Esso’s tiger bared its teeth last week with the surprise
announcement that parent company Exxon had put together the world’s
biggest merger, with rival Mobil.
The dollars 82bn (pounds 60bn) deal itself was large enough to make City
analysts take notice, but other developments in petrol retailing in the
same week made it doubly significant. French company Total unveiled its
takeover of Belgian competitor PetroFina, while Shell confirmed that
merger talks with Texaco had been called off.
The deal makes Exxon the world’s largest oil firm, followed by Royal
Dutch Shell and BP Amoco.
Why the sudden rush for partners? In a word, margins. The cut-throat
market means that oil companies struggle to make money from selling
Differentiating petrol is a tough game - all the main players have
standard offerings, so no one brand stands out.
In a market that has competed chiefly on price, the only option is for
companies to keep squeezing costs and investing in added value
This means getting together and taking advantage of economies of scale
in buying, managing and marketing.
In the UK, the market has been complicated further by the impact of
Between 1996 and 1997, supermarket forecourts increased their share of
the market from 18.8% to 23.3% (see chart). This rise is even more
remarkable when you bear in mind that supermarkets have only 1000 sites
between them, compared with Esso’s 1874 and Shell’s 1841.
For the big three UK petrol retailers - Esso, Shell and BP - marketing
is particularly significant as they search for ways to persuade drivers
to seek out their forecourts over those of their rivals. For smaller
brands, such as Elf and Total, it becomes crucial.
The companies have adopted a combination of price competition and
diversification into retail to raise their game. Both Esso and BP have
linked with the supermarkets to lure motorists onto forecourts. Esso
signed a deal with arch-rival Tesco last month to open Tesco Express
shops on Esso forecourts.
BP has struck a similar deal with Safeway, while Elf has announced it is
to build more Somerfield stores on its sites.
Shell has chosen to fight back on the supermarkets’ own turf, recruiting
former Tesco marketing chief David Robey in September to lead the
The firm has been investing heavily in non-petrol retailing over the
past year, and advertising for the brand through J Walter Thompson has
focused on the convenience of its Select forecourt shops.
To increase the prominence of the shop, Shell has even opened one on
London’s Strand, which is not attached to a petrol station. The store
stocks all the kinds of products you would expect to find in a Tesco
Metro - including snack foods, newspapers and chilled ready meals.
These products offer significant profit potential. It also means that
Shell is competing directly against the supermarket which has made the
most impact on the petrol market. Tesco increased its market share to
7.8% last year, up from 6.3% in 1996.
Moving further into retail not only offers substantially higher margins
than petrol, but it also offers the likes of Shell and BP increased
exposure of their brand.
Loyalty schemes, for so many years the mainstay of petrol marketing,
have given way to reduced prices.
Market leader Esso had relied on its Tiger Tokens loyalty scheme since
1986. But two years ago it was abandoned in favour of Price Watch, a
scheme designed to position the Esso brand as the cheapest on the high
This was a direct counter to the supermarkets who had been pricing
petrol low as a loss leader to draw consumers into their stores. Esso
has ploughed pounds 5.5m into advertising Price Watch over the past
year, the bulk of its ad budget. But Esso’s market share still fell from
20.3% to 18.7% last year.
BP’s ad spend has been modest compared with its larger rivals - pounds
2m for the year to date (AC Nielsen MEAL). But it has been put to work
promoting the BP/Mobil Premier Points loyalty scheme, run in conjunction
Shell has also upweighted its investment in its Smart loyalty scheme.
Smart is now the most extensive multi-partner loyalty scheme operating
in this country.
Although the Exxon/Mobil deal will give Shell and the supermarkets a
rival with deeper pockets, it is BP which will feel the effects
BP struck a joint deal with Mobil two years ago, which saw all of
Mobil’s 800 petrol forecourts rebranded in BP colours, while Mobil took
charge of the companies’ lubricants business.
Mobil’s merger with Esso has left the future unclear. A spokeswoman for
BP said: ’The merger is sudden and we haven’t had time to discuss the
implications. But it will have an impact.’
This could mean Mobil making a return to the high street by claiming
back its forecourts and branding them back to Mobil, or more likely to
The deal will have two short-term implications - Esso will have the
capability to finance an ever fiercer price war and the supermarkets are
sure to bite back.
In the longer term, it is the smaller players who will lose out. Texaco,
with 4.5% of the market may begin to wish its engagement to Shell had
led to marriage, while Total, Elf and Jet will find it difficult to
match dropping prices.
But the challenge for each company will be to work out if it’s worth
ploughing more money into building brands in a market intent on
competing almost solely on price.
Petrol sales share
Company 1996 1997
Supermarkets* 18.8% 23%
(includes Sainsbury’s and Tesco)
Esso 20.3% 18.7%
Shell 17% 16.7%
BP/Mobil 14.8% 13%
Texaco 4.4% 4.5%
Total 4.3% 4.3%
Elf 3.1% 4%
Others 14.8% 15%
(includes Jet and Fina)