Non-fuel biz adding spark to oil firms

Oil marketing companies are increasing focus on their non-fuel retail business, with hopes of improving margins of their overall fuel marketing divisions. The attempt is likely to pay off in the long run, however, in the initial years it may just help fight growing competition.

State-owned Bharat Petroleum Corporation Ltd (BPCL), in a presentation to analysts earlier this month, said it would focus on the non-fuel retail business. "The non-fuel business has become a necessity for most players post-deregulation," the company said.

India deregulated petrol prices in June 2010 and diesel prices in October 2014. Since the prices of these fuels are now linked to global benchmarks, private retailers can sell at the same price as public sector undertakings. Earlier, this was not possible since because state-owned oil marketing companies were retailing fuel at a discount.

Non-fuel retail refers to products and services that an oil company offers at its fuel outlets that are not related to its core fuel marketing business. BPCL has started offering assisted e-commerce, financial services, vocational education and other allied services at some of its retail outlets on a pilot basis.

The Mukesh Ambani-led Reliance Industries has also started the process to club its organised retail business with fuel retailing. The company said Reliance Retail was operating 361 fuel retail outlets on June 30. Reliance Industries has merged its organised retail and fuel retail businesses at these outlets owned and operated by the company. An e-mail to Reliance Industries remained unanswered.

Indian Oil Corporation Ltd, the biggest fuel retailer in the country, and Hindustan Petroleum Corporation Ltd (HPCL) already have their non-fuel business in place.

 

"It is difficult to say why an oil company would want to mix organised retail with fuel retail. The idea could be to be offer a wider product offering to consumer as competition is increasing. For companies like Reliance Industries, it could be a way to leverage its organised retail business for making inroads into the fuel retail business," said Vivek Jain, associate director with India Ratings.

For companies, it is a margin play. "The primary objectives of non-fuel retail are to offer additional value to customers and build differentiation to boosting footfall, NFR has the potential to significantly supplement the bottom line and offer additional revenue stream to dealers/liquefied petroleum gas (LPG) distributors," IndianOil said in an e-mail response on Thursday.

Dhaval Joshi, analyst with Emkay Global, in a research note said BPCL was targeting a 2.5 per cent margin from its freight exchange and financial services offering and 3-11 per cent margin from the e-commerce offering. An e-mail query sent to BCPL and IndianOil remained unanswered.

"The cost of setting up a distribution centre needs to be viable and such non-fuel options could also help increase revenue per square metre of land used to set up these retail outlets," Jain from India Ratings added.

The concept is relatively new for Indian oil companies and may take some time to show results.

"So far there is no example in India to show if this model works. The companies are talking about the global model, where non-fuel retail contributes significantly. But one also needs to see how long they took to achieve that scale," said an analyst with a domestic brokerage firm who did not wish to be named.

The contribution from the non-revenue business so far has remained insignificant in India.

HPCL, for instance, reported total revenue of Rs 68.4 crore in its non-fuel business in 2014-2015 according to its annual report. For the financial year 2015-2016, Indian Oil reported revenue of Rs 215 crore from its non-retail business. IndianOil said it is targeting a total revenue of Rs 240 crore from the non fuel retail business in the current financial year."

Envisaging a compounded annual growth rate of about 25 per cent targets in non fuel retail through fuel stations for the next three years,' the company said. So far about 88 per cent of such revenue earned for IndianOil is from non-fuel retailing in its LPG business.

Similarly, Indian Oil reported a total income of Rs 154 crore from this division in the same year. For both these companies, these numbers are an insignificant percentage of their total revenues.

Jain from India Ratings agrees the move will help maintain or improve market share more than boost revenues. "We do not have the numbers, but the contribution from the non-fuel retail business currently may not be significant," he said. In the Emkay note, Joshi also highlighted BPCL's non-fuel initiatives were designed to help improve market share.

As of 1st April 2016, according to Petroleum Planning and Analysis Cell, Indian Oil operated 25,363 fuel retail outlets, BPCL 13,439 and HPCL 13,802. Amongst the private companies, Essar operated 2,100 retail outlets and RIL is in the process of re-starting its 1,400 retail outlets, of which more than 1,000 are operational.