Mumbai: Following in the footsteps of global oil marketing companies, Indian Oil Corp. Ltd (IOC) has decided to enter the retail business at some 2,000 of its 16,455 retail outlets. Each of these retail pumps, on an average, is around 10,000sq. ft in size.
IOC had engaged retail consultancy Technopak Advisors to draw up a roadmap and has selected around 2,000 outlets to start the project. The consultant made detailed recommendations on what can be stocked at these outlets and the store format suitable at each of the selected stores, said a senior IOC official involved with the retail foray.
IOC is planning to partner with existing retailers, such as Apollo, for pharmacies, Subhiksha, bookseller Crossword and Café Coffee Day. This is similar in concept to the “In & Out” retail store format at competitor Bharat Petroleum Corp. Ltd, which has formed strategic alliances with major brand owners, retailers, and music stores Planet M and Music World, among others.
“Since there is no national retail chain which may be suitable for all areas, we may need to have regional, state-level or local partners as well,” says Sarthak Behuria, chairman, IOC. The company hopes that with its 2,000 stores, it will become, by far, India’s largest retailer with space in prime city locations.
“We are studying the recommendations of the consultants and will have different formats for urban retail outlets, rural retail outlets and those on highways. We will also have a critical mass of 30-50 stores in each market with our retail partners,” says Behuria.
This is similar to the strategy adopted by many retailers that want to dominate one city before they expand to others.
IOC is banking on alliance partners and hiring more staff for this retail foray, which will span everything from vending food, groceries, consumer staples, flowers, medicines and railway tickets, depending on the location and potential of each identified retail pump.
To start out, IOC will do a pilot with 50-60 outlets in a single region along the lines recommended by Technopak.
If successful, the retail network will be rolled out over the next two years with a majority of the investments being made by partners and dealers, with IOC getting a share of the business.
India’s largest firm, which also features in Fortune magazine’s global 500 companies by revenue, IOC expects the retail business to contribute a total turnover of around Rs3,000 crore when rolled out fully. In comparison, India’s largest listed retailer, Pantaloon Retail (India) Ltd, had sales of Rs2,358.47 crore for the nine-month period ending March.
Globally, petrol pump-based convenience stores have developed into large businesses with companies such as Royal Dutch Shell Plc., Caltex Australia Petroleum Pty Ltd, and BP Plc. generating profits from convenience store chains.
India’s organized retail business is quite nascent, constituting 3%, or $6.4 billion, of an estimated $200 billion Indian retail business. Consultant KPMG estimates that the share of organized retailers will reach $23 billion by 2010. A KPMG survey says most large retailers expect to grow in excess of 40% per annum in the next three years.
IOC, which racks up losses on its core fuel sales at such stations, is hoping it can benefit from that growth and start generating profits from its essentially existing, sunk cost.
To lower its risk though, it’s keeping its investment in the retail foray low by franchising the space to organized retailers and also allowing dealers who have the wherewithal to invest in this business on their own to do so. Almost 45% of its retail outlets are situated on land owned by the company.
IOC’s branded auto fuels have garnered a larger market share than its overall share in unbranded fuels. As a result, IOC feels confident that leveraging its understanding of the consumer and strength of its partners, it can make a success of this business.
“Forecourt retailing, which means selling merchandise in a petrol pump with extra space, is a very successful format of convenience stores globally,” says Gibson Vedamani, chief executive officer, Retailers Association of India. “IOC’s extension in highway petrol pumps will be unique, as highway traffic by cars has started growing. But it will take time to mature. In India, we have different customer profiles, which need a different kind of retail variation. If IOC can cater to all sets of customers with different models, then it would be successful.”
IOC and its other public sector compatriots first began experimenting with convenience stores at their petrol pumps 10 years ago.
“We built a network of 340 Convenios, but, frankly, we were focused on fuel retailing, improving the customer experience, reducing adulteration, upgrading our retail outlets,” says Behuria. “As a result, we parked Convenios. Now that our fuel retail initiatives are on track, we are focusing on the non-fuel retail business as this is the right time.”
In a related development, IOC has also inked a deal with Future Group and Ansal Properties & Infrastructure Ltd to set up fuel retail outlets at malls being built by them.