The Hindu Business Line : Pricing and marketing, the key for oil PSUs

FOR ALL those who were at one time part of India's petroleum refining and marketing industry, albeit in the public sector for over three decades, the news item `PSU Oil Cos. question Reliance's diesel pricing strategy' (Business Line, October 11) must have been both interesting and surprising.

Interesting because as a consumer, one would feel happy that competition is at last catching up in the petroleum sector with resultant consumer benefits. The surprise part would emerge from the sad realisation that public sector oil marketing companies (OMCs) did not foresee the emerging competition and plan their marketing strategies to face this eventuality.

The PSUs have argued that what Reliance did on pricing was not strictly within the four corners of law. But this is what marketing is all about — to proactively explore and aggressively snatch sales opportunities. If there is a contravention of regulations, appropriate regulatory/enforcement agencies will take steps to prevent and/or correct loopholes if any.

An article in a business dailyquotes a senior industrialist as saying that "Over the years, FMCG companies had enjoyed the benefits of extremely high margins. Now that's changing, price cuts are a rule rather than an exception. Also, companies realise that playing this card is a good bet with the price-sensitive Indian consumer. Indian consumers evaluate immediately whether it is value for money — that's what needs to be cracked by companies."

Also, the market has entered what is described as the third phase of its life-cycle, when it is near saturation, and there are clearly emerging segments. "In such a scenario, low pricing and value pricing start to emerge, and it becomes a means to retain value and volume growth," says a former marketing executive in a FMCG major.

There have been any number of examples in Indian industry of manufacturers and marketers introducing products for the first time in a market with established brands, employing the principle of "Penetration Pricing" to capture consumer interest and enthuse a purchase decision in favour of their product.

Recall how Karsenbhai Patel of Nirma effectively and successfully introduced his detergent in a market dominated by a multinational corporation. Almost similar was the case of IPCL, which for the first time had to market very large volume of products (compared with industry standards prevailing now) 30 years ago in a market dominated by MNCs such as ICI, Union Carbide and Shell/NOCIL.

When a large-scale private manufacturer emerged on the scene, neither IPCL nor GAIL or Haldia Petrochemicals approached the government to safeguard their interest. The companies fought competition in their own turf in their own way.

Only against international competition did they seek government assistance for physical and fiscal controls against dumping. This was because India was a swing market for polymers and other petrochemicals for international players.

The OMCs have been in the business of marketing operations in India for over four decades. In the case of BPCL, HPCL and IBP, their marketing operations before nationalisation were under foreign brands such as Shell, Mobil, Stanvac and Esso. Only IOC has been an entirely Indian. All the OMCs have over the last 40 years they have been operating in India conceptualised, developed and established sound, effective and efficient retailing networks supported with a well-administered distribution and logistic system.

Unfortunately, however, because of the prevailing demand/supply conditions, the administered pricing system, and the regulatory and statutory directions on various aspects of marketing, the emphasis was more on adhering to controlled distribution and sales than free marketing.

The strength was managing distribution logistics than competitive marketing. To put it rather bluntly "Marketing" was not their forte till the reality of (a) delicensing of refineries by government, and (b) emergence of strong private sector refineries hit them. To say the least, they were ill prepared to get out of the mindset of price control and rationing.

The OMCs were well aware, particularly when in their new agreement on pipeline usage for product transfer, they not only got out of the take or pay clause, they also more or less halved the quantity of product carriage through their pipeline network.

It was only to be expected that with marketing licence available, the private sector would expedite the establishment of retail outlets and adopt marketing/pricing strategies to move volumes into consumption rapidly. After all, PSUs are well aware that diesel and petrol movement and consumption influence refinery throughput and profitability and, therefore, refineries would do all that is in their power to influence quick consumer offtake.

This becomes even more compelling when the private sector marketing operations face constraints of retail distribution and logistics network.

It is about time that both PSU-OMCs and the government wake up to deal with the competitive petroleum industry. The Government has first to give up its indirect control on pricing and allow market forces to prevail. This would mean giving freedom to oil companies on product pricing — a principle not easy to accept.

The Government should remember that it can at any time intervene if prices reach economically unacceptable high levels through both physical and fiscal means and essential commodities/pricing regulation statutes. In case of national emergencies, the Government has other statutory powers to exercise effective control.

In conclusion, PSUs should refrain from approaching their majority shareholder for help in their field marketing operations. They should quickly design systems and implement pricing policies not only to safeguard their market share but also adopt innovative marketing policies to deliver value to consumers. After all, in today's refinery operations, they enjoy enviable margins to support consumer interest.

(The author is Chairman, Gulf Oil India Ltd., Mumbai.)