Dissertation Presentation

By: Arvind Dwivedi

A Study of Non – Fuel Retailing in Indian Petroleum Industry Post Liberalisation
Guided By: Atul Razdan

Outline
u Introduction u Research Objectives u Research Methodology u Findings
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Background of Indian Petroleum Industry Changes in Indian Petroleum Industry Importance of Non- Fuel Retailing Non- Fuel Retailing Initiatives Real Estate Utilization

u Conclusion u Bibliography

Arvind Dwivedi: University of Petroleum & Energy Studies

Introduction
u The Indian retail industry can be segmented in different segment u The downstream petroleum retailing is one of the largest segments of the Indian retail industry and the petro-retail sector is one of the most organized sectors of the retail industry u Deregulation of the petroleum retail sector u Differentiated value propositions

Arvind Dwivedi: University of Petroleum & Energy Studies

Research Objectives
u To Study the Background of Petroleum Industry in India u To Identify the Specific Changes in Petroleum Industry Post Liberalization u To Highlight the Importance of Non Fuel Offerings for Petroleum Marketing Companies in India u To accentuate on the non fuel offerings and the initiatives taken by Indian Oil Marketing Companies u To showcase the advantages of non fuel services for optimal utilization of real estate

Arvind Dwivedi: University of Petroleum & Energy Studies

Research Methodology
u Research Design: Descriptive u Sources of Data:
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1. Secondary data: n a) Research reports on Non Fuel Retailing. n b) Performance and strategy reports of petroleum companies. n c) Articles on Non Fuel retailing. n d) White papers on non fuel retailing n e) Newspaper articles on non-fuel business n f) Online journals.

Arvind Dwivedi: University of Petroleum & Energy Studies

Findings

Background of Indian Petroleum Industry
u Historical Background u Structure of Indian Petroleum Industry u Petroleum Companies in India u Energy Consumption in India u Energy & Economy

Arvind Dwivedi: University of Petroleum & Energy Studies

Background: Historical
u Oil sector came into existence in India in late 19th century with discovery of oil in 1889 at Digboi u Until 1960, industry confined to north eastern states with production of 5000 bopd u Cambay onshore basin, in 1958 and the Bombay offshore basin, in 1974, enhanced the production level to 0.7 mbpd u The first refinery came up at Digboi in 1901 u The process of nationalization was started in 1970

Arvind Dwivedi: University of Petroleum & Energy Studies

Background: Structure
u Highly regulated industry with dominance of government companies u The Ministry of Petroleum and Natural Gas (MoP&NG)
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It governs the activities associated with exploration and production of oil and natural gas, import and export of crude oil and products, refining, distribution, marketing, and conservation of petroleum products.

u The three key organizations under the control of MoP&NG are :
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Directorate General of Hydrocarbons (DGH in 1993), Oil Co-ordination Committee (OCC in 1975) ,and Oil Industry Development Board (OIDB in 1975).

Arvind Dwivedi: University of Petroleum & Energy Studies

Background: Petroleum Companies
u The Indian oil refining sector has 10 companies:
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Indian Oil Corporation Limited (IOC) and its two subsidiaries, Chennai Petroleum Corporation Limited (earlier Madras Refineries Limited.) and Bongaigaon Refinery and Petrochemicals Limited (BRPL) Bharat Petroleum Corporation Limited (BPCL) and its two subsidiairies, Kochi Refineries Limited (earlier Cochin Refineries Limited.) and Numaligarh Refineries Limited (NRL) Hindustan Petroleum Corporation Limited (HPCL) ONGC Mangalore Refinery and Petrochemicals Limited (MRPL); and Reliance Petroleum Limited (RPL)--merged with parent Reliance Industries Ltd. (RIL) with effect from April 1, 2001.

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Arvind Dwivedi: University of Petroleum & Energy Studies

Background: Energy Consumption
u Per capita primary energy consumption in India is very low 305 kg when compared to the world average of 1,487 kg. u Per capita primary energy consumption, the per capita consumption of oil & gas in India is also a low 117 kg against the world average of 925 kg u Oil, gas, hydroelectricity, nuclear power and coal are the five constituents of primary energy. Oil and gas account for 62.2% of the total world primary energy consumption. u This figure is higher at 64.8% for developed nations like the US. In India, coal is the principle source of energy accounting for over 55% of the total primary energy consumption.

Arvind Dwivedi: University of Petroleum & Energy Studies

Background: Economy
u Oil and gas is a major contributor to economies worldwide u The major components of the revenue contributed by the oil companies are as follows: n Crude Oil: Royalty of 20% of well-head value with a ceiling of Rs. 850/tonne; Cess of n Rs. 1800/tonne under the Oil Industries Development (OID) Act; Sales tax of 4%; n Custom duty of 10% on imported crude; n Natural Gas: Royalty of 10% and sales tax varying from State to State;\ n Petroleum Products: Custom Duty and Excise Duty. Sales tax on domestic sales n Corporate Taxes: At the rate of 35% of profit before tax; and n Dividends: The contributions under this head are significant since the Government is a major shareholder in most oil companies

Arvind Dwivedi: University of Petroleum & Energy Studies

Background: Economy

Arvind Dwivedi: University of Petroleum & Energy Studies

Changes in Indian Petroleum Industry
u Why did Government go for liberalization of economy? u Development of Indian petroleum industry
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Options for Development Important Developments n Developments Pre- Liberalisation n Developments Post Liberalisation

Arvind Dwivedi: University of Petroleum & Energy Studies

Changes in Indian Petroleum Industry
u Reasons For Liberalization
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To liberate the ailing economy from shackles of balance of payment crisis. Government asked world Bank & International Monetary Fund (IMF) to bail out its ailing economy

Arvind Dwivedi: University of Petroleum & Energy Studies

Changes in Indian Petroleum Industry
uDevelopment of Indian Petroleum industry
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Premature phase from 1947 to 1969 Consolidation phase from 1970 to 1989 The Liberalization phase from 1991 onwards`

Arvind Dwivedi: University of Petroleum & Energy Studies

Changes in Indian Petroleum Industry
u Options for development
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seek assistance of a great power like Soviet Union, collaborate with a small country like Rumania explore the possibility of a government to government co-operation with other small but neutral countries like Austria which had developed sufficient technical expertise in petroleum industry by that time Try and develop the industry through self-help by employing technicians and bringing necessary machinery from which ever source available.

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Arvind Dwivedi: University of Petroleum & Energy Studies

Changes in Indian Petroleum Industry
u Important Developments
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Developments Pre- Liberalisation
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US replaced Soviet Union Allotment of acreages to american companies with ONGC as Indian partner Entry of private players in refining sector in JV with Indian PSU successfully replaced/barred entry of other alternative energy sources

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Arvind Dwivedi: University of Petroleum & Energy Studies

Changes in Indian Petroleum Industry
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Developments Post Liberalisation
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Refining
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Invitation to private companies in the refining sector Capacity expansion/new grassroot refineries both in the public and private sectors marketing rights for petroleum products if a company invests Rs.20 Billion in E&P Dismantling Administrative Pricing Mechanism (APM) in phased manner

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Marketing
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Arvind Dwivedi: University of Petroleum & Energy Studies

Administered Pricing Mechanism early seventies when Shipping Corporation of India u The APM had its roots in the

(SCI) took loan from the World Bank to purchase oil carriers. The World Bank had then recommended a 'cost plus' pricing formula to SCI for freight calculation. The same principle in the name of 'retention concept' was introduced in 1976 for pricing of crude and petroleum products. The price of indigenous crude was based on operating cost plus 15% post tax return on capital employed. And oil refineries and marketing companies calculated the price of their products on the basis of operating cost plus 12% post tax on net worth.

u The other important component of APM - a complicated pricing formula is 'cross subsidization mechanism u The economy had become dependent on petroleum and private parties were not happy with 12-15% assured return. They wanted more. Hence APM was dismantled in a phased manner.

Arvind Dwivedi: University of Petroleum & Energy Studies

Importance of Non Fuel Retailing
uWinds of change uIndia vs World (US) uKey issues

Arvind Dwivedi: University of Petroleum & Energy Studies

Importance of Non Fuel Retailing
uWinds of Change
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Callous Competitive Environment Mounting Expectations of Consumer Call for Alternate Sources of Revenue Shift in Branding (From Outlet to Corporate) Emergence of Non-Fuel Services As a Major Activity at Retail Outlets Competition on price Alternate sources of revenues

Arvind Dwivedi: University of Petroleum & Energy Studies

Importance of Non Fuel Retailing
India Vs World (US)

Arvind Dwivedi: University of Petroleum & Energy Studies

Importance of Non Fuel Retailing
uKey Issues
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How to build a unique and sustainable competitive advantage? How to attract new customers and capture a share of their wallet?

Arvind Dwivedi: University of Petroleum & Energy Studies

Importance of Non Fuel Retailing
uBuild a unique and sustainable competitive advantage

Arvind Dwivedi: University of Petroleum & Energy Studies

Importance of Non Fuel Retailing
uKey Imperatives
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Develop in-depth consumer insight (Know the Consumer) and Building offerings around the target consumer Building a strong brand proposition

Arvind Dwivedi: University of Petroleum & Energy Studies

Non-Fuel Retailing Initiatives
u What Is Retailing? u Non Fuel Retailing u India as a Non Fuel Retailing Destination u Options for Non-Fuel Offerings u Non Fuel Initiatives of Indian PSU’S

Arvind Dwivedi: University of Petroleum & Energy Studies

Non-Fuel Retailing Initiatives
uRetailing “Retailing is the set of activities that markets products or

services to final consumers for their own personal or household use whereas Retailer is someone who cuts off or sheds a small piece from something”

Arvind Dwivedi: University of Petroleum & Energy Studies

Non-Fuel Retailing Initiatives
uIndian Retail Sector
First Gear: (Create awareness) * New retailers driving awareness * High degree of fragmentation * Real estate groups starting retail chains * Consumer expecting 'value for Third Gear: (Back end management) * Category management * Vendor partnership * Stock turns * Channel synchronization * Consumer acquisition * Customer relation's

Indian Retail Sector Second Gear: (Meet customer
expectations) * Consumer-driven * Emergence of pure retailers * Retailers getting multi-location and multi-format * Global retailers evincing interest in India Fourth Gear: (Consolidation) * Aggressive rollout * Organized retail acquitting significant share * Beginning of cross-border movement * Mergers and acquisitions

Arvind Dwivedi: University of Petroleum & Energy Studies

Non-Fuel Retailing Initiatives
uNon Fuel Retailing
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Sale of Value Added Fuels – Branded Fuels Value added products and services – Non Fuel products and services

Arvind Dwivedi: University of Petroleum & Energy Studies

Non-Fuel Retailing Initiatives
u India as a Non Fuel Retailing Destination
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2nd Most attractive developing market 4th Largest economy after USA, China & Japan. 2nd Fastest growing economy in the world Would be 3rd largest economy in next 15 years 5th among the 30 emerging markets for retailers 300+ million middle class - the Real consumers Increased disposable Income Among top 10 FDI destinations Massive investment planned in infrastructure development in next 5 years Exponential growth is taking place in Retailing in India Organized Retail Only 3% but growing at 30%

Arvind Dwivedi: University of Petroleum & Energy Studies

Non-Fuel Retailing Initiatives
uOptions for Non-Fuel Offerings
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ATM (Automated Teller Machine or Any Time Money) Quick care point Windscreen cleaning facility Free health check-up: INDE-PAY Vending Machine of Coffee and Coca-Cola Pay Phone Other Necessary Amenities n Toilets n Drinking Water

Arvind Dwivedi: University of Petroleum & Energy Studies

Non-Fuel Retailing Initiatives
u Non Fuel Initiatives of Indian PSU’S
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Indian Oil Corporation Limited (IOCL) n XTRACARE n innovative, plans to start fuel services at shopping malls n Convenience stores (they sell a wide range of packaged foods, hot and cold drinks) n the company has tied up with major retailers and set up convenience stores, super markets and other formats n In urban areas, the stores are in two sizes, 300 to 700 sq feet and 700 to 1,000 sq feet. They are between 1,000 sq feet and 1,500 sq feet on highways n IOCL has 108 Kisan Seva Kendras (KSKs), its low-cost petrol pumps that sell agriculture inputs, equipment and daily essentials in rural areas

Arvind Dwivedi: University of Petroleum & Energy Studies

Non-Fuel Retailing Initiatives
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Bharat Petroleum Corporation Limited (BPCL) n “In &Out” stores n In & Out stores have a wide range of services which include ATMs of leading Banks, Music stores from Planet M and Music World, Beverages from Pepsi, Coffee and snacks from Café Coffee Day and Coffee Day Xpress, and a variety of impulse buys including confectionery, snacks, convenience foods, toiletries and select range of branded groceries and other FMCG products through exclusive tie-ups with such FMCG majors like ITC, Cadbury and Frito-Lay n The In &Out stores offer Western Union Money Transfer facilities in Mumbai. They also offer prepaid mobile recharge cards and echarging of mobiles. It also has music stores by the name of Satellites and Unplugged from Planet M and Music World respectively at select outlets for music cassettes and CDs.

Arvind Dwivedi: University of Petroleum & Energy Studies

Non-Fuel Retailing Initiatives
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Hindustan Petroleum Corporation Limited (HPCL) n Club HP n HPCL has struck strategic alliances with leading brands like Fed Ex, Coca Cola India, Western Union Money Transfer, ICICI Bank, Cafe Coffee Day, Skypak, US Pizza, and many more. HPCL is also forging service specific alliances with several automobile companies and OEMs like Tata Motors to jointly recognize "Club HP" outlets, which will be authorized service centers for leading automobile brands n Club HP" outlets have been cataloged as Standard, Mega and Max depending on the levels of services and amenities available

Arvind Dwivedi: University of Petroleum & Energy Studies

Real Estate Utilization
u Real Estate Opportunities u Transportation Network u Emerging Retail Formats u A Hypothetical Case for offering Non Fuel Services at an Outlet

Arvind Dwivedi: University of Petroleum & Energy Studies

Real Estate Utilization
u Real Estate Oportunities
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Organized retailing is less than 3% of total retail whereas; it is 20% in China, 36% in Brazil and about 50% in Malaysia. Organized retailing has forecasts to become 24% by 2010 in India Estimated at 12 Million retail outlets of which, 95% would be smaller than500 sq. feet (estimated number of outlets in Brazil approx 1.1 Million and around 905, 000 in US) Lowest retail space per capita in the world at 2 sq. ft per capita. Early mover advantage still available due to huge untapped resources and facilities Potential for high market capitalization Shifts in consumer expectations and buying behavior

Arvind Dwivedi: University of Petroleum & Energy Studies

Real Estate Utilization
u Transportation Network
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India is observing speedy development of transportation infrastructure Second largest Road network in the world (3.34 million kilometers) Projects like EW and NS corridors and Golden Quadrilateral are expected to boost movement of goods and people across country Average annual growth rate of vehicle ownership estimated at 10.16% over the last 5 years Urban local bodies are taking initiatives for road development Strengthening of road networks have increased movement of people and goods Increased movement along roads have opened retailing opportunities explicitly for road users

Arvind Dwivedi: University of Petroleum & Energy Studies

Real Estate Utilization
uEmerging Retail Formats

Arvind Dwivedi: University of Petroleum & Energy Studies

Real Estate Utilization
u A Hypothetical Case for offering Non Fuel Services at an Outlet
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Following are the Financials considered for the hypothetical case: n Land area for fuel retail outlet: 1.00 acres ( urban or sub urban stop) n Fuel operations: 0.65 acres (includes space for dispensers, tanks, office buildings, electricity and generator rooms, etc) n Retail operations: 0.35 acres (vacant space or unutilized space which can be used for non fuel operations such as ATM , convenience store or restaurants, etc) n Assumed FSI for retail development: 1.0 (FSI stands for Floor Space Index- ratio of total floor space to total plot size. FSI indicates that total plot area is being used for retail operations) n Built-up area for retail development: 15, 246 sq. ft. n Land cost: NIL (included in cost of fuel outlet i.e. while setting up fuel operations) n Construction cost: INR 1,200 per sq. ft.(average cost of construction in year 2006) n Total Construction Cost: INR 18,295,200

Arvind Dwivedi: University of Petroleum & Energy Studies

Real Estate Utilization
u Achievable Pricing By Means Of Non Fuel Offerings

Arvind Dwivedi: University of Petroleum & Energy Studies

Conclusion
u The companies are still struggling to grasp the changing dynamics of the retail sector u The industry is still being designed. Mergers, entry of private players, issues on branding and consolidation in the upstream and downstream sectors have pushed non-fuel to the back-seat u The key to success lies in identifying and meeting customer behavior patterns and changing demographics u New and emerging retail formats will drive the diversity of the fastchanging retail backdrop u Retailers need to invest heavily in capturing specific market u It is important for retailers to create a unique position in the marketplace based on value, relationships or experience

Arvind Dwivedi: University of Petroleum & Energy Studies

Conclusion

“For now, the existing players are expanding — cautiously. In a highly-competitive environment, it remains to be seen who will crack the consumer riddle”

Arvind Dwivedi: University of Petroleum & Energy Studies

Bibliography
u Oil & Gas Industry in India - Indian Petroleum Industry www.iloveindia.com/economy-of-india/oil-gas-industry.html Indian Petroleum Industry http://www.economywatch.com/world-industries/petroleum/indian.html u Directorate General of Hydrocarbons, FIFTH ANNUAL CONFERENCE ON “GAS In INDIA” www.dghindia.org/site/pdfattachments/breaking_news/5th_conf_gas.ppt List of petroleum companies http://en.wikipedia.org/wiki/List_of_petroleum_companies http://www.economywatch.com/companies/petroleum-companies.html Trends in Consumption and Production: Household Energy Consumption www.un.org/esa/sustdev/publications/esa99dp6.pdf http://www.indiaenergyportal.org/ Retail in India http://blogs.siliconindia.com/pollen/Retail_in_India-bid-i54Izoe249570105.html Retailing in India: A nation of shopkeepers http://www.euromonitor.com/Retailing_in_India_A_nation_of_shopkeepers

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Arvind Dwivedi: University of Petroleum & Energy Studies

Bibliography
u Background of Petroleum Industry http://gail.nic.in/energyzone/industry.pdf Exchequer earns 3.5-4% of GDP by taxing oil http://www.mydigitalfc.com/2008/oil-taxes-35-4-gdp Ten years of economic liberalization www.cpim.org/marxist/200102_marxist_eco_ppatnaik.htm Globalization and the Indian Petroleum Industry http://business.mapsofindia.com/globalization/india-industry/petroleum-industry.html New Century Publications www.newcenturypublications.com/Catalogue%20-%202006-07.pdf Effects of Globalization on Indian Industry http://business.mapsofindia.com/globalization/india-industry/ Indian Petroleum Industry http://www.economywatch.com/world-industries/petroleum/indian.html www.dghindia.com www.india-nelp2.com u

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Arvind Dwivedi: University of Petroleum & Energy Studies

Bibliography
u PIRG Update, November 1997 The Statesman, 18th July, 2001 The Economic Times, 26th September, 2001 T he Hindu Survey of Indian Industries,1999 M.A Pathan, Chairman, IOCL, 3rd Annual Indian Oil and Gas Conference,2-4 December,1998, New Delhi Dipanakr Dey, State and Foreign Involvement in the Development of Indian Petroleum Industry between 1970 and 1989, PhD thesis, University of Calcutta,1999. Indian Current Affairs: September 2006 indiancurrentaffairs.blogspot.com/2006_09_01_archive.html Dipankar Dey, Asia-Europe Dialogue, December 7, 2001, Globalization and the Indian Petroleum Industry Petroleum Retail : A Battlefield www.managementparadise.com/projects/misc/petroleum.pdf Fueling Growth in Petro-Retailing: New Business Opportunities www.ficci.com/media-room/speeches-presentations/2003/Jan/jan-petro-srini.ppt Sustainable competitive advantage (SCA) www.1000ventures.com/business_guide/crosscuttings/sca_main.html

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Arvind Dwivedi: University of Petroleum & Energy Studies

Bibliography
u Fueling Growth in Petro-Retailing: New Business Opportunities www.ficci.com/media-room/speeches-presentations/2003/Jan/jan-petro-srini.ppt From Market Research to Consumer Insights www.russellreynolds.com/pdf/thought/MarketResearch_WhitePaper_8_New.pdf Building a Strong Brand by Dave Dolak http://www.davedolak.com/articles/dolak4.htm The New Rules of Branding: Building Strong Brands Faster www.mckinsey.com/practices/marketing/ourknowledge/pdf/WhitePaper_NewRulesofBranding.pdf Indian Retail Industry: Current Scenario www.indianmba.com/Occasional_Papers/OP95/op95.html Retailing Industry in India http://www.indiaonestop.com/retailing.htm Petro-Retailing-Expectations and Opportunities www.ficci.com/media-room/speeches-presentations/2003/Jan/jan-petro-fedex.ppt New strategies for non fuel business www.infraline.com/downstreamconference/presentations/ArjunHira-BPCL.pdf

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Arvind Dwivedi: University of Petroleum & Energy Studies

Bibliography
u Indian Oil eyes US$ 496.27 million from non-fuel retail www.ibef.in/artdisplay.aspx?cat_id=596&art_id=16713&arc=show IOC launches XTRACARE retail plan archives.chennaionline.com/events/Business/2004/12ioc.asp IOC to seek franchises at 2,000 fuel outlets http://www.livemint.com/articles/2007/07/12000705/IOC-to-seek-franchises-at-200.html The New Non-Fuel Push www.businessworld.in/index.php/The-New-Non-Fuel-Push.html Inside In & Out (Flash) http://www.speedfuels.com/in&out/Inside.htm THE ‘In & Out’ CONCEPT http://www.bharatpetroleum.com/wheels/inOutStores.asp Club HP - High - quality personalized "Vehicle and Consumer Care" http://www.hindustanpetroleum.com/En/UI/RetailClubHP.aspx Real Estate Opportunities in Fuel Retailing www.ficci.com/media-room/speechespresentations/2007/jan07/petrotech/day2/SessionIV/ManishKumar.pdf

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Arvind Dwivedi: University of Petroleum & Energy Studies

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