THE MEXICAN RETAIL FUELS REVOLUTION

Transcription

1 Energy THE MEXICAN RETAIL FUELS REVOLUTION MEXICAN OIL DEREGULATION OPENS DOOR FOR NEW FUELS MARKETERS AND RETAILERS AUTHORS Bob Orr, Partner Karina Swette, Principal

2 THE MEXICAN RETAIL FUELS REVOLUTION As Mexico deregulates its oil industry, it is opening the largest fuels marketing and retail opportunity on the horizon. For the first time, foreign companies will be allowed to own fuels assets, and companies can sell fuel branded and sold by suppliers other than Pemex. The downstream will open to new fuels marketers and new retail fuels offerings, changing the market landscape and the value distribution among participants. While most deregulation talk focuses on upstream, Oliver Wyman forecasts that significant structural changes in the downstream fuels sector will create high-value opportunities for companies willing to commit to the Mexican market and work through market evolution challenges. Mexican fuel consumption is forecast to grow by roughly 3 percent annually, a rate twice that of global demand growth and at a higher rate than the top five fuel-consuming countries. Fuel site throughputs are 30 percent higher than other mature markets, fuel prices are 20 percent higher than in the US, and convenience store penetration is low, at roughly 50 percent of fuel stations. Oliver Wyman estimates that by the turn of the decade, the number of fuel sites could grow by more than 40 percent. Fuels marketers and retailers should pay attention to Mexico. It is the sixth-largest consumer of motor gasoline and diesel and one of the final developing markets to deregulate, allowing foreign companies to import, own assets, and sell other fuel brands. Copyright 2015 Oliver Wyman 2

3 ATTRACTIVE FUELS MARKET DYNAMICS AND STRUCTURE The Mexican downstream fuels market should be very attractive to newcomers and local participants alike, driven by key fundamentals. Strong growing consumption and increasing imports High fuels site volumes Price levels and structure that could create substantial margin Fragmented wholesale and retail markets structure Limited consumer choice, allowing new entrants to bring new offers GROWING MARKET WITH HIGH LEVEL OF IMPORTS Mexicans consume more than 750,000 barrels of gasoline per day, ranking the country sixth in global market demand. Such demand growth will likely lead to an increasing reliance on imports. With oil prices in the US dropping, US refiners that have access to cheap crude will continue to increase fuels exports, and Mexico is their closest and largest import market. Imports already account for 48 percent of Mexican fuel consumption, and Oliver Wyman forecasts that will rise to as much as 60 percent of total consumption by Exhibit 1: Mexico domestic gasoline consumption and imports THOUSANDS OF BARRELS PER DAY, ,200 Projection Total consumption % CAGR 60% Total imports 9.2% CAGR 48% Sources: Pemex, EIA, and Oliver Wyman Analysis Copyright 2015 Oliver Wyman 3

4 HIGH FUELS SITE VOLUMES The number of retail fuels stations in Mexico is controlled by the government and stands at just over 10,000 sites. As demand has increased without a parallel growth in the number of stations, Mexico now has one of the highest average volume throughputs per station in the region and globally, at 5 million liters per station. Moreover, the average throughputs within larger Mexican regional markets, including Mexico City, are more than 6 million liters per station, 50 percent higher than the average for neighboring US regions, creating attractive site-level economics. In addition, several of these Mexican regional markets must use imported fuels products exclusively, compounding the tension in supply-demand dynamics and driving a potential structural change. Exhibit 2: Average annual consumption per region of Mexico and throughput MILLIONS OF LITERS, 2013, INCLUDING GASOLINE AND DIESEL Mexico: 5.0 Germany: Chile: 4.5 US: UK: 2.0 Italy: 1.6 Northeast Central South/ southeast 25% 24% 18% 17% 16% Note: UK excludes supermarkets in average Percent total volume in Mexico Sources: Country government reports, Oliver Wyman analysis Northwest Central/ west Copyright 2015 Oliver Wyman 4

5 PRICING OPPORTUNITY The Mexican government sets fuel prices and has steadily increased prices over time. Historically, this meant that the Mexican government was subsidizing fuel prices. However, that has reversed in recent years. In April 2012, gasoline prices in the US averaged $3.84 per gallon while the equivalent gallon of Pemex Magna in Mexico was $2.64. That s a $1.19 difference. But with recent global crude prices dropping, the price per gallon in the US has declined to $2.59, on average, while the pump price in Mexico has reached $3.11. That s 20 percent higher and creates arbitrage opportunities in certain regions. Exhibit 3: Comparison of gasoline prices INDEXED, (2005 = 100) cents-per-gallon price premium 200 Pemex Magna gasoline US regular conventional retail gasoline price 50 Jan 2005 Jul 2006 Jan 2008 Jul 2009 Jan cents-per-gallon price savings Jul 2012 Jan 2014 Jul 2015 Cushing, OK WTI spot price FOB Sources: Pemex Magna unleaded (regular), Energy Information Administration; Oliver Wyman analysis Copyright 2015 Oliver Wyman 5

6 FRAGMENTED MARKET WITH A LACK OF CONSUMER CHOICE With only Pemex branded fuel and stations allowed in Mexico, the competition and investment has been much more limited than in other markets. This has left the consumer offer relatively weak, as evidenced by the low penetration and variety of convenience stores. Only half of Mexican stations have convenience stores compared with around 80 percent in other markets. Exhibit 4: Convenience store penetration in gas stations NUMBER OF STATIONS WITH CONVENIENCE STORES 5% 18% 20% 45% 35% 95% 55% 82% 80% 65% Without convenience store6.0 0% Mexico US Germany UK Poland With convenience store Sources: CBRE Market View European Petroleum Retail Sector, US Census Bureau; Oliver Wyman analysis Copyright 2015 Oliver Wyman 6

7 Mexico is a highly fragmented fuels market. More than 5,000 franchisees operate only one or two sites, making organic improvement in offerings challenging. There are fewer non-fuel services than in similar markets, and many facilities lack the cleanliness and security desired by customers. Even the largest franchisees operate fewer than 300 stations, making scale operations a challenge. But that has not restricted the development of grass-roots efforts to meet consumer demand. The largest franchisees have developed their own offers including loyalty programs, fleet cards, and fresh food offerings, proof that the Mexican consumer is looking for expanded choices. Exhibit 5: Improving consumer choice Franchisee groups are developing their own customer offerings. OXXO GAS Widely known convenience stores: Oxxo Fuel is just one retail product in the array Alliance for automobiles service: Zona Akron System of tradable coupons: Billetigas Increasing volume of fuel commercialized despite market saturation CORPO GAS Large number of gas stations in Mexico Express service for automobiles Convenience stores: Go Mart Fast-food chain restaurant: Subway Loyalty program: Puntada Card system for fleets: Tanque Lleno ECO GASOLINERAS Second-largest player in Baja California Widely experienced in fuel distribution Fuel delivery commercial and industrial customers: Eco Transportes Card system for fleets: Enercard Insurance for Mexico and US: Mr. Agente Local soccer team stores: Tijuana Xolos CANTELLI Leader in the southern region Wide array of additional services includes hotels, groceries, convenience stores, automobile services, motorhome parking Coffee shop: The Italian Coffee No loyalty or rewards program PETRO 7 Consolidated branding in the country Convenience store in some stations: 7-Eleven Alliance for automobile service: Zona Akron System of tradable coupons: Petro Tickets Rewards program: Payback Rechargeable prepaid card ORSAN Fast-growing brand recognition in Mexico Known for accepting multiple payment methods Express billing through a bar code in key ring Loyalty program: IR Frequent Customer Card for fleets: Ultra Gas Coupons system: Vale ORSAN HIDROSINA Second-largest player in Mexico City No branded convenience stores Fuel coupons and prepaid cards Rewards in Club Premier and AeroMexico miles Corporate cards for organizations: Hidrosina Microchips for vehicle identification: Hidrotag GASMART Main business is convenience stores Rewards in Club Premier and AeroMexico miles Utilities payment offer: Gasmart+cargas Banking in some stations: Banamex aqui Purchasable electronic coupons Card system for fleets: GasmartCard Copyright 2015 Oliver Wyman 7

8 OPPORTUNITIES OPEN WITH REGULATORY CHANGES Deregulation laws were passed in 2013 and 2014, and Mexican regulators are implementing plans to relax control of the market in the next few years, impacting all areas of the energy value chain. For downstream activities, the law establishes a permit regime regulated by the Ministry of Energy (SENER) for petroleum treatment and refining and the import and export of petroleum products. The Energy Regulatory Commission (CRE) provides permits for crude oil, petroleum products, and petrochemicals, transportation, storage, distribution, compression, liquefaction, decompression, regasification, marketing and retail sale of crude oil, petroleum products and petrochemicals, along with integrated pipeline transportation and storage systems. The regulatory changes are occurring in phases. Exhibit 6: Mexican energy regulatory changes PERMITS TO TRANSPORT, STORE, AND DISTRIBUTE PERMITS TO OWN AND OPERATE RETAIL STATIONS PERMITS TO IMPORT AND EXPORT FUEL RETAIL PRICES OPEN AND MARKET FULLY OPENS IMPLICATIONS New fuels distribution and logistics entrants New investments in infrastructure New fuels brands New store brands New retail participants New fuels brands New supply partnerships with local franchises New fuels trading participants Wholesale and retail fuels competition based on pricing Potential low-price fuels offerings Sources: Pemex and Oliver Wyman analysis Investing in the Mexican fuels market comes with risk. Several details about the regulations are not clear, such as how and when permits will be awarded, if foreign companies will be allowed to buy existing assets, or how the number of retail stores will be regulated. Further, it is not clear how regulators will determine fuel prices during the transition period or how prices will change. It is essential for participants and investors to stay closely connected to changes and build flexible strategies. Copyright 2015 Oliver Wyman 8

9 PARTICIPATION OPTIONS Companies can pursue a range of options to participate in the downstream fuels market in Mexico, from full ownership and operation of assets within key segments of the value chain, to partnerships and joint ventures, to strong, brand-based sales agreements. Market dynamics will continue to evolve, with consolidation of current players and new sites and concepts from market entrants. Existing local fuels and convenience retailers will continue to grow and consolidate, with larger companies speeding up the pace of buying smaller operators. Entrants and local participants will build new fuels sites and probably test hypermarket and grocery fueling offers. A range of foreign refiners, fuels distributors, marketers, and retailers will build and buy stores, and form partnerships, bringing new consumer offerings in fuel and convenience. Exhibit 7: Entry options SUPPLY AND IMPORTS TRANSPORTATION, STORAGE AND DISTRIBUTION FUELS MARKETING AND RETAIL Sale of branded or unbranded fuel To existing franchisees, new retail owners, other foreign entrants, and Pemex. New entrants are already developing partnerships with larger franchisees. New suppliers and importers must gain access through controlled import terminals or focus on border market zones. Foreign pipeline companies may extend or build and operate new products pipelines across the northern Mexico border. Foreign companies may also purchase, build or operate products pipelines, terminals, and other logistics operations to more efficiently distribute and store fuels. Leverage advantaged fuels supply position to sell directly to local Mexican distributors and retailers. Leverage existing fuels brand to establish branded supply agreements and partnerships with retailers. Leverage existing retail fuel and store offers and brands to grow and gain value in partnership with local retailers. Acquire existing assets, networks, and retailers to establish base for growth. Build new assets and new offers to capture value from consumer choice. Given the regulatory changes and attractive market dynamics, the Mexican fuels market represents a once-in-a-generation opportunity for bold strategies to shape the market and for companies with strong fuels capabilities, offers, and the desire to grow value. Copyright 2015 Oliver Wyman 9

10 STRATEGIC CONSIDERATIONS FOR MEXICAN FUELS MARKET PARTICIPATION When considering whether to participate in the deregulated Mexican downstream market, companies should ask themselves several critical questions. How much in refined products am I exporting today that already ends up in Mexico (or other parts of Latin America)? Will those exports be sustained or grow? How could I take better advantage of my products that already flow from the Gulf of Mexico, the West Coast, or over the border into northern Mexico? How much would I benefit from securing future product placement and capturing more value in the fuels chain? In what part of the value chain can my offer, capabilities, and assets differentiate themselves and create value, given the level of Mexico market development? Should I invest in new assets or create partnerships to secure supply and placement? What are my current relationships? How should I work with local partners? Pemex? Government agencies? Franchisees? Other oil and gas companies? What parts of my retail offering will fulfill the needs of Mexican consumers, and how should I adapt? How do I prepare for the theft that continue to increase in several parts of the value chain? How much am I willing to invest? What is my risk tolerance? What am I leaving on the table if I don t participate? How do I build flexibility into my strategy as regulations evolve? Copyright 2015 Oliver Wyman 10

11 ABOUT OLIVER WYMAN Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 26 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm s 3,000 professionals help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC], a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With over 53,000 employees worldwide and annual revenue exceeding $11 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Mercer, a global leader in talent, health, retirement and investment consulting. For more information, visit Follow Oliver Wyman on ABOUT OUR ENERGY PRACTICE Oliver Wyman s energy practice helps companies address strategic and operational challenges through proven, results-oriented approaches across all sectors of the market. The practice bases its work on deep industry expertise across the energy sector, resulting from decades of work with industry leaders. The energy team has worked with leading international and domestic oil and gas companies operating in the Americas, Europe, Asia, Africa, and the Middle East. For more information on this report, please contact: BOB ORR Partner Houston bob.orr@oliverwyman.com KARINA SWETTE Principal karina.swette@oliverwyman.com This report was designed by Lech Ozimkiewicz and edited by Elizabeth Souder. Copyright 2015 Oliver Wyman All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman.