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    Fuel retailing is not a viable business proposition

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    Oil and Natural Gas Corporation (ONGC), one of the Navratna PSUs, made a significant announcement today. The company said that it is reconsidering its decision to get into fuel retailing business and will hold its plans to roll out fuel retail outlets.

    The company’s decision proved that though the business of retail is growing at a considerable pace, not all its verticals have proved to be a promising business proposition. Fuel retailing is one such business that has seen a downfall. Be it in terms of top-line or bottom-line, both ends of the growth graph indicate a major decline.

    ONGC was planning to start around 1,600 retail stations under the Oval brand name.

    “We are keeping our retail entry plans on the backburner. If the situation doesn’t improve, we will have to put it on the backburner forever. Fundamentally, I do not expect oil prices to come down as production is not able to keep pace with demand. Prices are under tremendous pressure,” informed, RS Sharma, chairman and managing director, ONGC.

    Two months ago, it was the domestic major that closed around 1,500 petrol pumps after it incurred a Rs 800-crore loss in its petroleum retail business. If sources are to be believed, the company’s retail vertical has planned to set up malls and multiplexes at closed fuel stations, a move to make viable use of invaluable retail space.

    The malls are believed to be providing space to the brands that include , , Reliance Time Out, , and . Earmarking about Rs 5,000 crore for the project, the company is planning to develop 700 to 800 properties at important locations.

    Shell, one of the biggest players in the industry, followed the shut-down spree by closing its fuel retail outlets in South India.

    Another major, (IOC), which claims to have seen maximum losses due to the government’s subsidies on fuel, quite obviously, cannot shut down operations, and is trying to bank on its branded fuel. The company has set up a new promotional campaign to promote branded fuel consumption in the country. Will the campaign be able to attract enough consumers to buy ‘branded fuel’, and will it make up for the losses incurred by IOC, is a matter of wait-and-watch.

    GC Daga, director, marketing, IOC, said: “There is a leaning towards branded fuel. We will be spending around Rs 800 crore towards our retail segment, which includes setting up new outlets, upgrading and automating existing ones. On branding and promotional activities, the company spends about Rs 35 crore annually for the two products.”

    IOC claims to have notched up a market share of over 48 per cent for its branded petrol XtraPremium, and says it has found 28.5 per cent of its existing customers shifting to the branded category. For its branded diesel XtraMile, the company has posted 65 per cent growth, with a market share of 58 per cent. An estimated 17.3 per cent of regular customers are opting for it.

    Less than a fortnight ago, one of India’s leading dailies had reported that the projected under-recoveries (difference between the actual cost and the retail price) for petrol, diesel, liquified petroleum gas (LPG) and kerosene were Rs 160,000 crore this fiscal. Today, this is closer to a mindboggling Rs 200,000 crore, thanks to world prices of fuels increasing dramatically.

    In fact, analysts believe crude will breach the $150 mark during the next 2-3 months, which means the losses on sale will also go up.

    Oil majors including Indian Oil, and are losing about Rs 450 crore daily on account of not being able to realise the actual price of fuels, which are being subsidised to the customer. Their top brass has been imploring the petroleum ministry for an immediate price increase, except that the latter is in no mood to oblige.

    – Ranjan Kaplish