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Old 23rd April 2015, 10:07   #1
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Default Petrol Pump Business: No longer as lucrative?

Related Thread: Link (The Petrol Pump Story - How Petrol Pumps Operate)

Full article on Economic Times. An excerpt:

Quote:
A proliferation of pumps has led to lowering of average volume at filling stations and left fuel retailing companies such as Indian Oil Corporation (IOC) and Hindustan Petroleum Corporation (HPCL) struggling to find new dealers.

In the financial year that ended in March, IOC and BPCL, which operate two-thirds of India's filling stations between them, received interest for fewer than half of about 24,500 dealerships they wanted to appoint.

IOC received 43 per cent response for 14,700 locations and HPCL 56 per cent for 9,800 locations. HPCL received more than one application in just one-third cases. BPCL did not provide any detail.
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Old 23rd April 2015, 10:26   #2
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Default Re: Petrol Pump Business: No longer as lucrative?

Basic economics (supply & demand) coming into picture here I guess.

From the article, it looks like Rs. 30 Lacs paid to HPCL/BPCL/IOC gets the pump owner the license and also the infrastructure setup for them on their land. If the pump owner already owns the land (ancestral property), it still looks like a pretty good deal to me.

Some time back, I had read that pump owners get Rs. 1.25 per litre of petrol or diesel sold. At average sales of 160,000 litires per pump, it works out to be an income (revenues) of Rs. 2 Lacs per month per pump.

"Averages" don't mean much though
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Old 23rd April 2015, 10:49   #3
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Red face Re: Petrol Pump Business: No longer as lucrative?

Is it also because of skewed tax rates in different states/municipal limits? I have rarely come across any new bunks being opened in the Mumbai/Thane municipal limits. No wonder half of Thane refuels in Mumbai due to the Rs 2 difference in the fuel cost.

I remember one of my acquaintances had dared to apply for the bunk ownership looking at the budgeted cost advertised in the newspaper. He later realized he may have to spend an additional 30-40% more than the initial investment to kick start the operations. The ROI was about 3-4 years down the line with continuous investments in the form of maintenance, salaries etc always being there in the initial years. The guy wised up and dropped the idea.
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Old 23rd April 2015, 11:03   #4
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Default Re: Petrol Pump Business: No longer as lucrative?

Couple of weeks back I was researching on the procedures or required qualification to apply for a dealership. You need a deposit of INR 25 Lakhs and INR 12 Lakhs for urban and rural areas respectively. however these amounts will vary on case to case basis, meaning there is no cap on the value if it is a prime location.

Over and above this, now, the oil companies, insist on land availability even during application stages a min. of 8000 to 10000 sq. ft either in our name or a well executed contract / lease for a longer duration of atleast 5 to 10 years. The cost of infrastructure is extra. In essence, one cannot apply without having INR 1.5 Crores to INR 2 Crores for a retail liscence in southern tamilnadu, Metros is even more. This will deter most of the applicants and eliminates the middle class aspiring to make it big and opening the doors to people with money, who inturn have other means of making money faster than a retail outlet.

Thus the response is poor and this might not improve unless the oil companies encourage budding entrepreuners with change in application criteria.
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Old 23rd April 2015, 11:36   #5
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Default Re: Petrol Pump Business: No longer as lucrative?

I think this is good, as it will force consolidation and we will have a few big chains like Shell, Reliance, Essar etc with consistent standards and quality. As a consumer, my main priorities are the quality of the fuel, and of the overall experience (space, cleanliness, professionalism of the staff, other facilities available etc), I couldn't care less whether the petrol station market is friendly to middle-class entrepreneurs.
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Old 23rd April 2015, 11:57   #6
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Default Re: Petrol Pump Business: No longer as lucrative?

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Originally Posted by varunanb View Post
This will deter most of the applicants and eliminates the middle class aspiring to make it big and opening the doors to people with money, who inturn have other means of making money faster than a retail outlet.
I think retail business (any retail) is not for middle class aspiring to make it big - and especially something like a petrol station where he cannot control the cost of acquiring the goods that he sells. He may be able to make a decent living out of it, but make it big, I doubt. Maybe if what he sells is really unique, but then probably the entry barrier will be too high. He might "see" a lot of money in the business, but it will be invested in the inventory. At the end of 5 years, he might not actually save much more than a salaried person - while having double the tension.

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Originally Posted by chncar View Post
I think this is good, as it will force consolidation and we will have a few big chains like Shell, Reliance, Essar etc with consistent standards and quality.
It might result in all pumps in an area being controlled by 2-3 people with consistent standards everywhere - good or bad.
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Old 23rd April 2015, 11:57   #7
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Default Re: Petrol Pump Business: No longer as lucrative?

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Originally Posted by smartcat View Post
Some time back, I had read that pump owners get Rs. 1.25 per litre of petrol or diesel sold. At average sales of 160,000 litires per pump, it works out to be an income (revenues) of Rs. 2 Lacs per month per pump.
That's peanuts if you minus the operating cost of the pump, or did you mean something else?
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Old 23rd April 2015, 12:04   #8
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Default Re: Petrol Pump Business: No longer as lucrative?

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It might result in all pumps in an area being controlled by 2-3 people with consistent standards everywhere - good or bad.
True, but I would rather have these 2-3 people (probably more like 4-6 brands) be professionally run corporate entities that have their image to think of and shareholders/board to answer to, than be some local politician investing his black money into a petrol pump. There is a risk of poor service with both, but the risk is much greater with the latter.

So long as the government ensures that there is no cartelization and anti-competitive behavior, I think consolidation into company owned petrol bunks with a few PSUs and private companies is fine.
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Old 23rd April 2015, 12:23   #9
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Default Re: Petrol Pump Business: No longer as lucrative?

In my part of the country, especially so in and around Kochi, many people who have petrol pumps actually want to close them down.

I recently received an indirect offer from a pump owner whom I know. His pump (in a semi- rural area on the outskirts of a town) is just 9 years old, and sits on 17,400 square feet land and he asked Rs. 2.70 crores for it, that is around Rs. 1,500 per square foot. The property adjacent to it has an asking price of more than 2,000 per square feet.

The problem is that once you start a pump, it is very difficult to close it down and with real estate prices moving into the stratosphere, it is always more profitable if you construct a commercial building and let it out.

The situation is even more worse in towns where almost every owner is looking at closing down their pump and redeveloping the land into commercial complexes.
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Old 23rd April 2015, 13:14   #10
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Default Re: Petrol Pump Business: No longer as lucrative?

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Originally Posted by varunanb View Post
In essence, one cannot apply without having INR 1.5 Crores to INR 2 Crores
This is true for doing any business.
If you go franchisee mode, the franchisee fees usually runs in crores, along with a steady stream of basic qualification requirements like what kind of complex, what kind of furnishings, AC facilities, how many sqft of area, parking in the compound etc.

If you don't go the franchisee way (selling petrol is also franchisee, since Oil companies do everything from advertising, to formulation, to supply chain), you will have to bear the above expenses on your own in your business. Therefore you will incur similar costs some or the other way.

Do you find this wrong?

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Originally Posted by fine69 View Post
That's peanuts if you minus the operating cost of the pump, or did you mean something else?
Yes it may be. From this line of business. But then you have regular access to huge daily cash. That ... can be ... used ... in ... hawala economy. And earn commission on it.

Last edited by alpha1 : 23rd April 2015 at 13:17.
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Old 23rd April 2015, 13:24   #11
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Default Re: Petrol Pump Business: No longer as lucrative?

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Originally Posted by fine69 View Post
That's peanuts if you minus the operating cost of the pump, or did you mean something else?
Other than employee, electricity & maybe cost of keeping inventory, are there any other significant operating expenses in running a petrol pump?

Anyway, by "averages don't mean much", I meant that for a pump owner who volumes have fallen to, say 100,000 litres a month because of increased competition in the city or a new fly over bypassing a town in rural area, these averages don't mean a thing to him.
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Old 23rd April 2015, 13:55   #12
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Default Re: Petrol Pump Business: No longer as lucrative?

Land always has been and will be the biggest cost of setting up a petrol pump. If existing land owners do not find it lucrative to setup a petrol pump, no one else will. The only way to bring that cost down, is for Oil companies to relax their minimum area norms. At one time I had heard new pump licences were only granted to kin of freedom fighters, physically handicapped, etc. It comes as a shock that it is open for anyone and is still not seeing takers.
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Old 23rd April 2015, 14:10   #13
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Default Re: Petrol Pump Business: No longer as lucrative?

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Originally Posted by chncar View Post
True, but I would rather have these 2-3 people (probably more like 4-6 brands) be professionally run corporate entities that have their image to think of and shareholders/board to answer to, than be some local politician investing his black money into a petrol pump.
Ah, ok. You are talking about COCO pumps. However, it would be these shareholders/board which may be pushing the companies to look for dealers as the costs involved in setting up and running the outlets can be saved. If they can't find suitable dealers, they may not even set up an outlet in a particular area forcing people to find outlets elsewhere.

Quote:
Originally Posted by smartcat View Post
Other than employee, electricity & maybe cost of keeping inventory, are there any other significant operating expenses in running a petrol pump?
Probably not if the land is ancestral property. Otherwise, the whole equation changes. 2L may not even cover the interests to be paid on the loans.
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Old 23rd April 2015, 14:14   #14
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Default Re: Petrol Pump Business: No longer as lucrative?

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Originally Posted by alpha1 View Post
This is true for doing any business.
If you go franchisee mode, the franchisee fees usually runs in crores, along with a steady stream of basic qualification requirements like what kind of complex, what kind of furnishings, AC facilities, how many sqft of area, parking in the compound etc.

If you don't go the franchisee way (selling petrol is also franchisee, since Oil companies do everything from advertising, to formulation, to supply chain), you will have to bear the above expenses on your own in your business. Therefore you will incur similar costs some or the other way.

Do you find this wrong?
You are right. I was merely replying to the context of the thread implying that petrol pumps are no longer lucrative as a bussiness.

The ROI should be atleast about 4 to 5 years and unlike other franchisee models, you cannot do much to increase the foot fall nor the amount of fuel they purchase. Also the margins are too less even if there is no value addition by pump owners.

The only guarantee is that you have steady flow of cash, that too, until the government plans to develop an alternate road or restrict traffic in the particular stretch.

The probable solution is the oil companies start more of their own outlets or reduce the burden on the indivudual willing to invest.

This is purely from a bussiness perspective and as a customer I would also demand my money's worth of fuel and nothing less. But what is the value for money?
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Old 23rd April 2015, 14:31   #15
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Default Re: Petrol Pump Business: No longer as lucrative?

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Originally Posted by ashua View Post
Land always has been and will be the biggest cost of setting up a petrol pump. If existing land owners do not find it lucrative to setup a petrol pump, no one else will. The only way to bring that cost down, is for Oil companies to relax their minimum area norms.
Perhaps the minimum area norm is well intentioned because the oil company wants repeat customer who don't find it difficult to maneuver in their pumps.
Or perhaps they don't want to shut down the pump while tanker refueling is being done.
Or perhaps it is based on safety standards (safety passage, evacuation in case of fire)

Even if they do reduce the minimum area requirement - the price of land per sq ft remains unchanged. Yes you will have access to more potential bidders. But how many will actually bid still depends on mathematics of profit making, I don't think that will change.

Maybe this is a good realization that the land can be put to a better use in other business ventures than setting up a petrol pump. Of course this will mean that oil companies will revise the commission upwards so as to attract the bidders back.
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