PETROLEUM RETAIL DEVELOPMENT

Index
Historical perspective of Petroleum development in india Retail network planning / trade area & site identification/

Petroleum Retail Management in India, Business Policy,Models &Formats

Petro Retail Asset Management&investment decisions(IRR/ NPV) Role of technology / IT in Petro retailing Health Safety & Environment Important Legal & Environmental issues applicable in Petro Retailing Presentation Workshops / case studies/ field work

BRIEF INTRODUCTION Prof VP VERMA QUALIFICATION 1. BSc ENGG. MECH.DOING PHD IN MANAGEMENT 2. MBA SPECIALISATION IN HRD MKT. (FMS DELHI) 3.PG DIPLOMA IN PERSONNEL MGT (FMS DELHI) 4. PG DIPLOMA IN LABOUR LAWS & IR(LAW INSTITUTE) PROFESSIONAL EXPERIENCE OF OVER 40 YRS. 1. PRESIDENT OF NRI GROUP CO. FOR 5 YRS. SET UP 10 CRORES PROJECT WITH FOREIGN COLLABORATION, EQUITY & MARKETING NET WORK OF THE PRODUCTS. 2. INDIAN OIL CORPORATION / CALTEX LTD. FOR 15 YRS. LOOKED AFTER COS OPERATIONS IN NORTH INDIA . 3. CROMPTON GREAVES LTD 15 YRS. PROFIT CENTER HEAD AS GM/VP ON ALL INDIA BASIS. INCHARGE OF 500 CRORE DIVISION, 800 EMPLOYEES, INCHARGE OF MANUFACTURING, MARKETING, FINANCE & PERSONNEL FUNCTIONS. REPORTING TO MD . 4. OWN BUSINESS 5 YRS. *CHAIRMAN OF FINANCE CO- MANAGED TWO PUBLIC ISSUES OF 10 CRORES. *MANAGEMENT CONSULTANCY TO INDUSTRIES. *ACTIVELY ASSOCIATED- CORPORATE TRAINING/ MDPs TEACHING IN MANAGEMENT INSTITUTES AS VISITING FACULTY FOR THE LAST 30 YRS.IN BOMBAY & DELHI. 6. ATTENDED SEVERAL MANAGEMENT SEMINARS/ PROGRAMS AT NATIONAL & INTERNATIONAL LEVEL.EXTENSIVELY TRAVELLED ALL OVER WORLD. EXPOSED TO MANAGEMENT PRACTICES OF REPUTED MNCS

Historical perspective of Petroleum development Understanding Demand & Supply position in the country Brief perspective of National & Global Business of Petroleum products for better comprehension of the subject it will be worthwhile to understand overall perspective Estimated demand of Petroleum products in India 135 mmt -Current refinery capacity -No of refineries in India, public sector private sector 149 mmt 17 nos 2 nos 60 % 40 % 35 mmt 100 mmt

-Rough capacity distribution Public sector Private sector

-Current crude oil domestic production in India Imports

-Approx import bill at current prices of $450/ton

$45billion 1

This year Indias export earningestimated, 160 billion $, thus country spends nearly 30% of its total export earning only in importing crude oil, to meet countrys energy requirements, which poses a big burden on our national economy, the current values are calculated at 70$ a barrel During next 3 yrs after the recession is over, prices of crude oil are estimated to rise to a conservative 100$ a barrel, which will increase our foreign exchange burden by another 50% Taking a perspective of 5 to 10 yrs this figure is likely to rise to 150$ due to demand exceeding supply position Globally. Thus as a nation we need to focus on alternative sources of energy,boost in domestic supply, conservation & efficiency improvement devices to overcome this serious problem, which otherwise may have a severe impact on our development & growth of our economy Globally the current demand of petroleum products is around 3600 mmt & the annual growth rate is 1.2-2% PA. Advanced countries have been focusing intensively on alternative sources of energy as well as improving the efficiency of utilization system. 2

In India the demand growth rate has been 5 6 % PA, whereas crude production has remained stagnant. Nearly 60% of the Petroleum products are used in the Transport & power sector, during the last 5 yrs, considerable amount of advancements have been made towards these objectives, some important developments are as under Auto Sector Development & use of bio fuels as alternative fuels 10% can be straight away blended for use in automobile sector, in European countries much higher % is being used with minor modifications in auto engines Use of CNG / LNG in auto engines, cost of operation is almost 60% Development of hybrid cars- mileage per lt will improve 3- 4 times Use of hydrogen gas Improvement in thermal efficiency of auto engines Battery operated cars 3

Power Sector

Use of Nuclear energy in Power plants, India has taken important steps towards this, here the capital costs are high & gestation periods are double
Use of mini hydel stations for local area distribution. Capital costs & gestations are both very high Use of coal based thermal stations at the pit heads to minimize pollution coal is converted into soft coal or gas based on new German technologies Use of electric trains instead of diesel engine Use of solar energy for domestic & industrial applications Use of non conventional & renewable energy- like wind, bio & waste material 4

Role of Petroleum in our economy & brief Retail History of India in it

Oil & gas put together meet 60% of our commercial energy requirements, again transport sector (rail, road, water & air & Power sector) consume 60% of Petroleum products, balance 40% is used in Petro chemicals, Plastic, fertilizers, pesticides & agriculture Globally first oil well were drilled by Col Drake in Pennsylvania in 1859 & in India 1st oil refinery was built in Digboi in 1901 . So oil industry is globally 150 yrs old & in India 100 yrs old. At the current consumption rate the reserves will last us till 2050, unless thru technology & innovations we find new solutions, the energy position will assume criticality decade by decade, this is a challenge which managers working in the energy sector will have to handle with full focus
Brief retail history in India is as under -1882 petro retailing started in India by standard oil co of USA, by supplying kerosene 5

-1890 first oil was struck in India in Digboi

-1901 Indias first refinery was built at Digboi

-1950-55 refineries were set up by Burma Shell, ESSO & Caltex -1956. Govt of India passed the Industrial policy resolution placing Petroleum sector under public sector -1958, 1st Public sector co was registered as Indian Refineries Ltd, on down stream side & ONGC was established thru act of Parliament

-1959, 1st Marketing co was registered as Indian Oil Co Ltd

-1964, IRL & IOC were merged as Indian Oil Corporation -1970, all foreign cos were Nationalized & entire Petroleum sector came under Govt control -1975, oil coordination committee was set up on behalf of Govt to have effective control on the entire industry, especially imports & proper supply & distribution to conserve scarce foreign exchange 6

During past 6 decades size of industry has grown from 1950-51 ,at 3.5 million tons to 2008-09 to 134 mt,an increase of 40 times on account of enormous growth in transport, industrial power & agriculture sectors -1992-93,Govt initiated imp phase of deregulation & de liberalization, with removal of controls on lubricants & importof bulkGases

-2001-02, process of liberalization to be completed by allowing foreign & Indian cos to invest in India in up stream & down stream sectors, they were allowed to enter the Marketing operations, provided they have an investment of minRs 2000 crores in infrastructure
-1.4. 2002 APM ( Administrative Price Mechanism) was notionally dismantled to allow free hand to oil cos to import & market petroleum products in the country

- violent fluctuations in crude prices in international market & to maintain socio economic stability Govt during last 7 years kept control thru public sector cos to regulate the prices of HSD, MS, Kerosene & LPG & allowed to alter prices of lubricants, ATF & heavy oils 7

Retail Network Planning / Trade Area & Site Identification/ Investment Decisions (IRR/ NPV) Significance of network planning In petroleum industry planning assumes critical importance because of following complexities of business -Multiple products requiring different facilities,vast area& population -Multiple supply sources for different products -Nature of products inflammable & volatile -Diverse transportation modes (rail, road & sea) -Regulated infrastructure (approval of explosives, weights & measures & several local bodies like MCD, PWD, fire brigade dept etc) -High capital cost on infrastructure & heavy over heads with low margins & low returns -Highly competitive environments 9

Major advantage of liberalization was flow of large amount of capital by private & foreign cos into the petroleum sector thus increasing the enormous infrastructure of refining ( RPL & Essar import & marketing of ), lubricant & petroleum gases by Caltex, Shell & other MNCs. Exploration by carion energy, IOC, RPL & few other MNCs

-though RPL & few other cos set up nearly 1400 retail outlets in the country, but the marketing operation was not successful due to alarming increase of crude oil prices in 2007-08, which could not be passed on to the consumers due to Govts indirect control in pricing thru PSU cos which were compensated thru oil bonds worth several thousand crores for keeping the prices under regulated controls due to political & socio economic compulsions of the Govt.

Demand Estimation To be compiled, sector wise, area wise for each project giving present demand & projected demand for next 5 yrs eg demand for HSD for a retail outlet, may be compiled as under -No of private & commercial vehicles, passing on the routes -Demand for agriculture sector, irrigation, sowing, harvesting -Demand of product in industrial areas -Misc customers like commercial establishments, fleet owners -Competitors activities The cos are designing special schemes, incentives & host of services as USPs for attracting customers for long term relationships, like petro cards, service coupons, lucky draw coupons etc Infrastructure Strategic location, proper layout with land, building, transportation & handling & customer service facilities 12

Distribution channels Refinery Terminals Port terminals Installation / Inland terminals

Depots /LPG bottling plants

Stockist / Distributors / Dealers Aviation stations Consumer outlets Retail outlets Important analysis / data to be compiled for net work planning Demand estimation / marketing plan Infrastructures Financial analysis Manpower plans 11

Important Legal &Regulatory issues applicable in Petro Retailing Introduction & Background Upto March 2002 Govt controlled entire Petroleum Industry thru Oil Coordination Committee (OCC) covering all upstream / down stream activities like refining, import, supply & distribution, Marketing, Intercompany transfer,Product- sharing ,. optimal use of infrastructure, Pricing, Subsidies, In fact this is one of the classic example of efficient Management of one of the vital sector of economy, wherein Govt insured best possible use of scarce resources of petroleum products in an optimal manner. However due to regulated & controlled regime the growth of indigenous resources like production of crude oil & petroleum gases remain stagnant as no big private/ international players were willing to invest huge amount of funds without full freedom to do business, which resulted in huge burden of importing nearly of countrys crude oil requirement at exorbitant cost of nearly Rs2.5 lac crores PA which drains away nearly 1/3 of our countrys total foreign exchange earned by our entire export activities 13

As a result of deregulation most of the big international cos / large business houses have entered this industry despite several handicaps posed by PSUs & Govt restrictive policies, this is because Indian economy has been growing at an enormous rate of 8-9 % during the last over 5 yrs & promises to become one of the 5 largest economies of the world in the next 20 yrs.
Govt has planned to control this important sector by setting up a petroleum regulatory board, which will regulate the entire industry by covering all aspects like refining, processing, storage, transportation, distribution & marketing activities of petroleum products excluding production of crude oil & natural gases & the later which is being regulated by the Govt by inviting global bids under a separate policy of National exploration & licensing policy ( NELP) which is in operation over more than a decade & shown considerable promise It must be remembered that investments required are very large (over Rs one lac crores have been invested in the last 4-5 yrs) & the gestation periods are large, the country should start getting the results of intensive steps from yr 2010 onwards 14

Position after Deregulation ie 2002 till date

Petroleum prices have tremendous effect on socio economic & political environment in the country. Govt have been going slow in allowing free market mechanism in pricing the vital products like MS, HSD, Kerosene & LPG, which nearly constitutes 70% of the market value & have tremendous effect on inflation & cost of living. The control is being exercised by setting up a planning & analysis wing under the control of Ministry of Petroleum. However other products like lubricants, ATF & heavy oils&bulk import &saleof Gases made free.
In order to make up their losses oil cos have been steeply increasing prices of above products causing lot of turbulence in industry specially impact of ATF prices on aviation sector, which this yr has recorded a loss of over 10,000 crores As a nation,wehavetofind aopt imumsolution to our EnergyNeeds .Overall this makes a challenging case study for management students to make a thorough analysis of available options & suggest a workable plan for the nation

Formation & Role of Petroleum Regulatory Board

Important Functions
Protect interest of consumer by establishing fair trade practices amongst all oil cos

Authorize cos to produce/ procure market petroleum products/ gases, insure adequate availability & equitable distribution
Monitor prices, prevent profiteering & shortages

Display of maximum prices by retail outlets

Regulate & enforce retail & marketing services obligations of the cos Establish & Operate LNG terminals for marketing the gas

Declare pipeline as the common carrier, fix transportation rates & fair access to all users
Establish mechanism for sharing infrastructure & products for distribution most economically

16

Maintain data bank & information regarding all petroleum products

To adjudicate & decide all disputes relating to all activities of refining, processing, storage, transportation, distribution & marketing of products
Receive and redress complaint of consumers Powers of the board vested with full powers of civil court to summon, receive & record evidence, witnesses, documents & give judgements as per law of natural justice The board will have powers to pass orders, impose fine & penalties & insure compliance Obligations of Entities obtain prior authorization before commencing any activities related to marketing of notified petroleum products Maintain records, allow inspections file statements as specified by the board 17

Fulfill obligations regarding use of common infrastructure & product sharing agreements, which are in the overall interest of economical & efficient distribution of products for the consumers Power of Central Govt. Act provides powers to the central govt to issue directions to the board in public interest & in case of any special circumstances by issuing a notification take over management of any activity or suspend any operations for a specified period in the overall interest of the country

Environmental Clearance
Govt has set up Pollution Control Boards to control damage to the environments thru unregulated & untreated affluent & air, for which norms have been laid down for compliance Accordingly refineries, terminals, LPG bottling plants, Lube plants, Aviation stations & retail outlets have to comply with these regulations, especially discharge of affluent, disposal of sludge &waste gases 18

Clearance of local urban bodies / Magistrate

For putting up any petroleum installation, including retail outlet, approval of, concerned DM is required, who in turn obtains NOC from departments like PWD, Police & fire fighting department, such NOC also forms basis for obtaining explosive license Explosive license
Petroleum installations are governed by Petroleum rules 1976, with regard to storage handling, processing & transportation of products. These rules are enforced by Chief Controller of Explosives, Nagpur, with the help of Regional Controllers. It is mandatory to obtain approval of lay out, design & construction material to be used in the plant ,RO,s & also tank trucks used for movement. Rules also laid down for fire fighting equipment for such purpose Controllers carry out periodic inspection for compliance of safety rules 19

Factory Act 1948 / Shop & Establishment Act

Petroleum establishments mentioned above employing more than 10 workers with use of power have to register themselves under Factory Act
The Act regulates safety provisions, house keeping, working conditions in the plants & submission of periodic reports & maintenance of records, periodic inspections are carried out by the factory inspectors to ensure compliance License under Central Excise & Customs

Establishment handling, import, export & domestic sale have to obtain above license for payment of excise & custom duty as per the law
Products are allowed to move from one storage point to another under bond & the duties are paid at the time of sales transaction Registration under State Sales Tax & Central Sales Tax All the sales point have to obtain above registration & pay tax to state or central govt based on sale made in the state or interstate. 20

The schemes are being merged under a common tax system called either VAT or GST, which will simplify the tax system & bring it under one common tax, this will be applicable in about a years time Weights & Measures Act This step ensures Right Quantity to the buyer. Since the margins given to the trade are very low around 2-2.5% on gross sales. The easiest way to make fast money by under weighment & adulteration. Historically trade generally connive with the regulatory agencies to achieve these objectives. In recent years Oil Cos have played focus on consumer protection thru Q & Q which stands for right quantity & quality & it has been made as a slogan in their sales drive & promotion plans.this has been improved by making the equipments Tamper Proof & rigorous checks & controls, this is further reinforced thru consumer education programs Every state has a weights & measures department which checks the 21

accuracy of delivery equipments like dispensing pumps, flow meters, tank trucks & checking equipment like 20, 10, 5, , measures & stamps them every year for accuracy. The consumer can also check the accuracy of correct quantity with these appliances. CONSUMER AWARANESS IS MOST IMP TOWARDS THIS Statuary approval for Retail Outlets Clearance of local bodies-Pollution, Fire Dept, Police, Town Planning Layout, design, approach-PWD, Town Planning Pollution Control/ Environment clearance Explosive license under petroleum rules 1976 Registration under Factory Act/ Shop & Establishment Act Registration with Sales Tax Registration with weights & Measures for annual checking/ stamping

22

Safety Health & Environment

Oil Industry Safety Directorate

Govt of India has set up a Safety Directorate under the code of OISD to deal with safety issues of oil industry. Safety codes have been developed for Exploration Refining & Marketing Activities, Directorate thru its inspection team directs & guides cos for compliance of safety codes & practices. Safety codes come into play in Planning, Building & Operational Stages & Act As a Regulatory Authority

Important Laws which control safety health & environment aspect.

Explosive regulations under Petroleum Rules 1976 As per these regulations petroleum products have been divided into 3 categories, dangerous petroleum ( DP), which includes MS & related solvents, non dangerous petroleum (NDP) which include kerosene, ATF & HSD, Heavy Petroleum, which include & heavy oils. Separate rules with adequate precautions for safety & health have been23

provided for receipt storage & dispensing of theses products, prior approvals of lay out & specification of equipment, type & quantum of fire fighting equipment are mandatory before installing any facility for handling petroleum products Periodic inspections are carried out to ensure compliance

Clearance from local bodiesPolice, Fire, Pollution, Town Planning Dept In view of hazardous nature of products 3 depts have laid down separate rules for compliance with safety & environmental requirements, prior approvals are therefore mandatory for location, lay out, type of storage, & dispensing facilities along with safety provisions, before setting up any facility
Factory Act/ Shop & Establishment Act.Applicable where 10 or more workers are employed & working process is carried out with the help of power or 20 nos without the help of power. The Act makes adequate & mandatory provision for health safety & welfare of workers under section 7 to 34 & holds the management responsible for compliance. Major provisions are summarized below 24

Health measures House keeping & cleanliness of premises with adequate arrangement of waste & effluents (section 11 & 12) Proper control of ventilation, temperature & humidity (Sec 13,15) Prevent accumulation of dust & fumes (Sec 14) Minimum work place for each workman 14.2 cu m (Sec 16) Adequate lighting & proper drinking water (Sec 17,18) Proper latrines, urinals &spittoons (Sec 19,20) Safety measures

Proper fencing of moving machinery

Safe working pressure for pressure vessels Children below the age of 14 not to be employed 25

Material handling equipment to be checked by a competent person once a year & record maintained Keep dangerous pits, sumps, openings properly closed. Maintain floors, stairs obstruction free Provide goggles/screens for protection of eyes against fumes, gases dust Provide adequate fire fighting facilities & training to staff in handling such equipment. Conduct periodic fire drills

Appoint separate safety officers for plants of 1000 workers or more

Factory inspectors empowered to inspect units to ensure compliance Welfare Measures (Sec 42-50) Facility for storing of working clothes First Aid facilities, minimum one box for 150 employees

Medical room with trained staff where 500 or more no employed

26

Hygienic Canteen facilities where 250 or more employed

Proper Crches where 30 or more women are employed

Appoint welfare officer where strength is 500 or more Rules pertaining to working hours, rest intervals, shifts & over time are prescribed to avoid excessive fatigue Employee State Insurance Act 1948, regulated thru ESIC Child Labor (Prohibition & Regulation) Act 1986

&

child means a person who has not completed 14 years of age& not allowed to be employed.
Employee Provident fund Act 1952.

Applicable to all establishments employing 20 or more employees

This is a welfare scheme in which both the employer & the employee contribute 12% of basic + DA salary to a Govt fund which is payable after retirement or death 27

Payment of Wages Act 1936 & Minimum Wage Act 1948,

The scheme has now been modified to include family pension & life insurance to take care of financial needs in case of pre mature death
This lays down the wage period & mode pf payment without any unauthorized deductions.Employers are not allowed to pay below the minimum wage prescribed by the Govt for different States Workers Compensation Act 1923

Deals with compensation to workmen & its dependants, in case of accidents causing disablement & death during course of employment
Payment of Bonus & Gratuity Act, 1965

Prescribes minimum & maximum bonus & linking it with profit of the co, however as a welfare measure the minimum bonus of 8.33% has been made compulsory , even if the unit does not make an profit. The max limit has been fixed at 20%for profitmaking units 28

Payment of Gratuity is payable where an employee has completed minimum 5 yrs of service. The amount is to be calculated @ 15 days per year of service,subject to max limit ESI Act 1948 *This provides medical relief, sickness benefits, maternity benefits to women workers & pension to dependants of deceased workers & compensation for employment injuries & disease *This is a contributory scheme, where the employee contribution 1.75% of wages & the employer contribution is 4.75 of his wages

Summation There are nearly 110 labor laws in our country out of which more than 20 are related to health, safety, welfare of employees. No other country in the world has so man laws, but the irony is that due to mal practices & poor compliance the ground situation is not very healthy. Except for few large cos & organised sector which pay full attention to these important aspects. The others mostly small, medium & unorganized sector which cover more than 80% of the work force need lot of awakening to fulfill this important social obligation

Environmental Pollution in India

Rapid growing population & economic development are leading to environmental degradation in India, thru uncontrolled urbanization , industrialization & destruction of forest.
India has 18% of world population & 2.4% of worlds area, which greatly increases the pressure on depletion of the natural resources & increase in pollution rate One of the major source of pollution relevant to our subject of retailing of petroleum products come out of vehicle emissions using MS & HSD as fuel. During the last 10 yrs the automobile industry hasbeen expanding @ 15-18% PA & the current market ,addtion is 15 lacs four wheelers PA & 120 lacs two & three wheelers. Nearly 60% of vehical population is in 5 metro towns of Delhi,Bombay, Bangalore, Madras & Calcutta,where pollution level are alarmingly high The emission pollutants are CO, HC, NO & SPM(suspended particle matters). In view of out dated process designs in our refineries, 30

Quality of auto fuels have been so poor that we were producing nearly 20 times more pollutants in vehicle emissions in India than the western standards, this resulted into an alarming situationThis is further compounded by outdated vehical engine design. To control the alarming situation Govt of India set up Pollution Control Board in 1974 to deal with pollution aspects of major areas like air, water, noise & disposal of waste. It set up air quality monitoring stations in 18 major cities of the country where quality parameters like CO, Ozone, SO2, NO2 & SPM were measured on day to day basis. The board set up environmental standards, the average figures are as under SO2 NO2 60 mg/cu m 60 mg/cu m

SPM 140 mg/cu m CO 2 mg/ cu m 31

Lead 0.75 mg/cu m

Accordingly environmental standards for vehicle exhaust were set up to control the quality of air pollution. Currently we are at Bharat stage II Passenger cars Bharat stage II Bharat stage III Bharat stage IV Diesel vehicles CO 2.2 2.2 1.0 HC+NO 0.5 0.35 0.18 SPM effective 2003in metros effective 2010in metros

Bharat stage II
Bharat stage III Bharat stage IV

4.0 1.1
2.1 1.5 1.0 0.96

7.0
5.0 3.5

0.15
0.10 0.02

Two / three wheelers

Bharat stage II Bharat stage III 1.6 1.0 1.5 1.0 32

Environmental standards for auto fuels- Pollution Control Board has progressively improved the standard of auto fuels over last 15 yrs to control pollution. Important parameters for MS & Diesel are as under Diesel Sulphur % Cetane MS 2000 0.25 48.0 2005 0.05 48.0 2010 0.035 51.0

Sulphur %
Lead Benzene

0.10
0.013 3.0

0.05
0.013 1.0

0.015
0.005 nil

Role as a citizen Do you need to drive to work use public transport, bicycle, walking, car pool, keep fuel & air filter clean, remove carbon from silencer, maintain proper tyre pressure.Periodic pollution check 33 Use of Bio fuels Ethanol, bio diesel & petroleum gases, in metros

Petro Retail Asset Management

Helps to understand process required to establish a new Retail outlet. Important steps are as under
Understand Market potential market survey of area where RO planned by preparing a area map, highlighting major consumers Trading area selection & market potential mapped RO of competitors marked with marketing datas & USPs

Proposed location of RO is marked with details ofaproach roads

Stdy traffic count & estimate business potential Important parameters of suitable Site No HT cables passing over the plot No big drain at approach No land filling & no encroachments 34

No proposal of fly over or road widening

No open flame industry in the vicinity like foundry etc

Clear title, permissible by town planning Meets requirement of explosives, PWD, NHAI & local bodies

Site & Road

Mapping of business infrastructure, competitors, future developments, trading area upstream/ down stream, earth filling/cutting Road openings for RO, position of dividers, no of lanes Price differential due to state boarder in the vicinity Distance from the supply point Study of commercial/ industrial units in vicinity & their potential Market intelligence population count income & age profile, spending habits business data of the area

35

Compliance of Explosive Rules

35x35 meter minimum plot size for NH

6 meter clearance around drive way, 4 meter around vent pipe 4 meter high vent pipe, 1.5 m above building 4 m clearance around fill points 4.5-6m canopy height IRC guidelines ROs should be 1 km away from check barrier, distance between 2 ROs & from the junction point min 300 m Design of RO

With MNCs & private players coming in market RO designs are being modernized according to international practices & each co is standardizing designs, color, symbols, shape & structure to differentiate their brands & establish their unique RVI retail visual identity to improve their visibility in the market 36

ROs are increasingly become a package of customer convenience & services like ATM, Coffee shop, convenience store, wash facility, rest facility, snack bar, car service facility as add on features. In case of rural background, popular dhabas & over night facilities are common features

This is coupled with several incentive schemes like Petro cards, fleet cards, gift loyalty schemes have come in vogue to attract customers
In line with the international practices, whole idea is to create an environment of customer experience & delight & meet his daily requirements thru one stop shop to attract & retain more & more customers. A study done in the western countries indicate that ROs designed on the above pattern generate additional 40% profit thru non fuel activities, thus more & more emphasis is placed on such aspects which go a long way in improving the financial viabilities/ return of a RO project

Viability of RO project
Over the years returns from petro retail business have become very marginal as both the Capital cost & Working capital cost during last 2 decades have increased nearly 3 times, whereas commission has not increased more than 50% despite pressure applied by trade on oil cos. The viability of ROs, under current envoirnment is dependant on large volume of business generated out of high growth of automobile industry to the tune of 15-16% PA , mechanization of agriculture sector & self generation of power by commercial & industrial sector Min viable sale of auto fuels & lubes for RO is 300 & 10 KL/mthResp.

In addition the RO should generate income of 30-40% thru basket of services rendered like tire repair, spares, servicing & washing, lube oil change, food & snack services, pollution control service, STD booth etc
Due to low margins major problem industry faces, dealers playing with Quality & Quantity thru' adulteration & short supply to improve the margins the quantum is estimated around 4-5% on a modest scale 38

Investment Analysis

General pattern of Cost & Revenues are as under

Cost Cost / rental/ lease charges on land, building,equipment, infrastructure

Working Capital cost of fuel, lubes & spares etc

cost of electricity, water & misc services like maintenance/ upkeep Staff & other Administrative expenses Revenues Sale of fuels, Lubes & spares

Income out of all other add on services

Financial Analysis 3 Popular techniques 1.Pay back analysis. 2. Net present value (NPV). 3. Internal Rate of Return (IRR) 39

Payback Analysis (example)

Suppose total cost of Project = 100

Income over yrs 1st yr-10,2nd yr-20, 3rd yr-30,4th yr-40 = 100

Pay back period = 4 yrs, which is a good pay back, if with in 5 yrs Net Present Value (NPV) It is the summation of present value of cash inflows in each year minus the summation of present value of net cash outflows in each year, mathematically NPV = cash inflows - cash outflows (1+K) T

We work out NPV on different discounting rates

Say 10,12,14,16 & the point at which the value becomes 0 or negative gives us the discounting rates

We accept the value if Return is positive & reject if it is negative

40

This method is superior as while deciding the discounting factor for future income one can take into account- cost of inflation & money into account to assess the viability under current business environments cost of inflation is about 5% & cost of capital around 12%, thus a discounting factor of 5+12=17% should pay back in 4-5yrs

Internal Rate of Return (IRR)

It is the discount rate that generates zero net present values for a series of future cash flows mathematically it can be calculated as under-

CF1 + CF2 + ----- + CFn CF0 = 0

(1+r)1 (1+r)2------+ (1+r)n Thus NPV gives discounted value of a streams of cash flow generated from an investment, IRR computes the break even rate of return where inflows & out flows match with each other Thus to accept a project IRR should exceed the cost of capital & reject if it is less thanthe cost of capital 41

Petroleum Retail Management in India, Business- Policies Practices ,Models &Formats Business overview Approx 45% of petroleum products including gas are sold thru retail network which works out nearly 60 million tones & Rs1,35,000 crores. A big size consumer market. The product is sold thru approx 33,000 ROs which gives an average turnover of Rs 4 crores PA. The share of business between cos is (approx no) IOC-12,500; BPC-7500;HPC7500;IBP-3500;RIL-1400& others-600 Retailing defined involves marketing of products &services directly to the users / customers for their personal & business use Retailing interphases with all customer related processes especially supply chain mgt to create infrastructure to offer proper customer service of global standard

Recent trends in retailing business in India & abroad is to identify customer needs of consumer products based on location factors & provide a basket of fuel & non fuel products & services so as to increase volume of business / foot falls in business premises & thus improve overall profitability of operations

Changing Business Scenario shifting of Emphasis from Product focus to Customer Focus
After liberalization of economy in late 90s most of the world class Multinational Oil cos re entered the Indian market to share the growth opportunities of one of the fastest growing economies in the world for want of infrastructure support which is monopolized by PSU cos & Govts indirect control on prices of essential politically sensitive products like kerosene, diesel, domestic LPG & gasoline, most of them have entered in lube, bulk gas supply & oil exploration, with only a show case participation by setting up few ROs of international

standards for MS & HSD to establish their brand identity & offer international ambience & experience to Indian customer Change in Marketing Philosophy- Commodity selling to brand building Earlier PSU cos were selling products thru RO as commodities without emphasizing on quality aspects & customer satisfaction. Foreign as well as Indian cos have quickly responded to the market needs & redesigned their products into special brands to suit high tech auto segment with emphasis on better mileage thus offering value for money, in turn they have improved their margins by 5-6% as mark of innovative marketing Emphasis on Quantity & Quality (Q&Q) One of the major arrears of customer dissatisfaction in pre liberalization period was dealers manipulation to improve his margin thru short supply in mass scale adulteration with adoptation of new technology & work culture cos have reoriented their marketing strategies to win customer confidence thru delivering right-Q&Q which appears as 43

slogan boldly displayed with full visibility at ROs

Value added Services to meet variety of customer needs

Drinking water, Air, first aid & toilet facility Tyre repair & supply service

Car washing / servicing /minor repairs & spares/

ATM/ credit card/ cash card facility 44

Fulfilling Wider basket of Customer needs

ROs in Metro & major Urban towns are being upgraded to meet wider customer needs to encourage more frequent visits thus increase foot fall which is the basic need of any activity following facilities are added in addition to traditional ones mentioned above Convenience store with chemist facilities
Fast food, Indian food, tea, coffee & soft drink vending machines Loyalty programs & bonus schemes for long time regular customers Fleet owners schemes Trained staff to render efficient service thru courtesy & warmth To sum up cos have designed mktg strategies to build Brand Equity for long term business gains thru favorable image of 360 degree service & customer satisfaction by Redesigning product mix of 4Ps- product, positioning, pricing & promotion as under45

Products branded high performance products, Q&Q assurance, value added services, basket of customer needs & services Positioning- customer focused, excellent service & ambience Pricing- loyalty, bonus & incentives schemes to attract & retain long term customer promotion Promotion- Highlight brands, Q&Q assurance & USPs thru campaigns, slogans, aesthetics & ambience Advertisements Institutional- built org image,values,customerservice, socialresponsibilty Strategic- long term plans, targeted segments

Niche Marketing- promote branded products for better performance

Creating USPs- customer focus, reliable & wide network, international, quality standards- ISO, ISI, loyalty programs for long term retention 46

Retailing Policies for different petroleum products -LPG -Bulk consumers receiving supplies from depot, terminals /refineries -Domestic customer receiving cylinders from distributors

-commercial customers receiving cylinders from distributors /depots

-Auto gas LNG, CNG from piped gas, commercial cylinders -Kerosene/ mineral turpentine oil, from depot /distributors -Heavy oils from depots/ terminal/distributors -ATF for civil & air force aerodromes from depots/ terminals -Lubricating oils / special oils / greases - bulk supplies from depots/ terminals & retail supplies from stockist / distributors -MS, HSD bulk customers directly from depots / terminals. -Small consumers, individuals, fleet owners from Retail outlets 10

Retail Formats,Business Policies in Petroleum Sector Individual - DO/DO/RO/ lube distributor/SKOdealer Partners-CoCo / CFA / Stockist Business Industrial Houses-direct consumers (COs like Maruti, Honda, Bajaj auto) Cooperative - Agri, milk,seed etc Govt Depts like Railways, Roadways, Defence Co-co RO s, Aviation stations Franchise are treated as business partners Proper Training to keep up the image of co Compensation system based on Performance based incentive scheme Business Formats BtoB -bulk users ms , H SD,Lubes, Gases Retail Franchise -DoDO ,CoCo ,CoCo Investment Franchise-SKO ,Lube ,Distributor / Dealer Management Franchise -CFA Clearing Forwarding Agent, generally used in lube distribution

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Role of Technology / IT in Petro Retailing What is Technology it may be defined as a science which combines Knowledge, Process, Methods & Systems employed in Achieving Efficiency & Effectiveness of any business operation It consists of three important activities- Hardware, Software & Human skills, all need to be blended properly to obtain optimal results Changing Business Scenario Emphasis from low tech to high tech operations After liberalization of economy in late 90s most of the world class Multinational Oil cos re entered the Indian market to share business opportunities of one of the fastest growing economies in the world . Emphasis shifted from product selling to image & brand building

Product distribution to winning customer loyalty

From low tech operation where there were opportunities for manipulation at every stage of product handling to high tech computerized monitor & control system to ensure right Q & Q

International competition has brought in new business models in retail. The emphasis has shifted from selling commodities at lowest price to promoting brands with higher customer value & better realization Thru standardization infrastructure, automation & world class ambience have completely professionalized retailing business with focus on reliability, speed & convenience. New models of retailing business by adding a basket of consumer services

Technology oriented Value added Services to meet variety of customer needs like self tracking, loyalty & bonus schemes, automated car washing plants & ATM banking operations

To improve efficiency & effectiveness cos have brought in automation in retailing, important systems are based on Product delivery management systems Retail outlet automation Fleet management systems Product delivery management systems provides secured supply chain system for transfer of product from storage points to retail outlets & backward integration with value added services provider Retail automation system provide reliability convenience, speed thru visible & computerized product delivery & accounting reduce fuelling time, thru automated delivery system -acceptance of different modes of payment

-remote monitoring & control

-better management of assets thru automated monitoring/ controls Fleet management systems thru computerized loyalty bonus, incentive schemes to retain & reward high value customers

Use of New Technologies for better Customer Service & Satisfaction

International level technologies have been brought in service to achieve this objective ER,-for foolproof Supply chain.To ensure reliable Q&Q, important technology inputs has been built into the retailing system to make customer service a world class experience. Traditional dispensing systems replaced with automated & visible recording systems Automated premix pumps for mixing lube oil & petrol for 2 wheelers New generation electronic pumps have digital display & pre set arrangement for quantity, rate, value making transactions speedy & reliable multiple hoses with automatic cut off nozzles make tank filling fast & safe Air gauges with pressure pre set & auto cut off make tyre inflation convenient & accurate
Auto tank gauges for accurate accounting, vehicle tracking & loyalty, incentive programs to enlist & retain long term customers 51

Dispensing units are equipped with card readers to handle payments by cash card, smart card, debit card & credit card, to create better customer convenience Technology has made it possible to provide value added service like ATM, auto car washing, automatic car gauging & fuel replenishment thru online replenishment system From economics point of view,experience of western countries indicate that contibution of margin on account of non fuel,vailue added services is to the tune of 40%to45%of gross earing in Roswhich substantially improves its viability as well as customer service Thus we have moved into a new era of customer delight thru reliability convenience & speed of service thru modern technology at par with international standards