), international majors like
  BP, Shell, Exxon, Elf, as well as Indian and
  foreign non-majors , including hypermarkets,
  who will likely employ a maverick marketing
  style (Thailand model).
• Operation standards to be elevated to world class

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Key Concerns andIssues for India (contd)
Competition and Markets Structure

• New modern distribution systems and facilities
  have to be developed to provide sufficient and
  reliable service at acceptable standards to major
  and remote rural areas. New markets entrants will
  leave this domain to the traditional Indian
  operators

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Concerns and Issuesfor India
Investments

• New entrants will develop prevailing world class
  facilities and they will focus on urban and key
  sub-urban locations
• To close the gap in those markets and to become
  adequately competitive, traditional Indian
  marketers will have to rebuild or retrofit about
  30 and completely replace 30-40 of existing
  stations requiring somewhere between 10,000 and
  15,000 cr rs
• Longer term competitive and economic pressures
  will force a consolidation of liquid petroleum
  product and automotive gases (LPG and CNG) in
  single facilities
• The entry of new competitors will significantly
  elevate the cost (and value) for land for
  facilities

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Concerns and Issuesfor India (contd)
Environment

• Government regulations will require that the gap
  between existing standards and global standards
  will have to be reduced at an accelerated pace
• Higher investments for environmental protection
  equipment and installations will be necessary

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Concerns and Issuesfor India (contd)
Operating Culture and Value Changes

• Dealer/Company relations will have to undergo a
  fundamental change from independent,
  disconnected, and somewhat confrontational to
  highly cooperative and mutually respected
• Dealer selection has to be unrestricted and based
  exclusively on qualifications
• Corporate and organizational structures have to
  be de-bureaucratized, flattened, streamlined, and
  effectively empowered
• A fundamental shift to the new paradigm of
  People Pleasing has to take place

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Concerns and Issuesfor India (contd)
Operating Culture and Value Changes

• Extensive training and education programs are
  required for Indian retailers to be competitive
  in a free market
• How will the required enormous repositioning be
  financed and where will qualified trainers and
  facilitators be found?
• Corporations will have to introduce and foster a
  culture of competitiveness, productivity, and
  efficiency that is on par with global standards
  to keep their company viable
• How to secure the support of Executive Management
  and where to find the experienced trainer and
  facilitators for this task?
• Fundamental change in service quality will be
  part of the new culture

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Concerns and Issuesfor India (contd)
Customer Expectations and Behavior Changes

• A fundamental switch in customer expectation will
  initiate a fundamental change in the operating
  style of dealers and companies alike
• Waiting lines will not be tolerated any longer,
  prompt service will be expected
• Traditional customer loyalty will be replaced to
  loyalty to modern Big, Nice, and New operations
  that provide the highest standards of customer
  satisfaction
• Effective and satisfying grievance procedures and
  processes will become essential
• Operation standards to be elevated to world class

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India - Likely Retail Station Scenario
Shares expressed in
50
40
30
20
10
0
Station Share
Volume Share
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Retail Station Categories
Four Major Categories of Stations

• A) Urban Suburban
• Large facilities, 6-10 Multi-Product Dispenser,
  full-size canopy,
• Large building for C-store and co-branding, lube
  wash service
• Tailored, separate motorcycle facilities
• Leak-proof underground tanks and pipes, 50 KL
  tanks,
• Data transmission, remote control, credit/debit
  card acceptor
• B) Major Rural
• Medium size facilities, 2-4 MPDs, adequate canopy
• Medium size building for C-store, lube wash
  service
• Tailored, separate motorcycle facilities
• Leak-proof underground tanks and pipes, 50 KL
  tanks,
• Data transmission, remote control, credit/debit
  card acceptor

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Retail Station Categories (contd)

• C) Mini Rural
• Kiosk size facilities, standard electric or
  manual dispensers,
• Limited convenience product line
• Focus on integrated motor cycle facilities
• Small above or underground tanks
• Mostly traditional payment, range of data
  capture
• D) Highway / Truck-Stops
• With expansion of modern Highway infrastructure,
  emergence of state-of-the-art long-distance
  fueling service facilities and truck-stops
• E) Special Development Hyper Market Stations
• Global trends and availability of independent
  fuel supply will likely spawn (unattended)
  automated 6 - 8 MPD facilities in urban and
  key sub-urban areas

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Facility Replacement - Investment Patterns
(At least 10,000 - 15,000 cr. Rs for India)
100 80 60 40 20 0
Free Market
Decontrol Gap
of Replacement
Controlled Markets
Years
(12 -15)