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Non-Fuel Retailing : From Fringes to Focus

Infraline Energy Research & Information Services Conference on STRATEGIC SHIFT IN INDIAN DOWNSTREAM SECTOR Making India Export Hub for Petroleum Products and Innovations in Petroleum Retailing

August 25, 2005

Agenda for Today

Importance of Non-Fuel Retailing to create sustainable competitive advantage Key Global Trends in Non Fuel Retail Future of Non-fuel retailing in India and options for Petroleum Retail companies

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Increased Activity in Fuel Retailing in India

The Indian oil retailing sector is witnessing significant market activity that is altering the nature of competition
Major drivers for Major drivers for increased activity increased activity
1

Key Changes in Auto-Fuel Retailing

Growth in demand

Growth in the demand sector in all segments highway, urban, rural

2 Increased decontrol

Growth in retail outlets and new oil retailing formats to target growing diversity in consumer tastes and preferences Diversification into non-fuel sales Supplement margins in oil-retailing with non-fuel margins Better utilization of physical assets additional income source Alliances with other parties to get into non-fuel retailing Increased customer focus and differentiation to capture/protect market share in oil retailing Better quality and improved fuel product mix Improved service orientation Branding and loyalty programs
3

Phase-wise increased decontrol of fuels

3 New players > 2000 crores

Players with > 2000 crores investment in the sector now participating in retailing
4 Shift from selling to marketing

PSUs increasingly becoming customer-centric in their outlook to protect market share

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Evolution of Role of Petroleum Retail Outlets

The petroluem retail outlet is moving from a mere point of sales to the core of competitve differentiation, thanks to maturing customer, greater degree of competiton and higher degree of sofistication of the end-use segment
Phases in Evolution

Externally Neutral

Externally Supportive

Externally Agressive

Historically a mere dispensing point for product No marketing or service focus Customers less evolved Maturi 800, Scooters more prevalent No experience of modern trade for non-fuel

Deregulation and competition hotting up Customers becoming more discerning Increased focus on branding, creating better ambience and service at retail outlet Organised retail evolving, so are opportunities for non-fuel emerging

New competitive forces in the horizon Global standards emerging Beyond petro brandingnon-fuel and services become differentiating factors and growth and profit enhancers Retail Outlet becomes core focus, supply chain re-formed to service them better
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Evolution of Role of Petroleum Retail Outlets

From:

Before: Mom & Pop

To:

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What is Non-Fuel : From Customer Need Perspective

e tiv tra

Petroleum Retail Outlets Fuel

Location Quality Assurance Price Performance Ambience Time/service Friendly attendants Rewards Other needs? Convenience Food and grocery Fast Food Dashboard dining options Gifts Florist Cafe Planned Shopping needs Car accessories Pharmacy Specialty restaurants Books Music Related Carwash 2nd hand car sales Auto finance Parking Repair workshop

s lu Il

Non Fuel

Services
Unrelated Launderettes Photo shop Courier Travel Agent Crches Rest/refreshments

Need Analysis would vary from segment to segment

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Why Develop Non Fuel Retail

Value Value Migration Migration
In US, non-fuel sales contribute to almost 40% to the overall sales In US & Europe, typically non-fuel contributes 30-50% to the overall profitability In India, the margins are extremely thin (< 1%) on fuel retailing Using real estate for non-fuel sales can significantly improve the margins

Building // Building Leveraging Leveraging Competencies Competencies

Non-fuel retailing is a different ball game altogether as the wining propositions are significantly different compared to fuel retailing Theoretically need to develop alliances with parties that understand non-fuel retailing better But where are strong National/ Regional players for developing alliances?

Need for Non Fuel Retail

Create Create Differentiation Differentiation

Raise entry-barriers for new entrants Especially from the point of view of possible FDI in retailing

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Agenda for Today

Importance of Non-Fuel Retailing to create sustainable competitive advantage Key Global Trends in Non-Fuel Retail Future of Non-fuel retailing in India and options for Petroleum Retail companies

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Who has Better Bargaining Power? 60% increase in US supermarkets with pumps

In UK: BP/Safeway, Esso/Tesco Combos

o Supermarkets combined petrol share larger then Esso

In France, grocery controls 60%+ of petrol market

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Key Trends in Convenience Retail

Biggest Opportunities:
o Fresh Expansion o Strategic supply chain management o Meeting Shoppers need
Esso in Singapore has in-store bakery Amoco Split Second in US: 20% of store devoted to fast and fresh foods

Biggest Challenges:
o Big Box entry o Staff Quality o Oil company culture o Differentiation
Boots: UK market leader in pre-made sandwiches Woolworths in Australia adds petrol, Coles Myer launches small stores 50% of all C-stores in Japan are franchised by superstore chains Tesco and Sainsburys small stores in UK

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Key Trends in Convenience Retail

Big Prize for cracking the convenient products in convenient location conundrum Big Box adding necessary scale C-stores upgrading consumer proposition

Convenient Products

Big Box Retailers

Specialist C- Stores Independents Fuel C- Stores

Convenient Locations

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Agenda for Today

Importance of Non-Fuel Retailing to create sustainable competitive advantage Key Global Trends in Non-Fuel Retail Future of Non-fuel retailing in India and options for Petroleum Retail companies

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Key Questions for Non Fuel Retail Business

What purpose does it serve:
o Stand-alone profit center (which it should be) or o Just frill factor to create differentiation for fuel retailing

What is the overriding consumer value propositions:

o Convenience and / or o Planned purchase

In Indian context cash rich, time poor is not the only target for C-stores
o Do consumers visit C- stores only when they come to the station to fill gas or other occasions too based on need?

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Non-Fuel Retail Options

Retail Format Options

Impulse Purchase

Planned Purchase

Conventional Thinking Convenience Format

Un-Conventional Thinking Specialty Format

Convenience Store Food and grocery Household utilities Fresh food Gifts Florist
Possible mix of both formats present, depending on location and space availability

Specialty Concept Car Accessories Health and beauty Music Dashboard Dining

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Potentially huge opportunity as big-box competition is relatively nascent and there exist a need gap for better organized and structured chain of C-stores putting a better value proposition than the neighborhood mom and pop stores

Create a destination concept, not restricted to only car owners who come to gas station to fill fuel, but an extended target in the defined catchments

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Key Considerations for Non Fuel Retail

Own operation or third party: either way sourcing must be centralized Scaling up, otherwise poor customer acceptance and low profitability Efficient Value Chain Management and strategic relationship with vendors Organization capability building, fuel and non-fuel retailing are entirely different ball-games

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3 Dimensions of Building Winning Value Proposition

The three dimensions of Value Proposition
Product Product innovation and mix Auto accessories, fresh food, ready to cook/eat products, dashboard dining, loss leaders Exclusive private labels / Contract farming

Standardized Winning Customer Value Proposition

Price Price Differentiation Customer Segment-wise pricing Exclusive premium range? Multiple formats depending on location Happy hour/day

Service Service Differentiation Quick check-out Friendly attendants Rewards Program Tele ordering (and pick up when in gas station)/ home delivery Long opening hours Free car treatment while shopping
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Key Issues for Services Retail

Key is to find out what are the related as well as unrelated services where there is a need gap, where an organized provider fits in:
o Launderettes o Photo shop o Courier / travel agent / crches o Auto finance/ second-hand car sales

Rather than taking these as frill factors (which currently they are), one has to evaluate each from a business viability perspective One more profitable opportunity is alliance marketing with other related service providers

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Summary
Non-Fuel Retail can be an independent and attractive business opportunity on its own Key options to consider: Build from scratch or Make alliances
o Given the current demand supply mismatch, Build is still a viable option

Like all other forms of organized retailing, scaling up and creating strong distinctive value proposition is of primary importance at this stage Multiple formats can be considered in a nascent market such as India

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Thank You

Asitava Sen PricewaterhouseCoopers Pvt Ltd PwC Centre, Saidulajab Opposite D Block, Saket Mehrauli Badarpur Road New Delhi 110030 Phone: 91 11 51250875 E-mail: asitava.sen@in.pwc.com

2004 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

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