The future of fuel retailing in India

In 1976, India barred the private sector from participating in fuel retail and nationalised the local businesses of international oil companies. Brands commonly seen at petrol stations elsewhere in the world - Shell, Esso and Caltex - disappeared from the Indian market. Shell, for instance, became Bharat Petroleum and Esso metamorphosed into Hindustan Petroleum.

In 2002, however, the government made a U-turn, allowing multinationals and other private players to re-enter the market. The policy shift sparked a rush of service station openings as both private and public companies positioned themselves to sell to the nation's growing, increasingly mobile middle class.

While the private sector welcomed the liberalised market, in practice it came with several strings attached. Private players were required to invest at least 20 billion rupees (around $500 million) in refineries, pipelines or other energy-related assets in the country, limiting the number of new entrants. And although the government abolished formal controls on fuel prices, it continued to dictate them indirectly through the pricing policy of India's national oil companies (NOCs). These factors have slowed the evolution of the sector - at least for the moment.

Promising road ahead

The Indian market for transportation fuels holds a lot of promise. The country's aspiring middle class, recently estimated at 40 million households by consultancy McKinsey, is becoming increasingly motorised. Small towns are expanding at a rapid pace, sparking investment in roads and other infrastructure. The largest express highway project in India, for example, aims to link the cities of New Delhi, Mumbai, Kolkata and Chennai with a system of four- to six-lane highways.

Automobile sales, which today number just over a million vehicles a year, could reach 20 million a year by 2030, predicts US-based consultancy Keystone, making India the third-largest automobile market in the world after China and the USA.

Moreover, the fact that many of India's service stations are poorly designed and congested leaves a natural opening for newcomers who offer a better alternative. Typical old-fashioned Indian service stations feature long queues, cars jockeying for position, oily forecourts and hand-operated petrol pumps that may not accurately measure the volume of each sale. They also lack convenience stores or other facilities.

Liberalisation prompted Indian companies such as Reliance and Essar to aggressively enter the fuel retail market. Reliance, for instance, expanded its network rapidly, building more than 1,200 service stations, with plans for up to 6,000.  However, Reliance stopped at around 1,300 stations when it started to lose money, due to the government's policy of influencing prices.

Shell is so far the only international oil company to enter the Indian retail market. The company's development of a liquefied natural gas terminal and regasification facility at Hazira allowed it to meet the government's call for investment. In 2005, after an absence of nearly three decades, Shell opened a new petrol station in India. Run by a former Pizza Hut manager with a track record of good customer service, the station - on Dr. Rajkumar Road in Bangalore - quickly became a landmark thanks to its team of efficient attendants directing traffic, cleaning windshields and pumping petrol. Today Shell operates 35 stations in southern India.

"We did not come here simply to lead in the market," says Surinderdeep Singh, Managing Director of Shell India Marketing Pvt. Ltd.  "Rather, we would like to create a brand known for its quality fuels, accurate quantities and superior services."

India's NOCs dominate the market that the newcomers have entered. Bharat Petroleum, Indian Oil and Hindustan Petroleum have vast networks of petrol stations across India - approximately 30,000 in all. Many of these petrol stations were inherited from the old multinationals or established when land prices were much lower than they are today.

New competitors

For almost 30 years the government strictly controlled public-sector companies, dictating prices, and directing the expansion of their dealer networks. While these companies had retained the infrastructure of the nationalised multinationals, their reason for being changed dramatically. Objectives such as job creation had taken precedence over purely commercial goals, including profitability when running the business.

The move toward liberalisation brought a sudden shift in priorities as the public-sector companies prepared to face the new competition. "We've actually grown more in the last four years than we had in the last 30," says Tejbir Singh Sanghvi, Deputy General Manager of Highway Retailing at Hindustan Petroleum. "The government has given us more flexibility in terms of expanding our dealer network.  We've also had to develop a lot in order to compete. There are new initiatives, new physical standards and new technologies. Fuel retail used to be a seller's market.  Now the focus has shifted to the consumer."

Newcomers to the Indian market face several challenges. For one, the government has an indirect hand in pricing policy through its national oil companies. The policy takes into account factors such as inflation and the proximity of upcoming elections. For example, between 2002 and 2006 the price of petrol in the international market increased one and a half times. During the same period the retail price of petrol in India only rose by about 50%.

The government subsidises India's NOCs to compensate for below-market prices. Between April, 2005 and March, 2006 subsidies totalled approximately $3.6 billion, according to a government advisory committee report. Since state-owned oil companies command some 80% market share, private-sector competitors must match their artificially-low prices to stay in business.

"It was assumed that after the APM (Administered Pricing Mechanism) was dismantled in 2002, there would be a genuine free market in India for transportation fuels," says Vivek Srivastava of Reliance. "But the APM never really faded away in practice, thanks to political reality."

Retail site headache

Securing prime retail sites is also a headache. Real estate prices remain high and the process of acquiring real estate is mired in red tape. Moreover, land titles in India tend not to be clear, leading to delays. And construction can be challenging - schedules aren't adhered to, quality needs to be closely monitored, and safety consciousness has a long way to go.

However, the outlook for newcomers is starting to improve. Government policies are becoming increasingly liberal and market-driven, and there is an overall cultural shift towards greater professionalism in Indian business. While there does not appear to be any imminent movement on the government's approach to fuel pricing, the economy in general is moving towards greater deregulation. Tax reform promised in 2010 could significantly improve the outlook for private players in the oil sector through a simplified indirect tax structure. This could allow the government greater room to introduce free pricing.

Meanwhile, fuel retailers in India are gradually adopting the practices already used in international markets, which plays to the strength of newcomers who are building their networks from scratch.  Fuel retailing in other parts of Asia, such as Singapore, has moved towards providing convenience stops for customers, following the model that prevails in Europe and North America. India is likely to follow in the same direction, especially in cities.

However, the pace of change and the speed with which newcomers gain a foothold in the Indian market still depend largely on government policy. As long as market forces do not determine prices and subsidies to NOCs continue, these companies will have an advantage.

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