NAMIBOIL

Pricing High difficulty

Oil & Gas Candidate-led case

This case focuses on a client’s decision on how to set prices, in the context of an industry that has
recently relaxed price controls. The case requires candidates to display strong structuring skills and case
leadership in order to reach a conclusion.

Problem definition

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Your client is NamibOil, a petrol company in Namibia. The client owns and operates a large number of
petrol stations throughout Namibia, and is the second largest petrol operator in the country. The client
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provides regular unleaded and diesel fuel to drivers in the country.
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Until now, the Namibian government has fixed the price of petrol for all sales points in the country. The
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government recently made the decision to remove price controls, however, and from January 1 next year
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operators will be able to charge any price they would like to customers – with no restrictions.
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The CEO of NamibOil has hired us to suggest an appropriate pricing strategy for the company.
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What price should NamibOil charge as of 1 January next year?

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Relevant information
If asked at this stage or later, please share the below.

On the client and the core problem:

• The client and its competitors sell two fuel products: regular unleaded and diesel
• The client runs over 100 petrol stations across Namibia. Typically these petrol stations have a
number of petrol pumps and a small shop selling food and drink. Non-petrol sales in these shops
account for 20% of the client’s annual revenue.
• The regulatory change gives the client free rein to increase or decrease their current price points.
The only remaining constraint is that the client may not vary price between its petrol stations. As a
result, the client is interested in determining a new price point that should be applied across all of its
petrol stations
• There are 3 major competitors to the client
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The client’s goal at this stage is to reach at least a directional view on whether they should change

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prices, in which direction, and to what rough magnitude
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Price changes for products in the client’s shop (e.g. snacks and drinks) are not in scope for the case
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On the country and economic context:

• Namibia is a large country (825k sqkm) with very limited public transport for its 2 million inhabitants
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• The major industry in Namibia is agriculture and GDP/capita is $11.5k

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• Petrol volumes have grown consistently with population growth (c. 3% p.a)
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• There is limited government or popular pressure to reduce carbon emissions; electric cars, or
alternatives such as cycling, are generally not popular
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 Structuring

Guidance for interviewer

This can be a challenging case to structure, as there are many potential factors at play in a newly
deregulated market.

Establishing the client’s cost base is a sensible place to start. It provides a minimum threshold from
which to make decisions, and provides a basis for any later calculations on how to optimize for margin.
Candidates may opt for a ‘qualitative’ framework to inform likely price movements (considering e.g.
market dominance of client), or a more analytic approach considering price elasticities. The example
below touches upon both. If considering elasticity analysis, the candidate should flag overtly that direct
data will not be available until price controls are relaxed – some form of proxy will have to be used.

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A strong candidate will consider the full P&L. In principle it is not just the margin on fuel that matters, but

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that generated from food & drink sales in the shops at the petrol stations.
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Possible answer
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1. What is the minimum price to cover costs?

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a. Cost of fuel
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b. Operating cost of petrol stations

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c. Overhead cost apportioned across petrol stations

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2. Is there competitive pressure on price?

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a. Market share of our client vs competitors

b. Geographic distance from competitors
c. Potential for new entrants

3. What change in price would yield the best overall profit for the client?
a. Direct effects: How do movements in price affect overall fuel profits?
b. Indirect effects: How do movements in fuel price affect shop profits?

4. Are there other, non-economic factors that may influence our decision?
a. Risk of a revised decision from regulators
b. Risk of reputational damage

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 Driver 1: What is the minimum price to cover costs?

Relevant information
If asked, please share that:
• The client sells two major fuel types: regular unleaded and diesel. Today’s cost for each of these is
as follows:
− Regular unleaded: N$9.07
− Diesel: N$10.07
• In comparison, the client’s current pricing is as follows:
− Regular unleaded: N$12.1
− Diesel: N$13.8
• The client has not provided us with a more granular breakdown of cost (e.g. overheads vs cost of
goods sold)

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Guidance for interviewer in gm y
Some candidates will seek to learn more about the client’s cost base up-front, in order to determine how
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much ‘room for maneuver’ the client has on pricing.
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Insightful candidates will recognize that the cost is likely to vary based on volumes, due to economies of
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scale. If a candidate does not hit on this point directly, flag it before moving on – it will be a basis for
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further exploration later on.

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The client has profit margins of 25% on both fuel types. This in principle gives our client quite a flexible
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position: it has flexibility not only to increase prices, but to decrease quite considerably in pursuit of volumes
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before margins erode.

This cost however only reflects an “as is” scenario. We should explore how cost varies at different volume
assumptions as we make our profit calculations.

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 Driver 2: Is there competitive pressure on price?

Relevant information
If asked, please share that:
• The market remains heavily regulated and is restricted by government permits for trading. It would
not be straightforward for a new entrant to begin trading in the market in a short timeframe
• For related reasons, it is often difficult for existing players to open new branches quickly. Local
government tends to regulate the volume of petrol stations in a given region. This may be relaxed in
due course, just as price controls have, but there is no sign of this at present
• In general, customers only switch to a competing petrol station if there is an alternative within 8
kilometres

Guidance for interviewer

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A candidate exploring this driver will typically be attempting to assess the client’s opportunity to increase

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prices from a mostly indirect perspective – looking at local market dominance and protection from new
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entrants.
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If a candidate asks about competitors and the client’s market share, hand out Exhibit 1 for their review.
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This exhibit allows candidates to calculate market share, which they should be encourage to do.
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It is critical to understand not only the client’s overall market position in Namibia, but its relative
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dominance within specific localities, i.e. the extent to which customers have alternatives nearby. If a
candidate asks about this point, share Exhibit 2.
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Possible answer

A number of factors seem to suggest our client is in a strong position to increase prices.

First of all, our client is a strong player in this market. Using Exhibit 1, we can see the total market is worth
c.$1.3bn Namibian dollars. Using this we can compute the market share of the four major players:
• Caltex: ~11% (158,000 / 1,408,000)
• Client: ~33% (463,500 / 1,408,000)
• Namibian Petroleum: ~36% (506,000 / 1,408,000)
• Engen: ~20% (280,000 / 1,408,000)

Our client reflects around a third of the overall market, and the only player at comparable scale is Namibian
Petroleum. This strong position puts the client in a good place to increase prices. We also know that barriers
to enter the market are high, which mean it is unlikely new entrants would begin to chip away at the market
shares seen in Exhibit 1.

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When we look at specific localities, the picture also looks quite strong for our client. We know that customers
tend not to switch to competitors unless alternative petrol stations are 8 kilometers away or nearer. Exhibit 2
shows that the strongest competitor tends to be the furthest away – perhaps indicating that the two players
had historically covered alternate regions. The smaller players have some of their stations less than 8
kilometers away from ours, but their lack of scale suggest they would struggle to compete on price.

Overall, these indicative factors suggest that our client is in a strong market position to increase prices. We
should dive deeper however to understand exactly what price point would be optimal for the client.

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In a rush to ramp up your case structuring skills?

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Practice on your own with the Structuring Drills in the

Interview Prep Course

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 Driver 3: What change in price would yield the best overall profit for the client?

Relevant information
If asked, please share that:
• The client has collated data on a number of price points – seen in Exhibit 3. Other price points are of
course possible, but we have no specific data on their effects
• The client has not provided any specific information on shop sales, although we understand that
today shop sales comprise 20% of revenue and profits. We should assume shop sales and profits
scale linearly with volume changes

Guidance for interviewer

This section of the case handles the price elasticity of demand, i.e. demand at a variety of price points. A
candidate touching on this point should appreciate that such data cannot yet exist for Namibia at the

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time of the case, since price controls have not yet been relaxed. You should therefore push the

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candidate on other means to get data, and (if they don’t hit on it directly) mention that relevant
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international comparisons are available and considered reliable.
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At this point you should share Exhibit 3.

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It’s critical during this exercise for candidates to consider shop sales. If the candidate doesn’t do this
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directly, hint that they should do so.

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Although the calculations presented below workings are precise ones, in practice it is perfectly
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acceptable for candidates to round their numbers.

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Possible answer

We seem to be in a strong position to move on price, but let’s review what an optimal pricing point would
actually be. The best way to do this would be making use of the client’s data on price scenarios – we’ll
review this and calculate the revenue and profit impact of the different price points.

Analysis: Unleaded

Scenario 1 Scenario 2 Today’s Price Scenario 3 Scenario 4

Price N$/litre 10.2 11.6 12.1 13.6 14.6

Volume
25,488 24,486 23,311 22,965 20,016
(000s)

Revenue 259,978 284,038 282,066 312,324 292,234

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 Scenario 1 Scenario 2 Today’s Price Scenario 3 Scenario 4

Costs
210,582 224,390 211,549 224,873 201,641
(N$000s)

Profits 49,396 59,648 70,516 87,451 90,592

Analysis: Diesel

Scenario 1 Scenario 2 Today’s Price Scenario 3 Scenario 4

Price N$/litre 12.2 13.4 13.8 15.4 16.4

Volume
13,256 13,146 13,119 13,010 12,220
(000s)

Revenue 161,723 176,156 181,042 200,354 200,408

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Costs

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Profits 37,196 44,039 47,065 60,106 66,135
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The optimal price point for both unleaded and diesel fuel appears to be the highest price point considered.
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However, both ‘scenario 4’ price points are only favourable by a very small margin over ‘scenario 3’,
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indicating that the profit curve is beginning to flatten as price reaches above scenario 3.
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However, we know that at today’s volumes shop prices reflect around 20% of total profits, or ~$29m (fuel
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profits are $117m, and shop profits are one-fourth this size). Since shop profits are assumed to scale linearly
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with volume, these profits will decrease by only ~1% in scenario 3 vs today, but over 13% and 6% in
scenario 4 for unleaded and diesel respectively. This profit hit outweighs the potential profit increase from
fuel alone, and makes scenario 3 the preference.

We should still evaluate whether there might be a more specific price-point between these scenarios that is
preferable. Based on this research, however, scenario 3 is the optimal price point to consider on economics
alone.

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 Driver 4: Are there other, non-economic factors that may influence our decision?

Relevant information
If asked, please share that:
• The client considers it extremely unlikely that the regulators will change their decision on price
controls in the near future
• The likelihood of reputational damage is low, and would only become an issue if the client hiked
prices to such a level that the economies were in any case unfavourable due to volume loss

Guidance for interviewer

While it’s a good signal for candidates to be thinking about non-economic factors, in this case such
factors are not a problem in practice.

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Possible answer

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There does not appear to be any major reputational or regulatory risk at play here. These risks are mitigated
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further based on the fact that the most advantageous price position does not appear to be dramatically more
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aggressive than current pricing.

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 Conclusion
What’s your overall recommendation to the client?

We were asked what pricing strategy NamibOil should implement come January 1st given deregulation in the
market.

I recommend the client prices its petrol and diesel at 13.6 and 15.4 respectively, which is an increase from
today’s price.

This is because this price point is the most profitable, taking into account both fuel and shop revenue. It also
takes advantage of the client’s high market share, local dominance, and therefore pricing power. The service
stations of the main competitor are more than 8kms away from the client so local price competition is low.
The other competitors are unlikely to have much pricing power because they lack the scale to compete on

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price.

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As a next step, I recommend that the client validate this decision with more data (and consider more granular
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price points, if possible). I also recommend that the client upgrade its petrol stations and customer service to
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reflect the more premium price point.
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 Exhibits

Exhibit 1: Petrol sales over the last 12 months (diesel and regular unleaded combined) in Namibian
dollars, by competitor

Company Liters sold (000s) Revenue (N$000s)

Caltex 12,448 150,085

NamibOil 36,486 463,367

Namibian Petroleum 39,874 506,397

Engen 22,024 270,764

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Exhibit 2: Distribution of distances (km) between competitor petrol stations and the closest NamibOil
petrol station

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Exhibit 3: Dynamic demand analysis: sale volumes and costs at different price points under
liberalized market conditions

Regular
Scenario 1 Scenario 2 Today’s Price Scenario 3 Scenario 4
Unleaded

Price N$/litre 10.2 11.6 12.1 13.6 14.6

Volume
25,488 24,486 23,311 22,965 20,016
(000s)

Costs
210,582 224,390 211,549 224,873 201,641
(N$000s)

Diesel Scenario 1 Scenario 2 Today’s Price Scenario 3 Scenario 4

Price N$/litre 12.2 13.4 13.8 15.4 16.4

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Volume

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13,256 13,146 12,009 13,010 12,220

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Costs
124,527 132,117 120,977 140,248 134,273
(N$000s)
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