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Essar beats rivals; opens 1st petrol pump

Hemangi Balse and Nandini Lakshman | September 13, 2003

It was scheduled as a high-profile event.

If everything had gone according to plan, either racing champ Michael Schumacher or our own homegrown racing star Narain Karthikeyan should have been the first customer at the spanking new petrol station on the Maharashtra state highway in Devrukh, Ratnagiri district.

But contrary to expectations, last Sunday's launch of Essar Oil's first petrol pump was extremely low-key, with Anant Geete, Union Power Minister, cutting the ribbon.

This makes the Rs 292.68 crore (Rs 2.926 billion) Essar Oil the first Indian private sector company in 102 years to set up a gas station, pipping competitors like Reliance who have been putting an exhaustive retail strategy in place.

Until now, the 19,800-odd petrol stations in the country, have been set up either by multinationals or public sector companies. The first station in India was put up by a multinational in 1901, following the discovery of oil in Burma in 1887 and the installation of the Digboi refinery.

Though Essar's 10 million tonne capacity oil refinery at Vadinar in Gujarat is at least two years away, it has set the retail ball rolling and worked out a blueprint to set up 2,000 retail outlets by the time the refinery is up and running. It has recruited a battery of high-profile oil executives.

With marketing being the name of the game, overseeing this key function is Raman Pandya, head retailing at Essar Oil.

Pandya who was earlier head of marketing at Castrol, is believed to have been responsible for that company's 4 per cent market share catapulting to 27 per cent, after the government decontrolled the lubricant sector in the mid-'90s.

The Ruia brothers -- Shashi  and Ravi -- the promoters of Essar Oil, are now hoping Pandya, recruited four months ago, will work his magic with Essar Oil. Can he?

"Marketing and understanding the consumer will be key. That is what is going to make a difference between success and failure," says Pandya.

So for starters, Essar will use the franchisee route. "This way, we will be able to execute sites faster," he says.

Both Essar and Reliance have been placing adverts in publications inviting franchisees for their outlets. This is in comparison to public sector oil companies which prefer to own most of their retail stations.

For a company which has already pumped in Rs 6,500 crore (Rs 65 billion) into its refinery, this is "only a soft launch", claims Pandya.

He is confident that this test marketing is more of a headstart providing Essar the flexibility to pick up good dealers and also change pricing. "We have no paradigm of a model to follow," he adds.

Apart from the coastal outlet in Devrukh, there are plans to set up house near multiplexes and hypermarkets besides going into the hinterland.

For the moment though, it looks like the Essar strategy will be restricted to the coastal regions to minimise transportation cost.

At the moment, the fuel is being imported from Europe and the Middle East and transported from Mumbai and Gujarat.

Pandya says that they will continue to do so till it is locally available. Which means, when their refinery goes onstream in October 2005.

There's also an accent on recruiting the right kind of people. "We want to develop an organisation which is young and dynamic with high energy levels. Nobody likes buying petrol or diesel, as it is expensive. The consumer should find it a pleasure to shop for petrol," says Pandya.

That's because, he claims that this will be Essar Oil's first interface with the consumer.

But analysts tracking the sector are far from impressed. "They have no infrastructure in place, so it doesn't mean much. Essar's retail launch is more symbolic to signal to lenders that they are getting back on their feet," says an analyst at a multinational broking firm.

Over the years, Essar has received flak for non-repayment of loans and has recently emerged out of a financial restructuring exercise.

On the pipeline front, Essar Oil is currently negotiating with Petronet India to take over its Rs 1,600 crore (Rs 16 billion), 1,760 km-long Central India Pipeline (CIPL) project connecting Jamnagar on the western coast to Ratlam in central India.

If all goes well, Essar plans to use the pipeline to evacuate petroleum products from its Vadinar refinery to the country's hinterland. There are also plans to put up depots and have storage tanks for fuel transportation.

Says Satyam Agarwal, analyst at Motilal Oswal Securities, "I think Essar has launched its retail outlet to understand the market and correct the vagaries of distribution." Pandya says this is one reason why it has got into it early.

In fact, there are many who believe that Essar's retail launch, much ahead of its refinery becoming operational, has much wider connotations. For some time now, Essar has been scouting for partners for its refinery project.

At one time, it was believed to be talking to Oman Oil and Kuwait Petroleum Corporation. But its track record in the Indian market is said to have stymied its efforts.

So much so, that early this year, it also advertised in London's Financial Times for a prospective partner.

Even as Essar is struggling to get its act right, the competition isn't napping.

Already, Reliance Industries, which is yet to announce a launch date, is planning to hit the road with a battery of 1,500 outlets at one go. It is currently testing its concept on home ground.

Having tied up with Flying J, an American company for marketing, it set up a station last year at its Jamnagar plant in Gujarat to check the design concepts. In the second quarter of this calendar year, it put up another gas pump at Hazira to detect operational glitches.

In fact, Reliance is believed to be experimenting with two models for its outlets. While one has just the petrol station, the other model also has a shop attached which sells groceries. "This is to gauge consumer preferences," says an analyst.

Reliance is also one of the shoppers vying for Hindustan Petroleum.

If Reliance is in no hurry to rush to the retail market, it's because of its tie-up with public sector marketing companies like Indian Oil Corporation, HPCL and Bharat Petroleum which is valid till March 2004.

These companies pick up 13 million tonnes of Reliance's petroleum products. The balance is exported.

Then, there's Royal Dutch Shell, which also has its eye firmly fixed on HPCL. Whichever company gets HPCL will immediately get a network of more than 4,863 outlets and a refining capacity of 13 mmtpa.

At the same time, the public sector oil companies are also in an expansion mode.

According to industry reports, in fiscal 2003, they set up 1,000 new outlets. IBP alone set up 520 and the rest were put up by IOC, BPCL and HPCL.

This fiscal end, there are plans to have another 2,000 more outlets in place. And by 2005, oil players say there will be 28,000 outlets.

Currently, the total refining capacity in the country stands at 116 mmtpa. With a refining capacity of 48 mmtpa, IOC and its affiliated companies produce about 45 per cent per cent of the country's crude.

HPCL's 19 mmtpa including MRPL's 6.4 mmtpa and BPCL's 6.9 mmtpa account for 10 per cent and nine per cent throughput respectively.

Against this backdrop, Essar will face many challenges. "Executing the project is our biggest challenge," says Pandya. Adds an analyst, "Financing the venture and competition will be the major roadblocks."

But Essar is determined to show that it won't be trailing the others in this brutally competitive industry and it has just sent out a clear message to that effect.



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