The time is ripe to start thinking “beyond fuel”
Fuel retailing is evolving like never before, with multiple dynamic forces at play, which makes it imperative for fuel retailing firms to have a “beyond fuel” plan.
First, there are signs that the fuel retailing landscape is on the verge of increased competition. In a recent article, Minister of State for Petroleum and Natural Gas Dharmendra Pradhan stated that the government would review — and possibly relax — regulations governing the entry of foreign firms into the country’s fuel retailing business. This will potentially lead to intense competition between incumbent fuel retailing companies and potential candidates looking to enter the country’s lucrative fuel retailing market. As per the British Petroleum’s Energy Outlook Report for 2017, India’s oil consumption will continue to grow at a compound annual growth rate of four per cent during 2015-2035. This is significantly higher than growth rates for the world (0.7 per cent), North America (minus 0.7 per cent) and even China (2.4 per cent).
The increase in competition will lead to a high supply base in terms of fuelling stations and an ensuing price war for a “commodity” to maintain traffic. This is bound to put margins from the fuel business under pressure. This has happened in other geographies before. Chile, a rapidly growing oil economy, experienced deregulation in 2005, leading to the entry of Petrobras and Terpel in 2008 and Luksic in 2011. What followed was intense competition between the Chilean national oil company, Copec, and the new entrants, leading to price pressure and declining fuel margins.
Second, emerging trends such as shared economy (think Uber, Ola etc) and electric vehicles (EV) may disrupt the oil industry itself. Tony Seba, a Stanford University economist, recently predicted that “no more petrol or diesel cars, buses or trucks will be sold anywhere in the world within eight years”. In addition, the Indian government’s goal is to have an all-EV fleet on Indian roads by 2030. While the exact dates and technologies may be in question, the death knell for oil as transportation fuel seems to have been sounded — oil is now officially a “dead man walking”.
Third, the drop in oil prices has resulted in an unprecedented windfall for these companies, making them cash-rich. The FY 16-17 combined net profit of the three major oil marketing companies is almost Rs 33,500 crore. This is 2.5 times the combined net profit of the 21 public sector banks in India! This money should be used to invest in new offerings, services and technologies, which go beyond fuel.
Last but not the least, India is in the midst of a massive consumption boom. Even assuming conservative gross domestic product increases of six to seven per cent a year, consumption expenditure in India is expected to rise by a factor of three to reach $4 trillion by 2024 (BCG’s report, “The New Indian: The Many Facets of a Changing Consumer”, March 2017). This presents a massive opportunity for fuel retailers, who have “access” to millions of consumers, whom they have served through fuel and LPG touch points.
What do fuel retailing companies need to do?
There are specific steps that fuel retailing companies can take. First, these companies will have to “protect the core” by being efficient and effective in fuel marketing to protect their market share and deliver on customer expectations.
Second, they must think “beyond fuel” structurally and strategically, and not just as an add-on. Addition of non-fuel services, which resolve customer pain points and create customer value, is a good starting point, which will require a deep understanding of the customer segments that they serve.
Third, they must embrace digital, which will be a key component of “beyond fuel” and a vehicle to generate customer delight. The potential digital opportunities that fuel companies can tap into are wide-ranging — from implementing digital payments at the forecourt to completely cloud-controlled retail outlets with live feedback systems, to doorstep fuelling using digital platforms.
Last but not the least, these companies can also develop “corporate ventures” and take investment bets in other parts of the value chain and even non-fuel initiatives. They can do so by intensifying internal research and development efforts and setting up “accelerators”, which can help them scan new business ideas, or taking equity investments in start-ups.
There was a time when Vinay used to go to fuel outlets to fuel his car. That time is changing fast.
Kaustubh Verma is principal and Rahool S Pai Panandiker is partner and director, The Boston Consulting Group