Monday 19 July 2010

New models give higher value to oil companies and their retail brands

Location, location, location - the oldest cliché in the book about Retail. Get the right outlet with the right products in the right place and the customers and the profits just roll in! And in the petroleum sector it has to be even truer surely. Right road, right traffic flow, well positioned petrol station - Bingo! Well yes of course location is vital - that's why the real estate costs so much when a site on a busy highway or on a motorway is released or sold. But as every retailer knows the trick is always to maximise the returns - to secure volume and income which exceeds expectations and provides business higher than the "case" assumption (the assumption that underpinned the original investment). This article is about that extra, that bonus level of return that can turn a good site or network into a great one.

One of the basic rules of retail is that it has to be process driven. Securing and maintaining high levels of customer satisfaction does not happen by chance – especially in petroleum retailing. This means that the “offer” has not only to meet the customers’ needs but also to be consistent over time. Any fool can get a consumer to try a product or service once – but to bring them back time and time again you have to repeat the quality, and precisely replicate the purchase experience, every time. This requires performance standards – standards which cover every aspect of the motorist’s visit to the petrol station. Where, as is invariably the case, sites are part of a branded network your standards must cover the network as a whole. Most oil companies have some flagship sites in prime locations on which they lavish special care and attention. There is nothing wrong with this – providing that the minimum standards which apply elsewhere in the network meet, or preferably exceed, customer expectations. Consistency of the marketing offer is vital.

Vertically integrated oil companies, those that operate all the way along the supply chain from the wellhead to the motorist, are driven by processes. Technical and performance standards apply at every step in the chain – so it is not surprising that there is generally, in principle, an acceptance of the need for standards in their retailing operations as well. I say “in principle” advisedly because my personal experience in Shell, and my observation of other oil companies, is that particularly in recent years there is an unwillingness to make the financial commitment in retail that would facilitate the achievement of consistently high levels of customer service. The principal reason for this is that whereas other retailers are customer obsessed – the success of a Wal-Mart or a Tesco is built on the foundation of a fixation with customers – this hardly ever applies to traditional oil companies. This is part of the reason that supermarket and hypermarket chains have made such inroads into petroleum retailing. When the board of a supermarket giant meets virtually every subject discussed is placed in the context of its effect on customer preference and consumer choice. When the boards of Shell or BP or ExxonMobil meet there retail business is low down the agenda – if it is there at all – and the customer rarely gets a look in.

This brings us to the question as to whether retail is or should be a core competence for a vertically integrated oil company. Back in 1996 I moved, with Shell, to the Middle East – based in Dubai. My previous job had been as project manager for the re-imaging of Shell’s more than 40,000 petrol stations around the world – so I considered myself something of an expert on branded retailing in the petroleum sector and I thought also that Shell had created a new, distinctive and customer-driven set of design and operational standards. What immediately surprised me in Dubai is how high the general standards of petroleum retailing were - and all the brands were local brands. For example Emarat, a Dubai company, had a new design and associated forecourt standards which were, frankly, just as good as what we had just developed for Shell. The key point about Emarat is that they are first and foremost a consumer focused marketing company. Of course in a country like the United Arab Emirates, with its huge oil reserves, there are also major upstream companies but the nation’s oil marketing brands are decoupled from their upstream activities. Like Tesco or Wal-Mart, Emarat and their competitors are 100% focused on their motorist and other customers. This I believe is also the model for the future for the multinationals like Shell and BP.

The reality is that the main raison d’être of a vertically integrated oil major these days has to be the upstream. Most of their investment and almost all of their energies are focused on this sector – particularly at Board level. Although the marketing businesses of these companies are large, and their brands have traditionally been strong, whatever advantage there once was has gradually been whittled away by the supermarket chains. The consumer brands are also damaged by completely unrelated issues and problems in the upstream – as BP has recently seen to their cost. So the crucial decision that Shell and BP and the rest must take is whether they do still see marketing, and especially retail, as a core business and if so how they should restructure to give it far more emphasis than it can receive when most of the corporation’s efforts are on the upstream. Core businesses demand the development of distinctive core competences – peripheral businesses, however notionally large, wither on the vine because the core competences are absent or insufficiently developed.

There is a window of opportunity for Shell, BP, ExxonMobil, Chevron, Total etc to focus on what they do best – the upstream – and realise the value of their marketing businesses and brands. There are plenty of models which could be followed to do this of which probably the best would be the one chosen some years ago by British Gas plc when they formed two separate companies, one essentially upstream (BG Group) and the other a marketing business - Centrica. If there is residual value in the brands such as BP, Amoco, Shell, Total, Texaco, Esso, Mobil, Elf and the rest then the creation of dedicated downstream companies to manage these brands entirely separately from the upstream is essential. The question as to whether retail is a core competence would then never need to be asked. Retail would be the main business, the public face and the raison d’être of these new companies – and their management would have to be just as customer obsessed as their supermarket competitors!

Paddy Briggs

July 2010

© Minale Tattersfield

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