DEMAND AND SUPPLY ANALYSIS OF LUBRICANT OIL | August 7
2012
| NEHA RAGHUVANSHINISHANT JOSEPHPANKAJ KUMAR BOTHRAPRIYOJEET KUMARPRIYANKA SHARMA | Submitted to: | KIRLOSKAR INSTITUTE OF ADVANCED MANAGEMENT STUDIES

OVERVIEW OF CASTROL:

Castrol India Limited (CIL) started its business operations in India way back in 1919 and established itself as a dominant brand in the premium automotive lubricants segment over a period of time. Prior to liberalization of the Indian economy in 1991, CIL, like other private sector players in the Indian lubricants industry, was focused on its survival as there was a complete dominance of public sector oil companies cornering 90 per cent of the market share. After liberalization in 1991, CIL found itself in a growth phase — its business environment was driven by great growth prospects, private players were allowed to import base oil, administered pricing system was discontinued, and the economy started growing at a higher rate. CIL increased its market share from 6 per cent to 20 per cent and its focus shifted towards ‘creating more capacity, modernizing infrastructure, and improving quality Castrol India Limited, a 71% subsidiary of BP, is a leading lubricants player in India, with ~20% market share of the domestic automotive lubricants industry. It manufactures and markets a range of automotive and industrial lubricants. It markets its automotive lubricants under two brands - Castrol and BP. The company enjoys leadership in most of the segments it operates in, including tractor oils, car engine oils, two-wheeler 4-stroke oils, and multi-grade diesel engine oils. Castrol has the largest manufacturing and marketing network amongst the lubricant companies in India. It has five plants across the country, including a state-of-the-art manufacturing facility at Silvassa. It has a distribution network of 270 distributors, servicing over 70,000 retail outlets. Though Castrol is present in both automotive lubricants and industrial lubricants, its strengths are in the automotive segment. In CY11, the product mix between the automotive and industrial & marine segments was ~86% and ~14%, respectively. EBIT contribution was also similar, with the automotive segment contributing ~84% and the industrial and marine segment contributing ~16%.

The strong brands of Castrol are Castrol Activ, Castrol Power T, Castrol GTX, Castrol EDGE, CRB Turbo and CRB Plus. The major competitors whom Castrol is facing from other brands are
Indian Oil Corporation, Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (it is an oligopolistic market)

SALES AND REVENUE:
Despite increasing costs in production the sales volume has percentage of sales have almost remained double the cost of production since 2005. This scenario can be attributed to the fact that Castrol is the market leader in the automotive lubricant industry. The increase in costs has resulted in lower sales for Castrol marginally. The increase in price hasn’t had a very huge impact on the sales volume.

The revenue and earnings before tax of Castrol

DEMAND:

Demand:
The automotive industry can be largely divided into: automotive, industrial and marine &energy applications. The automotive industry saw a rapid growth in the past few years which forms a very large base of demand for Castrol. The growth in the small and commercial segment is more than 30 % a year and the growth of two wheelers in terms of volumes are almost 16%. The increase in demand can be attributed to high levels of disposable income, increase of income from agri and non-agri based activities in the rural markets
Influences on cost of production: * Economic slowdown. * RBI policy. * Indian rupee value compared to dollars. YEAR | COST OF MATERIALS | SALES PER LITRE | 2005 | 37.4 | 73.7 | 2006 | 51.5 | 90.3 | 2007 | 49.9 | 100.8 | 2008 | 61.1 | 117.9 | 2009 | 54.7 | 130.8 | 2010 | 63.2 | 143.3 | 2011 | 81.4 | 164.8 | 164.8 200.0 175.0 143.3 150.0 130.8 125.0 117.9

100.0 90.3 100.8 75.0 73.7 51.5 49.9 61.1 54.7 63.2 57.4 81.4 50.0 37.4 25.0 0.0 2005 2006 2007 2008 2009 2010 2011

Cost of material Sales

Utilization of Income
For the year 2011 for the year 2010

Because Castrol products are designed to complement high quality engines the company works closely with Original Engine Manufacturers (OEMs) such as BMW, VW/Audi, Ford, Jaguar and Toyota to develop high quality lubricants that are tailored to meeting the requirements of modern engines. Castrol’s marketing research therefore involves finding out detailed information from both the OEM's and motor vehicle users: The desired result of the research is to produce and supply the best quality high technology oils to meet the needs of modern engines.
The marketing environment in which Castrol operates is constantly changing due to: * New engines being developed with better specifications * Changing government regulations * Customers are becoming wealthier due to which better quality products need to be developed

Market segmentation: * Motor cars * Luxury cars * Motor cycles * Trucks * Aircrafts

How Castrol handles the changing market environment? * Wide range of products which cater to different categories of vehicles * Quality of the product * Advertisements and promotions to brand the product * Castrol's 'Winning Formula' is a combination of technological superiority, excellent marketing and sales strategies and constantly adapting to changes in market and consumer needs

SUPPLY
To compete with dominant public sector distribution, concepts like "Bazaars" and "Super Stores" have also been developed. Castrol developed the concept of "Bazaars." These are outlets meant only for lubricant sales.
The concept of "User Outlet" is another new concept developed by Castrol. In this, the consumer selects his own brand of lube after giving his vehicle for service in the same outlet. Convenient stores and highway stops for vehicles are being built from where the vehicle owners can get their vehicles repaired and get their supply of lubricants.
Influences on supply: * The brand of the company is important to the customers * The quality and longevity of the lubricant * Increasing demand for the lubricant due to increasing sales in commercial and heavy vehicle industry * In spite of selling its product at a premium Castrol managed to gather a huge market share due to the fact that disposable money is increasing
Since it’s an oligopoly market the suppliers or distributors in the market are very limited. Castrol has eliminated intermediaries by developing its own supply strategies. It supplies its products to different vehicle showrooms, service stations lubricants outlets and has its own stores in the form of bazaars

ELASTICITY
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OLIGOPOLISTIC MARKET:
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists).Because there are few sellers; each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants. Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to raise prices and restrict production in much the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. A primary example of such a cartel is OPEC which has a profound influence on the international price of oil.
Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be actual communication between companies)–for example, in some industries there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.
In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater when there are more firms in an industry than if; for example, the firms were only regionally based and did not compete directly with each other.
Thus the welfare analysis of oligopolies is sensitive to the parameter values used to define the market's structure. In particular, the level of dead weight loss is hard to measure. The study of product differentiation indicates that oligopolies might also create excessive levels of differentiation in order to stifle competition.
In industrialized economies, barriers to entry have resulted in oligopolies forming in many sectors, with unprecedented levels of competition fueled by increasing globalization. Market shares in an oligopoly are typically determined by product development and advertising.

Industry structure:
A differentiated oligopoly market

Differentiated Oligopoly market
Top four players IOC/ HPCL/ BPCL and Castrol control >80% of the market
Nature of Demand
1. Endogenous demand - marketing matters
2. Earnings can be managed by shifting priorities appropriately
Nature of Firm Interaction
1. High interdependence amongst players
2. Maintaining distance amongst competitors critical - segmentation matters
3. Oligopolies can retain abnormal profits in the long run, because barriers to entry prevent sideline firms from entering market to capture excess profits.
Potential to Differentiate
1. Differentiation possible, firms can shape their own environment 2. Technology keeps evolving 3. Minimum efficiency scale needed

ANALYZING INDUSTRY ATTRACTIVENESS THROUGH INDUSTRY COMPETITION MATRIX

Buyer Power - Low
1. Lubricant a small fraction of buyers' maintenance cost, but extremely critical for longevity of the vehicle
2. Buyers small and fragmented
3. Hence, despite intense competition in the segment, buyer power varies from moderately high to low across segments (high for a major auto
OEM, low for an individual buyer, small fleet owner)

Rivalry amongst Players – Low Intensity of rivalry is low, despite presence of numerous players and the fact that firms sell similar goods, which are substitutes and thus price sensitive.
Key reasons are (1) fixed cost investment low (low exit barriers),
(2) ex post limit to competition,
(3) demand endogenous – allowing market segmentation and differentiation strategies to work

Entry Barriers - High
1. Ex post limit to competition 2. High minimum economies of scale needed to challenge established players; globally, industry dominated by few large players 3. Access to distribution
4. Brand identity
5. Access to complex and expensive technology
Substitutes - Low
1. No current perfect substitute 2. Technology developments, organic lubricants a threat
Bargaining Power of Suppliers - Moderate
1. Most global/ local players fully integrated
2. Many competitive suppliers; product is standardized

Pricing strategies:
Castrol has always offered superior customer value propositions in terms of product quality with relevant consumer benefits and has priced the products at a premium-to-market. They have also pioneered new distribution systems to make our products easily available to consumers. Not surprisingly, despite the premium pricing, consumers see their products as good value for money. The price of Castrol is lightly higher than its competitors but it provides high quality products. It does not want to reduce the costs as it might impact the quality of the product. In spite of being a premium brand castrol

SWOT ANALYSIS:

Strengths:

* Leader in the market * They have a huge loyal customer base * People have realized that Castrol lubricants is got high quality * The sale of automobiles have been consistently increasing * Strong R&D base that produces lubricants suitable to the specifications of every kind of automobile

Weakness:

* The sector is partially government-administered – that is, in LPG (domestic) and kerosene denting profitability. * Castrol depends to a large extent on imported crude oil.

Opportunities:

* Castrol has managed to create a brand for itself and whenever it launches new products the consumer acceptance will be high. * Ability to enter into other oil based markets due to the availability of a strong financial base.

Threats:

* New entrants into the market. * Increasing prices of crude oil. * Value of Indian rupee as compared to the dollar. * Interference of Government into the functioning of oil based companies hamper its growths.