Dealer pressure fuels Essar's retail revival

MUMBAI: Essar Oil is set to reopen its 300 odd closed petrol pumps and commission about 400 new pumps all over the country after its dealers threatened to walk out of the arrangement with the company.

At a time when other private fuel retailers have stopped their expansion plans, the company will expand its network to about 900 petrol stations by the end of September this year. Fuel supply to the pumps will be restricted and so will their marketshare, since they will sell fuel at prices much higher than the public sector oil companies (PSU).

The decision to keep a bare-bone retail network alive is prompted by pressure from the petrol pump franchisees who have made investments in land and equipment at the outlets. Many of them had threatened to opt out of the arrangement with Essar Oil, after the company stopped fuel supplies to them 15 months ago in an attempt to cut its losses.

Retail selling prices of the PSU oil companies are kept artificially low by the government, even though international crude oil prices are touching all-time highs. Their losses are however, being compensated for, by the government.

Private companies like Reliance Industries (RIL) and Essar Oil, who have no such safety net, were bleeding with losses per litre of fuel, at one time, touching Rs 10. In June, they decided to increase their fuel price by Rs 2.50/litre above the PSU selling price.

They have since seen a drastic fall in sales, with their marketshare now negligible. Essar Oil had limited fuel supplies to only about 100 of its franchisees. However, the company has now decided to keep all its outlets open, and will compensate the franchisees for their losses.

In a letter to the franchisees, a copy of which is available with ET, Essar Oil chief operating officer (COO) Raj Varma has said that the franchisees will be paid an ad hoc compensation of 12.5% of the investment made on their retail outlet as well as land acquisition.

They will also be paid the regular dealer commission per litre of fuel sale plus a rental at 5% of investment. However, the retail selling price of fuel will be kept higher than the PSU prices thus limiting sales (and losses on the sale). International oil prices have touched new highs this week and the losses are now in the region of Rs 3.50/litre on petrol and Rs 5.50/litre on diesel.