AGENDA: Anything to petrol but price? - In a week of mergers that highlighted the importance of size and economies to fuel firms, Claire Murphy and Binnur Beyaztas report on alternative efforts to market petrol

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.

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.



Profit pressure



Why the sudden rush for partners? In a word, margins. The cut-throat

market means that oil companies struggle to make money from selling

petrol.



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

services.



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

supermarkets.



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

fight.



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.



Shell counterattack



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

street.



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

with Argos.



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

soonest.



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

Esso.



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)

Source: Datamonitor



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