Reliance Downstream Avatar 2.0

Reliance debuted in the petro-retail in 2004, opening 1432 retail outlets in the span of just two years. It had the testimonials of excellent refinery margin and market effective parameters to push the sales but mid-way, the rules of game changed which lead to close down its operations in the field. It was too young in its first innings of downstream business operations thus, biting the dust.

What factors lead RIL to shut down its operations?

  • In 2007-08 due to the rise in price of crude, the Government shared the price burden and did not transfer the market price to the end consumers (Aam Janta). Bharat Petroleum (BPCL), Hindustan Petroleum (HPCL) and Indian Oil (IOCL) being the Government arms were the beneficiaries of this move as the prices of High Speed Diesel (HSD) and Motor Spirit (MS, commonly known as petrol) were lower in their retail outlets as compared to private retail outlets (Reliance, Essar and Shell).
  • Owner of the nation’s largest refinery, RIL suffered huge losses selling HSD and MS at prices higher than the state-run retailers. On an average, petrol from Reliance outlets cost1 3 a litre, more than that from the PSU pumps.
  • The difference between the prices was big which lead to the change in the business strategy of three private companies, namely, Reliance, Essar and Shell Outlet.

bmnIn 20082 RIL decided to close its downstream operations as there was no level playing field. By that time it had already done huge investment in retail outlets, fuel retailing license, acquisition of fluid dispensing machines and non-fuel retail merchant tie ups.

As subsidy sharing of HSD and MS was taking heavy toll on the current account deficit of the country, in 20123 the Government initiated measures to link HSD and MS with market prices4. This move provided an opportunity to the existing as well as new players as now the market forces were to determine the prices. In 2014-15, RIL started its second innings with opening of 3005 outlets and phase wise expansion plans.

Before moving further, we look at the number of retail outlets by Oil marketing companies in India. Current number of retail outlets depicts the dominance of public sector undertakings.

table 1

What motivated RIL to venture again in downstream business?

  • Reliance X Factor

The cutting edge factor for RIL in the downstream business is presence in backward integration. The refinery is world class with Gross Refinery Margin, GRM, one of the highest in the world. GRM is the difference between crude oil price and total value of petroleum products produced by the refinery.

table 2

Source: Report by Petroleum Planning & Analysis Cell11

So what costs companies in offering a litre of petrol to consumer may cost less for RIL, courtesy its excellent GRM. Suppose market price of petrol is Rs.70, RIL has the cushion to sell more than a litre in the same price to fetch the market segment. But because of the watchdog Competition Commission of India, we will not be able to see the mentioned instance where RIL may sell 1.3 litre of petrol to end consumer on the same Rs. 70 even though market is now de-regulated. However, it would be interesting to see how the Government reacts if RIL initiates a price war in the highly PSU dominated segment.

  • Pat on the back

Marketing Effectiveness (ME) is a measure of a company’s effectiveness in a particular market. If a company’s outlet share is X per cent and if its market share is also X per cent, then its ME equal to 1 (ME=X/X=1).

Reliance felt that it was possible to have just 3 per cent of outlet share and yet have more than 12 per cent of market share. This dream was achieved during the financial year 2005-200612. Marketing Effectiveness (ME) is a measure of a company’s effectiveness in a particular market. If a company’s outlet share is X per cent and if its market share is also X per cent, then its ME equal to 1 (ME=X/X=1). For long, IOCL and HPCL, BPCL were content with achieving ME of 1 as everyone had believed that it you had 40 per cent of outlet share, you would get 40 per cent of market share of total volume(s) of product sold. The theory reflects the notion that all stations are built alike, managed alike and hence, would sell alike. Not many efforts were made until late 1990s to brand this homogenous commodity. BPCL was first to break this myth with its ‘Pure for Sure’ campaign. This gave an instant result with its ME going beyond 1.

  • History witnessed similar instances

History has seen private companies manoeuvring out of the box marketing schemes to boost their sales. West has witnessed the storm from ‘Flying J’ which with just around 200 stations had become the Number112 diesel retailer in North America, beating the likes of Exxon Mobil, Shell, BP and Chevron.

If we do a SWOT Analysis of RIL’s petro-retail business, we would observe the following:

table 3

With market sentiments up and a stable government in the centre, RIL could reiterate its performance of first innings. It has the experience that could come handy when it plans to fully operationalize all its outlets in the coming days. It can cause the big public sector undertakings to set new rules in the downstream segment.

One thing is sure; ‘Ache Din’ for end consumer.

Siddhartha Bhatnagar

Post graduate in Energy & Infrastructure domain, currently working as an upstream business analyst in Hydrocarbon Accounting.


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Posted by The Indian Economist