RPS DOWNSTREAM
– RETAIL
RPS Energy is part of RPS Group, a
FTSE 250 company with a turnover of $700m. RPS Energy is one of the world’s leading suppliers of independent commercial advisory services, project management support, and transaction support for the energy sector. Our clients include Governments, National Oil Companies, Integrated Majors, Independents, and Financial Institutions worldwide. The Downstream practice of RPS Energy has assembled a team of more than
50 sector specialists who have 20+ years extensive practical business experience across all elements of the
Downstream Value Chain. Our clients tell us that this provides a uniquely differentiated consulting service.
Nov 2009
This paper deals with the continued challenge for oil companies of how to improve and indeed maximise returns, both for existing retail networks as well as ensuring new retail expansion benefits from the structures and ideas proposed below.
The focus of our argument is that a combination of decisions taken on:
the appropriate channel of trade to operate the network,
operational improvement to drive efficient and standardised operational processes across a network at site and field support level,
organisational efficiency to create a cost efficient and customer responsive off site support structure to run the network, can drive significant and sustained improvement in retail returns for existing networks, and for new retail networks helping to ensure strong initial returns.
As the oil retail sector has developed a variety of different channels of trade have emerged.
Many of the choices companies make around channel of trade are informed by the level of complexity of the retail offer to the consumer, the level of influence & control the oil company wants to exercise over the deployment of the offer, and the level of margin capture (for fuel and all non fuel income streams) to the oil company. These choices and options are interlinked and typically the end result is that the oil company makes ‘polarising’ choices at either end of the scale:
Directly managed, Company Operated channel of trade is often used to run Company Owned sites (COCO operation), for higher complexity offers, as this gives the oil company 100% control of the deployment of the offer and 100% margin capture. However the cost to serve is high
For Dealer Owned sites, Dealer Operated channel of trade is often used to run networks that are owned by Dealers (or Distributors), for lower complexity offers. The oil company has a low level of control, and limited income capture (typically low income from fuel and no income capture from non fuel income streams). However the cost to serve is low
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In recent years the emergence of franchising as a channel of trade (Company or Dealer Owned,
Franchise Operated- COFO or DOFO) has seen less polarising options, with the level of control and margin capture more balanced between both parties. Franchising also brings entrepreneurial focus and passion to the operation, driving higher standards. In Europe, BP has been successful both at rolling out DOFO franchise operation for its ‘BP Connect’ retail offer in the UK, as well as exerting increased level of control and margin capture from COFO operations across a number of European markets. In the USA, Exxon Mobil have extended their ‘On the
Run’ franchise from DOFO sites into JOFO (Jobber Owned Franchise Operated) opening a total of 450 Franchise sites in the USA, and have now sold the franchise to Circle K (a major c –store operator).
Outside of the oil industry and into wider retailing and foodservice, a number of global food and coffee players (McDonalds, Starbucks, Burger King, KFC and others) and apparel retailers
(Marks & Spencer, H&M, Nike and Reebok) have expanded rapidly, especially in the Middle
East, Eastern and Central Europe and India and China. We believe the ‘early adoption’ and success of franchising in retail and food is an indication that franchising is a business model that can be deployed successfully in oil industry retail.
As retail offers become more complex, driven by increased competition and consumer expectations, we believe the franchise channel of trade, is an opportunity for oil companies to maximise returns across networks, either converting existing networks, or using franchising from the start for new networks. This can be achieved through:
Converting whole or part of site networks from COCO operation to COFO or DOFO to drive reduced cost in delivering and administering the offer, while using a strong franchise model to ensure consistency and margin capture. Conversion to DOFO, decapitalising (selling) sites can also significantly reduce capital employed improving return on capital
And/or from:
Using franchising to increase the level of participation in DODO (Dealer Owned Dealer
Operated) networks using DOFO franchising, allows the oil company to deploy more complex offers, extending a more professional and consistent brand image across the market.
Franchising also drives increased margin capture for the oil company, while still ensuring the cost to serve is optimised
These opportunities are shown in the graphic below:
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Figure 1: Channel of Trade Opportunities
Opportunity 1: COCO to franchise driving reduced cost to serve
1
COCO
COFO
DOFO
2
DODO
JOFO
Opportunity 2: DODO to franchise driving increased margin capture & delivery of more complex offer
Unbranded
L
Control of Offer,
Cost to Serve
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Closely linked to channel of trade is operational improvement and operational cost to deliver a retail offer across multi site networks. We define operational improvement as all on site costs, as well as costs to service field based support teams (e.g. Territory Managers). The increasing level of complexity of retail offers, increasing regulation in many markets and increased focus on
Health and Safety have all increased operational complexity and cost across all channels. This also poses a challenge for companies looking to expand into retail in new or existing markets, and so adopting the principles outlined in this paper from the start can help drive strong returns from the start.
In many markets, oil companies have attempted to simplify and reduce cost through reducing channels of trade and focusing on implementation of operational models across larger number of sites. Shell Retail in the UK would be a good example of this, with Shell moving to operate all
900 UK sites either as DODO sites or commission operated for Company Owned sites.
However implementing efficient operational models has been a continued challenge for oil companies and based on our experience there are a number of reasons why programmes are not successful. Key reasons are that they are too complex and attempt to tackle multiple issues, they focus on cost reduction, not on sales and margin building, and they are too restrictive and do not allow the Site Manager any ‘flex’ or latitude.
Furthermore programmes are often technology and process focused, just explaining what people need to do, not why they need to do it, with limited staff training and engagement. They are implemented across large numbers of sites within the same channel of trade, and following initial implementation and rollout, limited focus is given to sustaining the programme, meaning the discipline of implementation & efficiency savings quickly reduce.
Despite these challenges we believe and have exp erience of designing and implementing ‘lean retail’ programmes to drive operational improvement. The key elements of successful programmes have included:
Initial assessment of the realistic opportunity or ‘prize’, to allow realistic targets to be set
A foc used ‘toolkit’ of tools, processes and management information, targeting major on site cost blocks as well as building sales & margin through up-selling and other tools. Supported by structured visit plans to drive efficient off site field support
Initial implementation lead by peers (other Site Managers/Assistant Managers) rather than
‘head office experts’. Focus on long term sustainability of implementation using peer group review of how each site continues to implement programmes over time
Allowing Site Managers to flex the implementation of programmes, as long as they achieve the minimum opportunity or ‘prize’ at site level
Ensuring site staff are kept informed on the progress of the programme and are also incentivised on an ongoing basis, however small the incentivisation may be in monetary terms
A major oil retailer in Europe and Southern Africa has achieved non fuel sales growth of +6%, on site labour savings of 15-20% and non fuel inventory reduction of 15-25%, from successful implementation of an operational improvement programme. Furthermore they have been able to sustain delivery of these savings, after the initial implementation.
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RPS DOWNSTREAM
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In addition to managing operational improvement, organisational efficiency, that we define as the ‘head office’ off site organisational structure and support cost to support the retail site network, is the third driver to maximise returns from a retail network.
Among many oil retailers, we see evidence that following changes to channel of trade (going from high involvement, higher cost channels such as COCO) and/or having implemented operational improvement programmes to reduce cost, retailers are slow to implement appropriate organisational efficiency programmes to reduce costs and complexity in line with the new channel and operating models.
The key is to align the structure and size of the organisation to the revised requirements of the channel and partners (e.g. Franchisees, Dealers) rather than the historical oil retailer organisational structure. To be organisationally efficient the structure also needs to focus on providing strong resource for activities that add high value and margin to the channel & partners and reduce to a minimum or stop totally activities that do not add high value.
Table 2 on the next page, shows activities that are typically important to the oil company, and also the level of importance to a 3rd party site operator (Franchisee or Dealer). The opportunity for the oil company is to focus resource on the functions that add value and margin for the partner (shown in the yellow box). For lower added value functions (shown in the red box), outsourcing or reducing the emphasis and support on these functions can drive a customer focused (both to partners operating the sites, and consumers) and efficient organisation.
We have seen one example of a large oil retailer, who changed the channel of trade from COCO to DODO (selling sites to Dealers and reducing the capital employed), then significantly reorganised and reduced the off site organisational structure. The outcome was that the overall return to the oil retailer was the same as before, but with virtually no capital employed.
This is a good example of where the organisational support structure and cost is in line with the new business model and level of margin capture. If the business is moving to a Franchise or
Dealer model where non fuel income could be c 10% of sales, vs. 100% of available margin for a COCO network, the organisation should be designed ‘top down’ based on the revised income, rather than ‘bottom up’ reorganising the current structure.
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Figure 2: Organisational Efficiency Opportunities
Opportunity for higher, more effective support in these areas
Dry good logistics
Store promotions
Fuel logistics
Operational support
Category management
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Invoice processing
HSSE Advice
Web presence
Opportunity for less support in these areas
Brand marketing
Environmental issues
Importance to Oil Company H
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RPS DOWNSTREAM
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We believe that, there is a strong opportunity to improve and maximise returns for existing networks, and structure new networks efficiently from the start, focusing on three key issues:
Channel of trade leveraging franchising (DOFO &/or COFO) to drive returns. Decapitalising to
DOFO to reduce capital employed in existing networks
Designing and implementing a programme to drive operational improvement, targeting site level costs and sales improvement to drive a material improvement in returns
Redesigning the off site organisational structure to drive organisational efficiency and focusing on high added value activities to support new channel and operational models
The sequencing, of the three issues you deploy first, second and third will depend on the business priorities and an assessment of which issue offers the most material efficiency and profit opportunity
We have experience of designing and implementing programmes covering all three issues and would be happy to look at how we can assist your organisation
For further information, or to arrange an exploratory conversation with our senior specialists, please contact:
Martin Alford M +44 7583 161 661 E martin.alford@rpsgroup.com
W www.rpsgroup.com/downstream
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