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Distribution Channel Conflict:

Retail and Direct Sales Lubricant Markets


NIKHIL SARAF

Indian Institute of Management Indore

Distribution Channel Conflict- Retail & DS Lubricant Markets

Indian Petroleum Industry


Among the six core industries in India, the Oil and Gas industry is one of the most important
and oldest ones.

History
The process of economic liberalisation in India began in 1991 when India defaulted on her loans
and asked for a $1.8 billion bailout from the IMF. The bailout was done on the condition that
the government initiates further reforms, thus paving the way for Indias emergence as a free
market economy.
This also led to an influx of over 30 private and foreign Lubricant players in the Indian market
where price began to be governed by the open market forces with a huge potential. Despite
this however the government still plays a pivotal role and ONGC is still responsible for 77% of
oil and 81% of gas production while the Indian Oil Corporation (IOC) owns most of the refineries
putting it within the top 20 oil companies in the world.

Investment
According to data released by the Department of Industrial Policy and Promotion (DIPP), the
petroleum and natural gas sector attracted FDI worth US$ 6.67 billion between April 2000 and
March 2016.
Following are some of the major investments and developments in the oil and gas sector:

Investments in India's oil and gas sector will likely touch Rs 2.5-3 trillion (US$ 37.2844.73 billion) over the next few years, which will help raise the share of gas in the
countrys primary energy mix to 15 per cent by 2030, as per British multinational oil and
gas company BP Group.

The Oil and Natural Gas Corporation (ONGC) has launched a start-up fund of Rs 100
crore (US$ 14.91 million) on its Diamond Jubilee year to encourage and promote new
ideas related to oil and gas sector, thereby giving a fillip to Government's Startup India
initiative.

Yara International ASA, a Norwegian chemical company, plans to acquire Tata Chemicals
Limiteds Babrala urea plant and distribution business in Uttar Pradesh for about Rs
2,670 crore (US$ 398.13 million), on a debt and cash free basis.

New Opportunities / Government Initiatives

Some of the major initiatives taken by the Government of India to promote oil and gas sector
are:
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Distribution Channel Conflict- Retail & DS Lubricant Markets

The Ministry of Mines plans to restart operations in several hundred mines across the
country in order to raise the share of mining and quarrying industry in Indias Gross
Value Addition (GVA) by one percentage point from 2.4 per cent at present, over the
next two-to-three years.
The Union Cabinet has approved the National Mineral Exploration Policy (NMEP), which
will pave the way for auction of 100 prospective mineral blocks to attract private sector
in exploration, besides involving state-run agencies.
Ministry of State for Environment, Forests and Climate Change have launched a pilot
programme, aimed at introducing compressed natural gas (CNG) as fuel for twowheelers.
Ministry for Petroleum and Natural Gas has released the Hydrocarbon Vision 2030 for
North East India, with the objective of leveraging the north-eastern regions
hydrocarbon potential; enhance access to clean fuels, improve availability of petroleum
products, and facilitate economic development and to involve local population in the
economic activities in this sector.

Road Ahead
Indias oil demand is expected to grow at a CAGR of 3.6 per cent to 458 Million Tonnes of Oil
Equivalent (MTOE) by 2040, while demand for energy will more than double by 2040 as
economy will grow to more than five times its current size, as stated by Mr Dharmendra
Pradhan, Minister of State for Petroleum and Natural Gas.
Gas production will likely touch 90 Billion Cubic Metres (BCM) by 2040, subject to adjustment
to the current formula that determines the price paid to domestic producers, while demand for
natural gas will grow at a CAGR of 4.6 per cent to touch 149 MTOE.
Exchange Rate Used: INR 1 = US$ 0.0149 as on September 21, 2016

Lubricant Industry
Petrol and diesel prices have been deregulated but it is the lubricants segment that those in the
oil marketing sector find attractive and are preparing to fight over. India is now the worlds
third largest lubricants market, behind only America and China, with a market size of 2.5 billion
litres.
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Distribution Channel Conflict- Retail & DS Lubricant Markets

Lubricants demand is projected to grow at a 2.3 per cent compounded annual rate. Of that, the
automotive lubricants market is 52 per cent, and growing at six per cent annually. India and
Africa are the only growing markets for lubricants, with India having a bigger growth potential
The lubricants industry in India is dominated by
Indian Oil Corporation (Servo ),
Bharat Petroleum Corporation (MAK) and
Hindustan Petroleum Corporation (Milcy)
These have half the market share roughly.
The rest is with private multinationals including Shell, Gulf Oil, Castrol, Exxon Mobil, Total, IPOL
and smaller companies.

In the Indian market, lubricants are sold broadly through three channelsDirect Sales
1) Original Equipment Manufacturers (OEMs)
2) Distributors/CFAs
Retail Sales
1) Petrol pumps
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Distribution Channel Conflict- Retail & DS Lubricant Markets

Bazaar trade is the most profitable amongst the distribution channels and consists of spare
part shops, dedicated lubricant dealers, mechanic workshops and service centres
Studies expect the consumer segment to grow the fastest at a projected 6.6 percent per year,
while the commercial and industrial lubricant segments will exhibit a moderate growth of 2.3
and 1.6 percent per year, respectively.

Channel Structure:

Downstream

Oil Company

Direct Sales SBU

Retail SBU

Direct Selling/B2B

B2C

CFA

Retail Outlet

Distributor
Retailer/Mechanic

Customer
Customer

An oil company as part of its product portfolio has Lubricants as a profit product to offer. It is
cheaper relative to manufacture as this comes from the base oils that Oil refineries produce
after extracting the more costly products like LPG, Naphtha, Petrol and Diesel. This base oil is
then mixed with additives and there is an enormous brand building around the product. Unlike
Petrol, LPG and Diesel where the customer goes to the fueling stations under a PULL, Lubricant
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Distribution Channel Conflict- Retail & DS Lubricant Markets

market is mainly PUSH based. Branding and Marketing plays a very important role in the
Lubricant market where there is a very high brand perception among the users and they think
that there are wide perceived differences between various marketers. Unlike Petrol and Diesel,
where product and brand differentiation is very low, the Lubricant market has games played
outside the battlefield which decides who has the maximum market share.
Consequently, motorcycle oil is the largest product category in the consumer automotive
lubricants segment, with about 60 percent of the consumer automotive lubricants. Overall,
consumer automotive lubricants account for 13 percent of the total market.
Industrial lubricants is the largest market segment in India, with more than 54 percent of the
total market. Power generation, chemicals, automotive and other manufacturing, railways,
marine, and metals are the leading end-user industries, accounting for nearly 80 percent of
industrial lubricant consumption.

DIRECT SALES CHANNEL:


In the Indian context, Lubes are primarily sold in two channels by the OMCs. One is Direct Sales
where in there are various stakeholders in the chain. This is a B2B setup whereby the credit risk
and profits get distributed among the various players. Now, due to various intermediaries
between the manufacturer and the customer, the pie of the profits gets distributed and
everyone has a lesser share. A CFA/warehouse in most cases takes the product directly from
the company and sells it to various distributors who generally operate over a defined large
territory with rights and allegiance to a single manufacturer. They in turn sell it to the retailers
spread over the area or the mechanic shops who then sell it to the final customers. The
customers usually pay the MRP on the products in these channels at the retailer or mechanic
shop and pay for the labour as well.

RETAIL CHANNEL:
Herein, the retail outlet (RO-petrol pump) dealer uplifts the product directly from the
manufacturer location and the sells it to the customers at the POS of Petrol/Diesel. Thus, there
is an elimination of the middlemen in this B2B and a B2C mixed setup. The customer usually
receives discount at the POS but he has to do the changeover in her vehicle at some other place
or with an additional cost. Due to the lean structure of this arrangement, the profit margins are
high for the dealer.
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Distribution Channel Conflict- Retail & DS Lubricant Markets

Director Marketing

Sales Head Retail

Sales Head Direct Sales

Regional Managers

Regional Managers

Sales Officers

Retail Outlets

Sales Officers

CFA/Distributors

Retailers

Customers

Genesis of CHANNEL CONFLICT in Lubricants oil industry:


Mainly all major channel conflicts in the distribution chain seem to be resulting when the
objectives of various channel members are different e.g. Domain conflict in understanding
responsibilities and authority differently and secondly Perception conflict reading of the
market place is different and proposed actions vary. Each channel member wants to pursue his
own goals. Each wants to retain his independence and margins while deploying minimum sales
force. There are limited resources which all of them want to utilize in achieving their goals.
In the direct channel, a distributor incurs additional costs in terms of manpower, sales office
and sales force. He has both fixed as well as operating costs in addition to interest costs on the
credit extended by her in the market. In the retail channel, a dealer uses the existing structure
of her field sales men to sell the lubes as well, thus saving virtually on all costs related to
manpower. Most of the sales occur on MRP but the volumes are very low.

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Distribution Channel Conflict- Retail & DS Lubricant Markets

Trade discounts
and Margins

Channel
conflicts

Distributor

Petrol Pump

Volume linked
incentives

No area
restictions

Specific
customer
discounts

No discounts

HIGH VOLUMES

MARGINAL
VOLUMES

Area overlap

Dumping by
Retaill Outlets

An average oil PSU will sell in a test market of J&K around 36 KL of Lubes through the Retail
sales channel, its Direct channel will sell around 80 KL. This 36 KL tends to shift in the latter part
of the year due to mostly push by the company while the dealer resists it. This resistance comes
from the fact that she doesnt want to go out in the market and sell. Her habits stem from a
systemic rot of over 40 years in a closed economy whereby the customer was supposed to
come to the point of sale and not the other way round. A long legacy of monopoly is still stuck
with the selling part of this organizational structure. While the management has come out of
those yesteryears, this tail hasnt and is wagging more than its fair share. Now there are
exceptions to every case, and we are not talking about them.
When this dealer has a mindset that she earns well from the high volume petrol/diesel business
which is highly cash based and keeps the working capital flowing, she resists stocking Lubes.
High stock reflects a high inventory capital block and is a negative asset to the retail outlet who
is more interested in quick money from fuel sales.
OMCs look at this channel as a big opportunity of 40000 plus selling points while the dealers
dont share that enthusiasm. Leveraging such a huge infrastructure makes sense as well as
economic prudence. The dealers in order to offload this sudden rush of inventory towards the
end of the year indulge in cross selling and undercutting. They are ready to offer all incentives
or margins to the retailers to sell their product. This has a dampening effect on the market as
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Distribution Channel Conflict- Retail & DS Lubricant Markets

the direct sellers are forced to match the prices. After the dealers sell off, the direct sellers are
under pressure to maintain the same prices which dents their business model since they have
additional costs associated with their business. This is where the problem begins. This is how
the problem spreads to all markets and continues today as well.
A prime example of this dumping is evident from this example. CNG based lubricants for 3 & 4
wheelers are sold in Lucknow where these vehicles run. In the rural areas adjoining it, there are
no CNG gas stations and hence no such vehicles as the facilities are available at select Indian
cities. When the retail dealers of the state are forced to uplift lubes towards the end of the
financial year, a very peculiar conflict happens which is comic in nature but with very serious
undertones and reflection of the rot in the system. The dealers of remote areas of UP who pick
their product directly from company warehouses at Lucknow get a transport allowance as well
to ship the product to their respective petrol pumps. They have no use for CNG Lubricants in
their home markets. What came to light during an analysis was that these remote dealer were
uplifting 2 to 3 KL of these CNG Lubes every last day of the month even and dumping it outside
in the Lucknow market with every margin, including transportation on an immediate payment
basis. Thus they saved on blocked inventory by selling a product which had no market in their
districts. The issue came to light when the market in Lucknow got flooded and the direct
distributors were unable to match prices.
What this even showed was that in order to fulfill volume targets, the channels were at
loggerheads with each other and were not only undercutting on margins, but posting a poor
light in the customers mindset as well. The biggest benefactors from this were to be the Lube
companies who were not in the fuel business ranging from Gulf to Valvoline to Pennzoil to
Castrol. Since they didnt carry this baggage of multi-channel conflict, they were able to brand
their product and build an equity around it, when the OMCs lost their brand image to pricing
and inventory wars.
FOUR STAGES OF CHANNEL CONFLICT
LATENT : Some amount of discord exists but does not affect the working or delivery
of customer service objectives. Disagreement could be on roles, expectations,
perceptions, communication.
PERCEIVED: Discords become noticeable channel partners are aware of the
opposition. Channel members take the situation in their stride and go about their
normal business. No cause for worry but the opposition has to be recognized
FELT: Reaching the stage of worry, concern and alarm. Also known as affective
conflict. Parties are trying to outsmart each other. Causes could be economical or
personal. Needs to be managed effectively and not allowed to escalate.
MANIFEST: Reflects open antagonistic behaviour of channel partners. Confrontation
results. Initiatives taken are openly opposed affecting the performance of the
channel system. May require outside intervention to resolve.
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Distribution Channel Conflict- Retail & DS Lubricant Markets

Each stage is progressively more severe than the earlier one. This seems a case of
MANIFESTED Channel conflict in horizontal direction where the two SBUs are in conflict
with each other.

A Customers Viewpoint:
1. Customer always wants to interact directly with the seller. So, that they could have the
maximum attention and will be able to have better bargaining power.
2. Some customers have a view that she can leverage on the loyalty she shows to a brand is
directly promotional to the attention she receives from the OEM by means of visits, calls from
them.
3. Customers in direct selling channels always have a forum in the local area level through direct or
indirect interactions with others customers using the same products. The interactions help the
customer have a grasp of any good/bad news in the products. So it is important for the Sales
guys to keep the customers updated on all the happenings from time to time.
4. Customers use their influence in the forum/Area to promote a Brand or de-promote a brand.
This customer would have earned this power over a period of time it is important for the
OEM/Dealers to have a clear plan for this customer
TATA-Hitachi Experience with Oil sellers from one of my colleagues
This Experience was in handling customers through two channels a direct and an indirect channel
through dealers. Although the responsibility for each channel was Cleary defined, there were two places
when the dealer deviated and caused channel conflict.
A) Handling a demanding customer:
There are situations when sale is made without clearly analysing the customer risk profile. In such cases
if customer has political power or more influential in a particular area. The customer would try to use
his influence to get
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1) best price
2) Freebies
The dealer in these situations mostly deviate from their core responsibility by either passing the buck to
the OEM for handling this customers or join hands with the customer.
B) Low hanging fruits as a Direct customer:
There are some direct customers handled by the OEM who over the period of time become loyal to the
brand and the company. Additionally, these customers generate the higher ROI without much efforts.
The dealer who by his reach and better information from his channels try to get close with this loyal
customer for the monetary benefits by indirectly influencing them through various channels to bargain
for better price and providing insider information on the OEM power structure.
If the OEM staff are not on the toes they seldom get to know this after the customer has moved out
from their confidence towards dealers. There have been cases when the customers move towards
competition with the loss of confidence in the Brand. In channel wars, we lose these customers many a
times.

Possible Recommendations for resolving Channel Conflict :

Conflict cannot be eliminated. The goal of marketing management must be to optimize


market coverage and manage a healthy level of channel conflict so that it does not
become destructive. One way is to eliminate is to stop sales of large volumes/bulk
packaging to the retail outlets, since the idea is to cater to small customers who come
for refills like tractors, bikes, road rollers, motor vehicles.
Bar coded sales should be introduced which will allow POS transactions and desist
retailers from selling outside their territory or dumping product elsewhere..
Free facility for BRANDED oil change machines should be given to every fuel outlet with
sales above 3 KL per annum as a fixed investment. In case of non maintenance of sales
to further 5 KL, charges to be recovered.
Market share erosion and declining street prices are evidence that channel conflict is
becoming destructive. Channels are responding to excessive competition by deemphasizing the brand or by giving away too much in order to keep an account. This has
to be stopped by having a realistic view of the motor vehicle segement in a dealers area.
Data is available from Govt authorities. A dealer should not be forced to uplift by the
company beyond the numbers thrown by that analysis.
Compromise: Obviously both sides have to give up something to meet mid way.
Collaboration: Being a problem solving approach, try to maximize the benefit to both
parties while solving the dispute. Most ideal style of conflict resolution a win-win
approach. Requires a lot of time and effort to succeed. Sensitive information may have
to be shared.
Every manufacturer will likely face destructive channel conflict at some point. As
markets evolve and mature, many manufacturers will be required to add new, lowercost channels in order to cover all major market segments. Often, destructive conflict
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arises because changes in the manufacturer's go to market strategy lags the market
changes associated with market evolution. Hence, companies need to emphasise on
brand building and not dumping advertising at the slightest hint of price rises and
shrinking margins. A Brand takes time to build, and intermittent measures dont help.
Channel Conflict Solutions:

Dual compensation
The goal is to move the indirect channel from a place of potential to one of "partner" for
the direct sales force

Activity based compensation or discount


Conflict between channels of differing cost structures and capabilities. Activity based
discounts are applied by paying a channel a specific

Shared costs
The key difference is that functional discounts compensate the channel for incremental
tasks via a discount on product sold, while shared costs pay directly for the task

Compensation for market share


Usually applied to direct versus indirect conflict, the direct sales rep is compensated
based on total market share in a territory. The goals of the sales rep are based on direct
and indirect volume, thus motivating the direct rep to "partner" with indirect channels to
maximize territory volume.
References

1. Media Reports, Press Releases, Press Information Bureau, Ministry of Petroleum and
Natural Gas, Union Budget 2016-17
2. http://www.ibef.org/industry/oil-gas-india.aspx
3. https://en.wikipedia.org/wiki/History_of_the_oil_industry_in_India
4. http://www.business-standard.com/article/companies/competition-in-lubricant-segmenthots-up-115122400380_1.html
5. http://www.business-standard.com/article/companies/competition-in-lubricant-segmenthots-up-115122400380_1.html
6. http://www.daedal-research.com/oil-gas/indian-automotive-and-industrial-lubricantsmarket-trends-opportunities-2014-19#table-3
7. http://www.mondaq.com/unitedstates/x/79136/marketing/Channel+Conflict+Management
+How+To+Manage+Through+It+And+Win
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