What makes lubricant major Castrol India hold its turf in a difficult market.
There is a good possibility these days that when you drive into a fuel station, an attendant may tap your window and ask if you want to change the engine oil in your car. In all probability, the attendant has been paid by a public sector lube company intent on grabbing market share from Castrol India.
In the last 10 years, Castrol, owned 71 per cent by the BP Group of the United Kingdom, has taken the lubricant battle away from the fuel stations out to the streets, into bazaars and research laboratories. Its market share stands at 21 per cent, next only to the state-owned Indian Oil Corporation. In a staid category like lubricants, it has worked hard on its brand. Superbrands India recently rated Castrol as a Consumer Superbrand. According to AC Nielsen Brand Tracker, the Castrol master brand enjoys an unprompted brand awareness of 92 per cent among consumers.
The market is competitive and big — Rs 14,000 crore per annum and growing at 4 per cent. Castrol faces competition not just from public sector companies like IndianOil, Bharat Petroleum and Hindustan Petroleum but also from private sector rivals like Shell and Gulf Oil. Lubricants are sold to automobile makers, service centres and the retail network.
Castrol’s branding has an enduring appeal because the company chooses all routes to market to take the message to the consumer. Take advertising, for instance. Be it sponsorship of Honda Superbikes or appointing actor John Abraham as a brand ambassador, the company tries to create loyalty among consumers who are concerned about performance and delivery. Not surprising, it gets away with demanding premium from its consumers.
In the overall lubricants market, Castrol’s brand recall rests unmatched. But the more interesting part of this story is the money that it spends towards advertising and promotion. “We spent Rs 100 crore on advertising and promotion last year. Viewed as per cent of turnover (five per cent), it is lower than the industry average,” says Castrol Vice-president (Asia & Pacific Region) Naveen Kshatriya. This drives home an important point: Though smaller in size than its public sector rivals, Castrol’s advertising and promotion budgets are comparable. Hindustan Petroleum, for example, spent about the same as Castrol in 2008 — around Rs 100 crore under the head advertising and publicity — , though it is several times bigger in size. It is in fact a Fortune 500 company.
But in this industry, opine sector observers, the real battle for brand visibility is fought not just on the advertising and promotion mat, it is fought also in the open corridors of trade marketing. A sector analyst, not willing to be named, says a big part of the promotional spend of the public sector lubricant makers goes into trade promotions and price-support mechanisms. “So the absolute spend could be much higher,” says the analyst. On its part, Castrol uses trade management — another strong marketing tool — not only to build brand visibility but also to effectively implement inventory, pricing and market expansion initiatives. “We adopt a 360-degree approach to marketing,” Khsatriya says.
Castrol has a nationwide network of 270 distributors who service over 70,000 outlets. Moreover, the company set up the Castrol Authorised Service Associates network in 2007. Today, the network is 400-strong and it services over 12,000 independent mechanic workshops. BikeZone, a multi-brand two-wheeler service centre initiative launched in 2005, was another strategic step. It is a franchise initiative which, Castrol hopes, will contribute 10 per cent to profit before tax by 2012. “This (BikeZone) strategy is about preparing for tomorrow’s growth. Most of the sales we have seen in the last five or six years have come from select cities. In the future, growth is going to come from Tier 2 and 3 cities as well as rural areas,” says PricewaterhouseCoopers Partner Abdul Majeed.
Castrol backs its brand recall with technology upgrades. It has been launching four or five products every year to keep pace with changing technology, emission norms and consumer needs. “Engine technology must respond to stringent emission regulations being legislated globally,” Kshatriya says. There is a downside to it, though. Modern engine and engine oil technologies often result in longer oil change intervals, which, in turn, results in less oil top-ups. But Castrol’s premium brand equity helps it sell regular upgrades to willing consumers.
It goes to great lengths to ensure its products suit tough Indian road conditions. “For example, the engineers test if the oil lasts longer than what may be recommended by the automobile maker. So, a lubricant may be specified for 18,000 km of standard run but we may test it for 24,000 km,” he adds.
Because of its strong brand equity, Castrol has come out unscathed from the sharp rise in input costs last year. Sometime during August 2008, the price of base oil — the key raw material for lubricants — which had been rising ominously since the beginning of the year shot through the roof to $1,800 per ton, almost doubling from the 2007 levels. The price of additives increased 25 per cent over 2007 levels. Not surprisingly, the cost of material per litre for Castrol increased from Rs 49.9 in 2007 to Rs 61.1 in 2008. As a result, Castrol had to increase prices during this period.
Ergo, the volumes for the company declined by 17 per cent. However, its net sales went up 17 per cent and, more important, profit after tax grew 20 per cent from Rs 218 crore to Rs 262 crore.
Still, for the current year, the company has revised its growth estimate from 20 per cent to 10 per cent. KPMG Advisory Services Associate Director Kumar Manish says: “Consumption of lubricant is linked to the level of industrial activity and population of the automotive pack in the economy. There has been moderation in growth in these segments of late in the country.” Even then, onlookers are asking if 10 per cent growth is a tad too ambitious, given the grim market scenario — high forex rates, shrinking industrial production and stagnant auto sales.
Having cut growth estimates by half from the previous year, what are the plans that Castrol intends to adopt to ensure a home run this year? Kshatriya admits that the market off-take has dropped because of the current slowdown. “Our plan for the year is to defend margins and attack cost inefficiencies,” he says. By attacking cost inefficiencies, Kshatriya says he will look at the overall spend, without cutting costs blindly. “We will take away those advertising and promotion costs which may not lead to the development of our brand. For example, sometimes simplistic price rebates do not reach the end user nor benefit brand volumes — they are just pocketed by middlemen.”
Another important strategy will be to drive cost deflation into the company’s input costs. “We will renegotiate prices of goods and services, considering the price of several commodities and services has gone down. For example, airlines and hotel costs are going down so we will examine how we can streamline our travel costs,” he says.
