Can your Retail fuels business increase margins and grow volume through Premium fuels?

Transcription

1 Can your Retail fuels business increase margins and grow volume through Premium fuels? December 2012 Executive Summary Premium fuels are an established offer to motorists worldwide, not just from the oil majors, but from national oil companies, supermarket entrants and many independent fuel suppliers. Retail fuel companies benefit from the incremental margin delivered by both Premium gasoline and Premium diesel brands. Customers benefit from greater choice and access to more advanced fuels. Even during the current economic recession Premium fuels have performed remarkably well, in general maintaining their level of market penetration. The recent strategy of oil majors to dispose of downstream assets (refineries and depots) has created more accessibility for smaller fuel players to enter this differentiated fuels market. rpsgroup.com/downstream 1

2 Most leading fuel suppliers provide Premium Fuels, not just the oil majors Experience has shown that in many countries worldwide a significant proportion of motorists would prefer higher quality fuels for their cars and they are prepared to pay extra for the privilege. Motorists expect these Premium gasolines and diesels to give them extra benefits in performance, such as: improved power, better reliability, higher fuel economy, better starting or driveability in severe weather conditions, and lower emissions to the environment. This is a highly profitable market as Premium fuels are typically sold at three times the margin of Regular fuels leading to an overall boost of 20-40% in fuel gross margin. In our experience premium fuel penetration can be as high as 50%, and these penetration rates have persisted through the recent economic recession as its economics is largely driven by local market conditions and the appeal of the brand customer value proposition. Different markets demand different benefits, so an intimate knowledge of local customer needs is essential to identify the most appropriate marketing claims. Each global fuel supplier adopts a distinctive differentiation offer too, as do many of your local competitors some examples from Petron in the Philippines are shown below. is a high-quality premium motor gasoline blended with 10% bioethanol. XCS is also formulated with a highperformance additive system containing a unique organic combustion catalyst and excellent detergent additive for optimum performance. is the first and only pure 100 octane premium gasoline in the Philippines. It is formulated and developed to unleash the full potential of modern and high performance vehicles. is a low sulfur, premium product that contains smoke reducing agent and lubricity additive to protect fuel injection system is a technologically advanced fuel, enhanced with C-booster and combustion enhancer to provide smooth and premium performance. The question for your business is Does your current strategy for fuels maximise the potential to profit from Premium fuel sales? The extra margin for Premium Diesel can often be greater than for Premium Gasoline, for example: a 500 million litre p.a. fuels sales network might generate the order of US$12m p.a. extra gross margin, whereas the gasoline equivalent is often half that amount. Successful marketing of Premium fuels generates more interest from motorists in your overarching Retail brand offer, not just from those seeking Premium fuels. Consequently new customers are attracted to your Regular fuels by a halo effect. Although some of your existing customers migrate to your Premium grade, Regular fuel sales may not suffer and can often grow a few percentage points via this new customer base. rpsgroup.com/downstream 2

3 Volume The impact on cash flow after the initial investment (product development, technical substantiation, supply chain improvements and marketing) is fast. Introduction of a brand new Premium grade can only take 6 months to reach its potential penetration rate. The figure below shows typical monthly Premium volume penetration for two different market types. In exceptional circumstances we have seen much higher uplifts of up to 50%. The effect of marketing a new, improved version of a Premium fuel is quicker, usually resulting in a volume uplift of several percentage points. 25% 20% 15% 10% 5% 0% Premium Fuel Introduction Typical Volume penetration growth Market A Month Market B Introducing Premium Fuels to your existing Retail Business Any project to introduce Premium Fuels to your existing Retail Business should be tailored and managed through a staged process with clear decision points, to ensure successful strategy development and effective product launch: RPS Approach to Premium Fuels Development SELECT THE RIGHT PRODUCT INVEST, DEVELOP & PERFORMANCE PROVE GATE GATE GATE GATE Appraise Select Define Execute Operate Existing fuel portfolio and brand reputation Current operations performance Existing infrastructure and supply chain Fuel portfolio planning Statutory changes consideration (e.g. Euro specs, biofuels mandates) Customer and competitor understandings Customer-led value proposition Cost benefit analysis Distinctive and cost effective fuel formulation Investment in supply chain flexibility (e.g. depots, storage tanks) Effective product launch Effective market communications Market monitoring / Customer feedback response On-going marketing and promotions Sign Off Sign Off Sign Off Sign Off rpsgroup.com/downstream 3

4 Case Study A successful example involving one of our senior specialists was the introduction of a new winter Premium gasoline grade with improved cold-start for a Russian fuel company. A survey of customers identified that they experienced difficulties starting with gasoline based on the standard specification during harsh cold weather. By improving some properties in the base gasoline it was possible to significantly improve cold-start and to demonstrate this in a specially-designed cold facility. Launch of this product realized significant business benefit (>30% fuels sales volume increase and >US$1m extra gross margin in the first 6 months). This Premium gasoline has been developed further since and is still marketed as a high octane gasoline with improved cold start up characteristics which enable engines to start faster in cold weather. A premium fuels strategy evidently has the ability to enhance margins, brand and customer experience and has become a more accessible capability to marketers. The question is to what extent does your current strategy align with the opportunity? For further information, or to arrange an exploratory conversation with our senior specialists, please contact: John Unsworth M E john.unsworth@rpsgroup.com W RPS Retail Specialists John Unsworth Martin Alford Stuart Speding Derek Birtles John has 25+ years experience developing high value, technical innovation and strategy for Shell Downstream fuels businesses, During the last 9 years this has included overcoming technical obstacles to enable worldwide introduction of a new fuel brand, FuelSave, the refreshment of V-Power with new benefits and claims, and a Retail fuels technical change management programme for a non-shell Russian fuel company. 20+ years of international oil retail, commercial, logistics, fleet cards & supply chain experience with TOTAL internationally. This has included development of franchise concepts in c-stores, vehicle maintenance areas, and management of international JV s & partnerships with brands such as Burger King and Pepsi. 20+ years experience in Castrol, BP & Mobil has seen Stuart delivering major profit-delivering transformation programmes internationally and successfully leading initiatives within the more developing economies. His knowledge extends across both the fuels and lubricant value chains. Areas of expertise include strategy development, performance management, organisational design and efficiency. Over 30 years of international retail business experience in petrol distribution markets and convenience stores, specialising in retail asset development. Derek has been based in Dubai over the last 8 years consulting for asset development projects and developing c- store networks for leading retail brands and clients in UAE and Bahrain, incl. ENOC, ADNOC, BAPCO, Last Minute, and 24 Seven. rpsgroup.com/downstream 4

5 RPS Energy - Downstream RPS Energy a global energy consultancy RPS Energy is part of RPS Group, a FTSE 250 company with a turnover of $700m and 4500 employees One of the world s leading suppliers of independent technical and commercial advisory services, project management and transaction support to the international energy industry Over 30 years international experience and a resource base of over 1000 technical staff and associates We carry out 500 projects in 100 countries each year for clients including Governments, NOCs, IOCs, Independents, and Financial Institutions worldwide RPS Energy operates from main locations in UK, Ireland, the Netherlands, USA, Canada, Brazil, United Arab Emirates, Singapore, Malaysia and Australia The Downstream Consultancy business of RPS Energy has provided advisory services across the value chain from Refining, Trading and Supply, to Commercial Fuels, Lubricants and Retail Our experience and capability have supported a large number of strategic investment and business improvement projects for downstream companies worldwide Deep sector knowledge and project delivery The focus of our support is on optimising business performance and maximising growth potential Our teams are made up of highly experienced, industry professionals with unparalleled depth of knowledge and a strong track record of delivering incremental value and process improvement for world-class companies in major markets around the world We work closely with our clients to understand their issues and find effective ways of improving their business. We then craft solutions that ensure we also build enhanced, long-term capability Given the unique combination of deep sector experience and market insight we are able to offer tailored, pragmatic solutions and deliver actionable plans to help our clients achieve and sustain their business goals RPS Downstream Consulting Offers rpsgroup.com/downstream 5

6 Past Project Examples Retail & Marketing Franchise Strategy Development and Implementation Program RPS has delivered a complete business strategy development project for an integrated Retailer client in the Middle East for entering new markets in the region. An expert team of Retail and IT consultants have undertaken comprehensive market assessments, operation and system gap analysis to formulate market entry strategy solutions and make final recommendations. In the next phase the team is retained to oversee and handhold the implementation process, as well as advise on various operational issues. Retail Partner Selection A major retailer in an emerging Middle Eastern market engaged RPS support to select a suitable retail partner to substantially improve the customer offer and increase non-fuel income from its retail network. RPS conducted a detailed review of the client s asset base and current operations to identify the scale of opportunity and context for dealing with its future partner. We then worked closely with our client to review the selection criteria, carry out due diligence, review and score the business models, economics and proposed offers submitted by 3 potential partners. Brand Positioning and Pricing Strategy In order to maximise value extraction from their chosen focus markets and sectors, RPS designed and executed market evaluation and strategic value mapping programme on behalf of a global lubricants player to assess their current perceived positions on brand, cost, quality, and pricing in end consumer market. Output included value propositions, pricing strategies and an aligned brand positioning. Such programme has lent a context to RPS to develop clear brand strategies based on our strategic Brand Evaluation Framework to help our client grow their market and margin shares in line with their desired brand positioning and sector aspirations. Business Organisation Strategy With the NOC client seeking to re-organise and transform its downstream operations to improve returns, RPS acted as subject matter expert (SME), providing leading specialist knowledge and expertise to formulate a new market strategy. Business Expansion Strategy Following the completion of an in-depth market assessment RPS identified potential opportunities to access new high value segments and customers for our client. Acting as trusted advisor, RPS has developed a strategic business plan which includes an option to leverage the complementary strengths of the two major global lubricants brands and form a winning JV. Market Entry Strategy Delivered a detailed review of a potential material new market for a global lubricants player, covering market characterisation, pricing and margin analysis, and competitor analysis. The study concluded with recommendations for the highest value segments to enter and the most appropriate go-to-market approach. This has facilitated a further work to support the confirmed strategic segments of choice, which delivered a strategic evaluation of segment value propositions, route to market models, price positioning and brand destination statements rpsgroup.com/downstream 6

7 Past Project Examples Market Assessment Downstream Expansion Study To identify available downstream expansion opportunities for our client refiner, RPS conducted a detailed analysis of global market dynamics, refining margins and product offtake options. A further in-depth assessment developed a series of strategic growth and investment options covering trading dynamics, pricing mechanisms, logistics, and downstream markets (retail, commercial, aviation) for different major economic regions. Downstream Market Entry Study To support a client s market entry strategy into the Middle East, RPS performed a detailed market assessment of the downstream sectors that included: Setting up a market leading Retail presence Construction of a medium-sized refinery Creating a lubricants business (including manufacturing) Creating an LPG business Commercial Fuels Market Study To identify and assess future growth opportunities for a refiner/marketer in a major European country, RPS delivered a detailed assessment of the commercial fuels retail market. Analysis included detailing all market participants, their competitive positions and infrastructural capabilities. Refinery Commercial Studies RPS has carried out a number of refinery commercial studies where it performed full assessment and provided expert views to support the commercial and economic evaluation of potential greenfield refineries in Africa. The studies covered the key topics that drive the refinery s configuration and economic return, including: Local and regional product demand and supply, to inform and identify potential off-take opportunities Product quality specifications in potential local and export markets Crude & product prices for local and export markets, refinery margins Overall commercial inputs and insight for development of alternative options rpsgroup.com/downstream 7

8 Past Project Examples Downstream M&A Support M&A Support for Refining and Marketing RPS provided M&A support to a significant independent oil company undertaking a major refining and marketing transaction in Europe. Our expertise was utilised in providing on-theground management support and helping to shape and lead the overall acquisition programme in terms of directions, structures, roles, accountabilities, contracts and project management. Further specialised support was provided to the negotiating teams in regards to detailed knowledge of products and markets in order to secure the best position from the vendor. Refinery M&A Commercial Support With its intimate knowledge and extensive operational experience in the UK refining, supply and logistics market, RPS was enquired to provide knowledge and guidance with respect to the UK Downstream market to support our client with a major financial transaction, including negotiations with counterparties. Acquisition Support and Due Diligence Project managing the process for an NOC to acquire a major stake in a new refining and petrochemicals complex, including carrying out due diligence on the economic evaluation. Refinery Commercial Due Diligence Undertook due diligence work for a refiner considering acquiring a number of refining assets. Scope included: assessing the potential margin improvement opportunities through medium and long term investments, developing a view of what the purchases could bring to the client in integrated system value, assessing the value and constraints implied by various marketing businesses and supply and trading agreements associated with the potential acquisitions. Fuel Market Entry Strategy The client is a global leader in the downstream marketing of fuel products, who wish to make asset acquisition in Europe. They have engaged RPS to: conduct an assessment of these markets and form initial viewpoints and insights as to their suitability for an entry strategy detail all fuels market environment and future outlook, market structure and players models, price & margin analysis as well as other special considerations screen a large number of acquisition/joint ventures targets and conducted initial due diligence to identify the most suitable prospects for taking to the next stage rpsgroup.com/downstream 8

9 Past Project Examples Performance Improvement Improving Underperforming Refinery The new owners of a Med Refinery wanted to improve the efficiency, performance and reduce operational costs. A detailed assessment identified a number of performance improvement opportunities worth >$0.5 per bbl without additional capital investments. These include production planning and scheduling, plant optimisation, zero based cost budgeting, energy conservation, organisational redesign, identification of ad hoc improvement projects, and development of a strategic plan. Multi-year implementation of initiatives is now underway to deliver improvements across all elements of the Client s Refinery Operations. First year delivered twice the expected incremental value. Refinery Cost Savings Review Supported a detailed evaluation of the cost savings options for a major European refinery and developed practical implementation plans to deliver material savings across the refining organisation. Commercial Fuels and Supply and Logistics Optimisation In order to determine ways in which to increase its participation in the UK commercial fuels market, an IOC commissioned RPS to complete a series of market assessments, identify strategic options and make recommendations on optimising it supply and logistics operations. Scope included mapping the fuels operations in the UK (refineries, terminals), estimating throughputs, detaining the competitive landscape and modelling supply and transport solutions. Business Organisation With the NOC client seeking to re-organise and transform its downstream operations to improve returns, RPS acted as subject matter expert (SME), providing leading specialist knowledge and expertise to formulate a new market strategy. rpsgroup.com/downstream 9

10 Past Project Examples Supply, Trading, Terminaling & Storage Supply Logistics Network Study To optimise and maximise their supply and marketing opportunities, RPS conducted a detailed structural and economic study of the refined products supply infrastructure (including terminals, depots, pipelines, rails etc.) in a major European country for a refiner/marketer in their key market. Trading Evaluation and Enhancement Implementation To help a European refiner improve revenue streams and margins from their trading organisation, RPS carried out an evaluation of the current state of their trading organisation and an assessment of additional potential opportunities. We then supported the implementation of various profit enhancing initiatives, while managing the associated risks. Trading Unit Feasibility Study A European refiner/marketer engaged RPS in a feasibility study for a potential structure of a Trading Unit focused on entrepreneurial trading, with an aspiration to profit from the market and take out-right positions over and above the commercial optimisation of its existing assets. Following a comprehensive step-by-step approach RPS carried out a detailed competitor benchmarking study, an evaluation of the existing positions and the potential trading options, and delivered a complete design for the approved trading organisation. Trading Processes and Procedures RPS supported a European Refiner in developing the appropriate processes and procedures to manage the consequences associated with the trading activity they undertake. RPS built a database of "best practice" processes and procedures referring to deals management and control in the oil trading sector and set the standard for the customer. We also provided a benchmarking calibration to demonstrate how an oil integrator versus an energy commodities trading house apply these processes and to what extent. Terminal Assessment and Review RPS, with extensive experience of the Trading, Storage and Terminaling business, carried out an independent market assessment and review of a feasibility study of a terminal expansion project in the Middle East Gulf. The scope includes full study of the current and future storage markets in the region, market competitiveness, players positioning, and hire rates. RPS then reviewed the various technical and financial outcomes of the feasibility study, regarding jetties, draught, and capital costs. As part of the review we also made recommendations on how to progress with various elements of the project that are still under discussion. rpsgroup.com/downstream 10