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The central government's decision to deregulate diesel prices might have come as a Diwali bonanza for fuel retailers and customers, but it also means increased competition in the fuel retailing segment. This could eat into the margins and market share of the public sector oil marketing companies (OMCs), including Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL), which dominate over 95 per cent of the retail market.
The diesel price cut of Rs 3.37 a litre from Sunday was the first in the last five years. Diesel rates were last cut on January 29, 2009, by Rs 2 a litre to Rs 30.86.
Diesel sales account for about 55 per cent of overall sales of OMCs. With deregulation, private players Reliance Industries Limited (RIL), Essar Oil and Shell India will corner some share. If Oil and Natural Gas Corporation (ONGC) decides to venture into fuel retailing through its listed-subsidiary Mangalore Refinery and Petrochemicals Limited (MRPL), the company too could garner some market share.
Diesel deregulation means its prices will now be market-linked, making the customer pay more when global crude oil prices rise and vice versa. Global crude oil prices fell to $82.83 a barrel on Friday. Brent crude oil is down over 28.5 per cent since its high of $116 in June 2014.
RIL has been in discussion with its retailers to restart its outlets. So far the dealers have declined RIL's offer. Due to high differential between diesel prices of state-owned OMCs and private retailers, RIL had to shut its fuel retailing business in some geographies. RIL had till 2008 cornered about 14 per cent of diesel sales in the country.
"Deregulation means RIL does not need to tie up with any state-run OMC. Now, RIL only needs to address the commission issues with us," said an RIL retailer. RIL did not send out any communication till the time of going to press.
Meanwhile, MRPL already has a blueprint in place to roll out 120 retail outlets in the first phase of expansion strategy. The outlets will be first rolled out in its base state of Karnataka.
ONGC Chairman and Managing Director D K Sarraf had last month said, "I feel with the current petrol and diesel prices, the time is now right for MRPL (to venture into fuel retailing)."
MRPL has approval to set up 500 retail outlets and its parent company, ONGC, has approvals to set up 1100 retail outlets.
For Essar Oil and Shell India, which are already operating in the market, deregulation paves way to go whole hog on expansion.
Essar, with its 1,400 outlets in place, last year, decided to set up another 1,600 in the next three years, which will make it the largest private fuel retailer.
L K Gupta, MD & CEO, Essar Oil, said, "This move will not only help in controlling the fiscal deficit, but also be advantageous for the consumers, as they will now pay market rates for fuel. Diesel deregulation will bring the private oil marketing companies' retail network into system. This will increase competition, benefiting the end-consumer."
While Shell India has around 100 retail outlets, it has been waiting for deregulation process to start scaling up its fuel retail operations.
For public sector OMCs, the challenge will be to retain their customers. Anticipating the deregulation and competition, these companies have already begun adding frills to their bouquet of services to beat competition. The frills include etiquette training to staff, automation of fuel retail outlets and strengthening of loyalty programmes.
"After diesel deregulation, we expect competition in the fuel retailing space to intensify. However, we have taken measures and are fully geared to meet future challenges," said S Varadarajan, chairman and managing director of BPCL.
BPCL has so far automated 4,408 retail outlets. "Several focused initiatives like Customer Understanding for Business Excellence (Cube), retail outlet maintenance for ensuring maximum equipment uptime and vehicle tracking system are some steps taken for enhancing customer experience and retention. This will hold BPCL in good stead when the market opens up to competition," BPCL said in its annual report.
As part of Project Cube, BPCL says it has learnt that adding small frills such as air pressure check of tyres or providing an oil-change facility free of cost or cleaning up the car's windshield while a customer drives into a retail outlet can create loyalty. BPCL, which has 12,500 across the country, plans to add more.
IOC, the largest fuel retailer in the country with 23,993 outlets, has launched a professional training initiative - Project Chetna - to enhance service standards of customer attendants on the forecourt.
With an emphasis on customer satisfaction, IOC is automating its entire distribution chain, terminal and depot facilities.
During 2013-14, some 1,700 outlets of IOC were brought under automation, taking the total number of automated retail outlets to 6,077. Automating a retail outlet costs about Rs 78 lakh.
IOC says automation will help the customer, dealer, as well as the company. Automation includes providing the customer with a printed bill and providing the details of the transaction done. "Many times customers doubt the litres of fuel dispensed against the amount charged. With automation, if the customer so desires, he can see how the transaction took place and verify the veracity of the same," said an official from IOC.
During 2013-14, the company also launched various mobile applications such as X-Sparsh for enhancing dealers' productivity and X-Snehash for provision of relevant information on-the-go for retail customers. "Such unique initiatives of the Corporation are aimed at profit-oriented approach," IOC said in its annual report.
"From Kashmir to Kanyakumari, we want to ensure our customers get the same experience. We are providing our staff with training in soft skills and have introduced the Club HP Star initiative where we have reduced the service time to customers to half. This is working well," said a senior HPCLofficial.
With diesel being the most used fuel product in the agriculture sector and the transportation industry, which have a direct impact on food prices, cut in diesel prices will cool off inflation. Diesel has a weight of 4.67 per cent in the Wholesale Price Index, the highest among the 670 commodities in the index.
Drop in diesel prices will also bring the government's subsidy bill down, as it will no longer have to reimburse oil companies for selling diesel at below-market price.
Last financial year, the government paid Rs 85,000 crore for selling diesel, LPG and kerosene at below-market prices. This year, the subsidy burden was estimated much lower at around Rs 63,000 crore.
Market-linking of diesel prices will further save the government over Rs 10,000 crore in subsidy payment this year, helping it meet its fiscal deficit target of 4.1 per cent of the gross domestic product.
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