Managerial Economic Castrol

Presented by Faraz Muhammad Khan Mehwish Aslam Saba Khalid MBA E 1D

Agenda
Industry Overview Major Players Introduction to BP and Castrol BP, PSO and Castrol The story behind Management Problem Demand Supply Determinants Competition SWOT and Porters Five Forces Market Structure, Conduct and Performance Management Issues Management Initiatives Recommendations

Industry Overview
Global energy consumption is expected to increase steadily over the next twenty years Global supply and demand trends are shifting as economies and populations grow Rapid economic growth

Developing countries need cheap, abundant and an environment-friendly source of energy

Industry Overview
The four sources of energy in Pakistan are power, gas, petroleum and coal About 844 million barrels of crude oil reserves have been discovered, of which 535 million barrels have already been produced Only 18 percent of oil need catered by local production Import the remaining 82 percent Consumption of oil has declined by 3.3%

Industry Overview
Decline in Oil consumption due to
Availability of alternatives
Relatively cheaper fuels natural gas and liquefied petroleum gas (LPG)) Low demand of Light diesel oil (LDO) in agriculture Massive increase in the use of CNG and natural gas

Major Players
Marketing, refining, distribution and retailing
Shell Pakistan Limited Caltex Oil (Pakistan) Limited Pakistan State Oil Company Limited Total PARCO Limited M/s Bosicar Pakistan Limited and Attock Petroleum Limited Oil refineries, National Refinery limited Attock Refinery limited Pakistan Refinery Limited Pak-Arab Refinery Limited

Exploration and production players Oil & Gas Development Company Ltd Pakistan Petroleum Ltd

BP Pakistan Exploration & Production

Pakistan Oilfields Ltd Shell Exploration Offshore

British Petroleum
Started its operations in Pakistan in1978 The company achieved first oil production in 1982 BP Pakistan is one of the largest foreign investors in Pakistan Currently producing 22 per cent of the country's oil and 6 per cent of its gas BP Pakistan (BPP) operates from three locations i.e. Islamabad, Karachi, with major operations in Badin

Castrol
BP deals with different lubricants worldwide Limited scope to Castrol lubricant in Pakistan Its a very small unit of BP Pakistan and accounts for 1/40th of company's product Caters to industrial and automotive customers

Castrol
Castrol came in Pakistan through a royalty agreement with Pakistan State Oil (PSO) PSO has 3800 retail outlets and it was wise of BP to handover the production and marketing of the product to them BP gets royalty of 2% from the sales of Castrol Castrol became the industry leader in the beginning The brand loyalty was there until competitors like Shell, Caltex, Total and other smaller brands entered the market

Castrol, BP and PSO

Management Problem

Why did Castrol sales reported a negative growth rate where as the vehicle industry showed a positive growth rate?

Total Vehicle Parc: 1991-2008

9.4

10 8.6 7.9 8 7.2

6.4

6 Million 5 4

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Vehicle Parc Growth by Space

gr 10% 5 MCO PCO CT 4

Million

gr 9%

gr 8%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Castrols Demand and Supply

Demand: Dependant on a number of factors income, advertising, distribution, product availability, usage and competitor pricing and actions Supply: Raw material pricing Government regulation Taxes Number of suppliers Technological changes Reduced control of BP As PSO has its own range of Lubricants as well that acts as Castrols competitor

Competition
Total Lube Market - 2006
Shell Caltex Castrol Other MNC's Imported Smuggled Spurious

Shell 13%

Caltex 8% Castrol 7%

Local Producers

Local Producers 46%

Other MNC's 5% Spurious 15% Smuggled 3% Imported 3%

SWOT Analysis

Strengths Established Brand Strong Brand Equity Financial Stability Experienced team at BP Global Presence Strong retail network (3800 Petrol pumps of PSO)

Weaknesses
Tarnished Brand Image because of faulty distribution High Price Lack of motivation from PSO Lack of expertise at PSO which destroys the marketing efforts Unrealistic targets Unhappy workforce PSO high influence on product marketing and sales

Opportunities Increase in vehicle growth rate means higher consumption of lubricants Expand in CNG and LPG lubricants MNCs might stop operation because of political instability and PSO could take advantage of it

Threats Cross Dumping Increase in smuggled and counterfeit products Competition might intensify Political instability might disturb BPs operations here also

Porters Five Force Model

Relating the Five Forces

COMPETITION Moderate concentration of the firm Low switching cost Low product differentiation Competitive pricing

ENTRY BARRIERS High entry barriers because of Cost R&D Competition Reputation Brand Image

Level of Growth and Sustainability of Industry Profits

BARGAINING POWER OF SUPPLIERS Low bargaining power because majority of the raw material ( oil, formula, HR and R&D) is in-house

BARGAINING POWER OF BUYERS High bargaining power of Retailers Wholesalers As they can dictate their terms and have high influence on the market Low bargaining power of customers

SUBSTITUTES No substitutes available in the market

Market Structure
Four firm concentration = 0.71
Local producers + Shell +Caltex+ Castrol Higher concentration

Herfindahl Hirschman Index = 2374.25

Closer to 0 = Not concentrated according to HHI Room for more players High technological improvement High Research and Development costs Entry Barrier are high Distribution Expertise Price sensitive Brand and Image conscious

Conduct
Consumer price range between Rs 550.00 Rs 700.00 for a 4 liter pack Price sensitive Demand for lubricant is highly elastic No customer loyalty

Conduct
ECP 100% Taxes 20% Retailer 14% Wholesaler / Sub- Dist 2% Distributor 2% PSO Margin 7% Logistics 2% COGS 53% 0 100 304.1 200 300 400 500 600 40.0 10.4 11.0 10.5 80.0 570.00 114.0

Performance
PSO earns a margin of 7% of the ECP ( End Consumer Price) Margins of PSO are high

BUT why are sales declining???

Management Issue
Channel wise Break-up

Non-Franchised w/shop Franchised w/shop 4% 1 % Spare Parts Shop 1 7%

Forecourt 21 %

Oil Shop 57%

PSO Route to Market for CASTROL

Distributors (80%)

Forecourts / Petrol Pumps (20%)

High Street (60%)

Wholesaler (40%)

Franchised workshops

Lube Shops

Garage

NonFranchised Workshops

Service Stations

Value Chain Analysis

ECP 100% Taxes 20% Retailer 14% Wholesaler / Sub- Dist 2% Distributor 2% PSO Margin 7% Logistics 2% COGS 53% 0 100 304.1 200 300 400 500 600 40.0 10.4 11.0 10.5 80.0 570.00 114.0

Conclusion

Management Initiatives
Take over only the distribution of Castrol Hired a separate sales team from the industry Margins of the value chain members are now strategically determined They have now calculated ROI on the basis of the value provided by the channel members It helps them capture the margin which was passed onto the channel members

Recommendations
Targets to be lowered by PSO Assign targets area-wise Penalties Restricting supplies Packaging Excessive marketing and brand building efforts

Q & A Session