Indias Petroleum Market: The Journey from a Commodity to Brands

Rekha Attri, Asst. Professor, Core Business School, Indore Dr. Ashish Manohar Urkude, Professor, UPES, Dehradun Dr. Manvinder Singh Pahwa, Associate Professor College of Management, UPES, Dehradun Abstract: Building a strong brand today is incredibly difficult. A strong brand can turn a commoditised, undifferentiated product into something unique and special. For instance, as soon as you put the brand of Tiffany on a diamond, the value of the diamond shoots up. It is no longer just a diamond, it is a Tiffany diamond. Similarly, as soon as the McKinsey brand touches a consulting project, the value of the project leaps. It is now a McKinsey study, and people assume that it is rigorous, thoughtful and valuable. The reverse is also true; a weak brand erodes value. When a brand associated with low quality touches a product, expectations sink. Brands are long term assets; they build over time and they erode over time. As a result, a company building a strong brand wont see the results right away. This paper gives a brief background to the advent of global oil brands and the journey of Indias petroleum market from a commodity to brands. Introduction Brand management has become a central feature of the modern economy. Coca-Cola, Nike, Google, Apple, Microsoft etc. are all large companies, but they are also brands that present powerful valuable tools for business. Brands allow businesses to reach consumers directly with messages regarding emotion, identity and self- worth, such that consumers are no longer buying a product but buying a brand (Aaker, 2003) In the article outlining the path ahead for Asian manufacturers aspiring to build global brands, the prerequisite for becoming a strong brand name is to be differentiated from other businesses in the same sector and to provide consumers with excellent service. Companies can prosper by promoting quality control, forging unique enterprise culture and making products competitive (Ruimin, 2006). Branding explicitly contemplates reducing or eliminating price competition as the brand personality cannot be duplicated. In addition this practice can be understood as a product differentiation tactic that allows a branded good to turn a commodity into a special category that sees higher margins compared to the others in the market space. (Desai and Waller, 2010) Due to new technology and the emergence of more qualified and demanding consumers, the task before companies building strong brands is to rethink on their organizational structures, build effective communication channels and competence of front line staff and have company culture which is more customer oriented (Wikstrom, 1996).

Advent of Global Oil Brands Up to the beginning of the 19th century no oil seems to have been obtained except from the surfaces of springs and streams. That it was to be found far below the surface of the earth was discovered independently at various points in Kentucky, West Virginia, Ohio and Pennsylvania by people drilling for salt-water to be used in manufacturing salt. The water they found was mixed with a dark-green, evil-smelling substance which was recognized as identical with the well-known "rock-oil." It was necessary to rid the water of this before it could be used for salt, and in many places cisterns were devised in which the brine was allowed to stand until the oil had risen to the surface. It was then run on the ground. This practice was soon discovered to be dangerous, as the oil ignited easily. The first use made of the oil obtained from the salt wells was medicinal. By the middle of the century it was without doubt the great American medicine, "Seneca Oil" (seems to have been the earnest name under which petroleum appeared) in the East which gained popularity. It was followed by a large output of Kentucky petroleum sold under the name "American Medicinal Oil. Several hundred thousand bottles of this oil are said to have been put up in Burkesville, Kentucky, and to have been shipped to the East and to Europe. Pittsburg was the place where the business of bottling petroleum for medicine was carried on most systematically and extensively. Near that town, at Tarentum in Allegheny county, were located salt wells owned and operated in the forties by Samuel M. Kier. The oil which came up with the salt water was sufficient to be a nuisance, and Mr. Kier sought a way to use it. Believing it had curative qualities he began to bottle it. By 1850 he had worked up this business until "Kier's Petroleum, or Rock-Oil" was sold all over the United States. The crude petroleum was put up in eight-ounce bottles with its virtues as a cure-all, and directions were given for its use. While it was admitted to be chiefly an ointment it was also recommended for cholera morbus, liver complaint and bronchitis. These were perhaps the first few incidences when packaging, branding and marketing activities were carried out to facilitate the extensive reach of the product. Standard Oil, the first great oil company and one of the first real multinational corporations, arose during this period. From its beginnings as a Cleveland, Ohio refinery in 1865, John A. Rockefellers Standard Oil Trust expanded to control between 80% and 90% of the refining, transportation and distribution of petroleum products in the U.S. As the Pennsylvania fields began to decline, Standard also moved into the volatile exploration and production stage that it had previously avoided. By 1891, it controlled one quarter of the U.S. petroleum production.

Suits by the states led to the dissolution of the Trust, but the coordination among the member firms survived and when New Jersey permitted the creation of holding companies, the Trust was replaced in 1899 by Standard Oil of New Jersey. It in turn was ordered broken up by the Supreme Court in 1911. Of the companies that emerged, Standard Oil of New Jersey (later Exxon) was largest and was still one of the worlds 10 largest corporations almost a century later. Others included Standard Oil California ( called Socal and, later, Chevron), Standard Oil of Ohio (Sohio), Standard Oil of Indiana (Amoco), Continental Oil (Conoco), Standard Oil of New York (Socony), Vacuum ( a lubricant company that , together with Socony, became Mobil), Atlantic Oil (later part of ARCO) and the leading production company in the group, Ohio Oil ( Marathon) (Anonymous, 2000) This was the beginning of the varied brand names in the oil industry that we know of today.

Marketing of Petroleum in India: From Yesteryears till Present Times The Indian government regulated the oil industry through various mechanisms such as Administered Price Mechanism (APM), distribution of licenses and import canalisations. Controls existed from crude procurement to pattern of production, product availability and expansion of the industry, pricing and consequently the earnings of the players in the sector. These controls not only restricted the entry of the private players, but also deferred the natural growth plans of the PSUs. Lack of adequate investments in the sector prompted the Indian government to decide to deregulate the industry in a phased manner. The process of partial withdrawal of regulation in the refining and marketing sector started in 1992, with the decanalisation of import of several petroleum products, decontrol of lubricants, awarding production sharing contracts for development of oil wells and rationalisation of tariff structure. Lubricant business was the first to see competition from private players, both MNC and Indian. Till about a decade ago, Marketing of Petrol in India actually meant Distribution of petrol. In the name of marketing, petrol selling companies focused primarily on strengthening their distribution network, that is, adding more and more number of outlets (petrol pumps) to their network. Efforts made for expanding the geographical coverage were termed as marketing (Duggar, 2007). The petroleum products like petrol, diesel, kerosene oil, LPG were sold to the end consumer at subsidised rates and the price fluctuation shocks of crude oil in the global market were absorbed largely by the government. The government helped these public sector units in the form of subsidies and bonds so that the end customer was shielded from the fluctuating global crude oil prices. However the consequences of not passing on the higher crude prices to the end customers were turning out to be disastrous as the burden on the government in the form of subsidies and bonds kept increasing. In March 2002, the Ministry of Petroleum and Natural Gas decided to grant authorization to market transportation fuels to the new entrants including the private sector. It was felt imperative to attract private investment into the oil sector with a view to put the infrastructure required for handling the volume as per projected demand. Another reason for opening up the sector to the private players was to inject air of competition into the sector. It was on 1st of April 2002, that the government discontinued the earlier administered pricing mechanism to link retail prices to market forces. This fuelled a huge rally in the stock prices of all the three OMCs. Between March 2001 and March 2004, the combined market capitalisation of Indian Oil, BPCL and HPCL expanded at a compounded annual growth rate (CAGR) of 55%. The profits as well as dividends distributed by these biggies grew at a CAGR of over 40% in this period. However, the years of 2004 and 2005 witnessed sharp and spiralling increase in international prices of crude oil and petroleum products. The impact of such phenomenal price increase in the international market had a major impact on Indian Oil Industry which is heavily dependent on imports for crude procurement. To insulate the consumers, it was decided that the share of burden should be equitably divided between various stakeholders i.e. Government, Oil Companies and Consumers. Moderate increase in oil prices coupled with customs and excise duty reductions on petrol, diesel, PDS kerosene and domestic LPG were carried out (Patra, 2007).

Since then the dependence of Public Sector Units (PSU) Oil Marketing Companies (OMCs) on the government aid increased progressively as their selling prices stagnated despite rising international crude oil prices. Although the players have been managing themselves somehow, they never really prospered all these years. The ever increasing competition due to deregulation and dismantling of administered price mechanism has changed the rules of the business. Various players in the oil marketing are now vying for the same market share. Today the marketing of petrol has changed from what it used to be in yester- years and hence petrol is on its way to transformation from being an undifferentiated commodity to a branded product (ICMR, 2008). Brand Building Initiatives of PSU OMCs in India Various initiatives were taken up by the OMCs to create differentiation in the minds of the customer and hence attract a higher share of their wallet. Indian Oil launched Xtrapremium and Xtramile branded fuels and also set up XTRACARE retail outlets for select urban and semi-urban markets. For highway motorists, it launched large format Swagat brand outlets and Kisan Seva Kendra's for the rural markets. The XTRAPOWER Fleet Card program was launched as a smart card-based fleet management solution for fleet operators and corporates for cashless purchase of fuel & lubes. IOCL made its presence felt in 2004 by advertising through banners and contests on the website Indiatimes.com . The Saal Bhar Free Fuel and the Car in A Tank offer on the purchase of branded fuels from Indian Oil outlets were campaigns run for building customer loyalty (www.iocl.com). BPCL launched Speed the branded petrol and Hi Speed diesel , introduced the loyalty card- PetroCard and Smartfleet loyalty card for fleet owners and corporate customers and also initiated the enhanced Fuel

Proposition movement, 'Pure for Sure' to communicate the brand promise to the customers . PETROZINE, was the e-initiative of the company for keeping in touch with their valued customers and it launched Petrodaily (e-magazine) to keep the valued customers updated on the happenings in the Petroleum industry worldwide as well as in India. The company opened non-fuelling utilities such as In & Out convenience stores, ATMs, Cyber Cafes etc. at the retail stations. Another innovative project started by BPCL to win customer loyalty was the concept, Ghar located at major highways across the country, which offered Dhaba services, secure parking spaces, restrooms, an essential items store, emergency assistance and messaging services to the fleet owners. BPCL made its presence felt in 2005 by advertising through banners and contests on the website Indiatimes.com and also executed the promotional campaigns of Bharo Petrol Chalo London to build customer loyalty (www.bpcl.com). HPCLs Branded Fuel Power and Turbojet were introduced along with the normal fuel at the retail outlets. The non-fuel activities at the retail outlets include ATM, take away food counter, C Store, vehicle accessories etc. The sales promotion campaign HP Happy Wheels Offer was designed to build customer connect and loyalty with the customers. The company started Rasoi Ghar project in rural market, whereby the villagers paid for the gas used, and were not required to pay any deposit. HPCL also introduced several loyalty cards, namely CLUB HP Smart1, i-mint card, Drive track card for the benefit of customers and fleet owners. For Club HP outlets mass media campaign was effectively utilized to communicate the brand promise under the banner Club HP Achcha Lagta Hai. The new Retail Brand "Club HP" assured customers of high - quality personalized "Vehicle and Consumer Care"( ww.hpcl.com).

Dilemma of Oil Marketing Companies- Lack of Brand Loyalty The oil industry influences almost all aspects of business, economics and geopolitics throughout the world. India's oil market is the world's seventh-largest and has so far been dominated by state firms such as the IOCL, BPCL and HPCL, especially in the marketing of petroleum products. These represent pretty strong brands amongst themselves, but one particular customer behavior that has intrigued the marketers and researchers for long has been the indifference exhibited by fuel consumers while making choice amongst these three brands to refuel their vehicles. In the oil marketing business, product differentiation is very hard to sustain. Despite the fact that companies have introduced different octane fuels and additives have been added to fuel, the apparent lack of switching costs creates a challenge for marketers as consumer has no reason to stay with one particular brand. Consumer surveys conducted in Delhi and Mumbai by Marketing and Development Research Associates (MDRA) in 2003 on 336 customers and by Kumar and Sahay in 2007 on 182 customers revealed that consumer prefers to patronize an outlet that is easily accessible either near his residence or enroute his place of work. It is his relationship with the dealer staff that determines the level of satisfaction. Further the reputation of the dealer serves as a proxy for trust about product quality. The market share figures (Table 1) of the Oil marketing companies in India shows that although IOCL is the market leader with 46% share of the total market, BPCL and HPCL are in close competition with each other, occupying 19.5% and 17.5% of the market share in the financial year 2009-10. The private players in totality which include Reliance and Essar also occupy 15.6% of the market share which is very close to the market share of HPCL (17.5%) and BPCL (19.5%). The table clearly indicates that the private players had a greater market share of 19% in 2005-2006 when BPCL was at 18.1% and HPCL was at 16.2% and even in the times of global recession the market share of these private players did not fall drastically (Petroleum Planning and Analysis Cell, 2010). Although many reasons could be stated for the decline but a part of this decline in the market share of the private players is not because of competitive forces but due to conscious decision of withdrawing due to largely stated unfavourable government policies. As per the speech made by the petroleum minister Mr. Murli Deora in 2008 in Rajya Sabha Reliance has informed that sales at their retail outlets was negligible due to selling price differential between private and public sector ROs, leading to the closure of all their 1,432 pumps in the country with effect from March 15th.

Table 1: Market Share of Oil Marketing Companies Marketing of Petroleum Products by Oil Companies (Market Share in Percentage) 2005-06 IOCL BPCL HPCL Other PSUs Private Parties Total % 40.8 18.1 16.2 5.9 19 100 2006-07 44.2 18.8 16.3 1.8 18.9 100 2007-08 44.95 19.28 17.11 1.75 16.91 100 2008-09 46 19.7 17.8 1.6 14.9 100 2009-10 46 19.5 17.5 1.4 15.6 100

Source: Petroleum Planning and Analysis cell, 2010 Although IOCL is comfortably positioned with the highest market share but the changing market dynamics, with the entry of private players in the marketing of petroleum products cannot be ignored and should definitely be an area of concern for at least HPCL and BPCL. With the year on year increase in the population in India and vehicular concentration on the roads, the oil consumption in the country is exhibiting an upward trend. As stated in the Indian Auto Report 2010, the Indian Automotive industry grew by 26% during the year 2009-10 (Society of Indian Automobile manufacturers, 2010) Exhibit 1: Motor Vehicle Production in India

Motor Vehicle Production in India

2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 0 6446856 5523626 5005375 5000000 10000000 15000000 11491272 11172571 11410378 10031296 8716930 7435197 14480479

26%

2.9% -2.1% 13.7%

15.1% 17.2%

15.3% 16.7% 10.4%

Source: SIAM (Society of Indian Automobile manufacturers), 2010

Petroleum Planning and Analysis Cell report on consumption of petroleum shows a 13.86% increase in consumption of petroleum in 2009-2010 as compared to previous year. Table 2: Consumption of Petroleum in India Consumption of Petroleum (in '000 tonne) Year Consumption YOY increase in consumption YOY %age Source: Petroleum Planning and Analysis Cell, 2010 The Asian Development Bank report on Efficiency and Climate change considerations for on road transport in Asia has forecasted the vehicle population and fuel consumption in India to exhibit a fast growth. Table 3: Forecast of Vehicle Population in India Forecast of Vehicle Population in India Vehicle Type 2-W 3-W HCV LCV Car Grand Total Source: Asian Development Bank Report, 2008 (2-W= 2 wheelers; 3-W= 3 wheelers; HCV=Heavy commercial vehicles; LCV= Light Commercial Vehicles) Table 4: Forecast of Fuel Consumption in India Forecast of Fuel Consumption in India Year Million Tons of Oil Equivalent (mtoe) Source: Asian Development Bank Report, 2008 Thus with the increase in the vehicular concentration there is going to be an increase in the demand for auto fuel and there lies a huge opportunity before the Oil Marketing Companies (OMCs) to improve their brand 2005 58 2008 73 2015 115 2025 221 2005 35.8 2.3 2.4 2.4 6.2 49.1 2008 46.1 3 2.9 3.2 8.8 63.9 2015 87.7 5.3 4.6 5.7 18 121.3 2025 174.1 8.8 9.1 12.5 41.6 246.1 Increase 7.38% 11.26% 8.95% 13.86% 2005-06 8647 2006-07 9286 639 2007-08 10332 1046 2008-09 11257 925 2009-10 12818 1561

equity so that they can compete with the private players as well as with their Public Sector Unit (PSU) counterparts. Conclusion Brand loyalty can yield significant marketing advantages including reduced marketing costs, greater trade leverage, resistance among loyal consumers to competitors propositions and higher profits. In the wake of the present scenario where the demand for auto fuel would be exhibiting an upward trend with the increase in vehicular traffic and there would be more competitive environment due to the private players, the PSU OMCs need to brainstorm over ways to strengthen their brand identity to combat the indifference exhibited by household petroleum consumers. Efforts towards building strong brand identity would enable higher customer loyalty which would ultimately give a company an edge over its competitors. Reference List

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www.iocl.com www.bpcl.com www.hpcl.com