Seven years after BP announced it would invest 171m on a five-year worldwide rebranding programme, it appeared to be committing one of marketing’s deadly sins – diluting its brand for the sake of short-term alliances.
Next month BP will open the first of 100 “superstations” in Basildon, where the BP brand is clearly subordinate to its supermarket partner, Safeway. A month later, the petrol giant will launch a large-scale TV campaign to publicise a further dilution of its brand – its joint venture with Mobil – which brings the Mobil brand onto BP forecourts.
The brand invasion on BP’s forecourts is in sharp contrast to the strategy of its main competitors, and on the face of it, BP’s actions contradict developments in other parts of the company. In June it pulled out of Alliance Gas, the joint venture between Statoil and Norwegian Norsk Hydro, to take on British Gas with a go-it-alone venture, BP Gas.
Yet, its petrol retailing division is suffering from brand overload.
The Mobil deal, which involves combining BP and Mobil’s marketing operations, was struck partly to reduce costs, though there is little duplication of sites.
The terms of the deal involve all Mobil forecourts switching to BP and the lubricants side of the business coming under the auspices of the Mobil operation.
But the main rationale for the move is wider. The petrol retailing industry is undergoing a deep structural change as a result of the success of the supermarkets. The likes of Sainsbury’s, Tesco, Safeway and Asda have increased their share of the petrol market from five per cent to 22 per cent in nine years.
The oil majors have made supermarket competition an excuse to force structural change in the sector – their real target being the independents, who control 22 per cent of the market.
The majors are also acutely aware of a still greater threat from OPEC-owned petrol companies which aim to reduce costs by cutting out middlemen and thereby severely damage their margins (MW March 8). Unlike fmcg sectors, where three or four companies usually dominate, petrol retailing is only weakly oligopolistic, so it is difficult to shut out competition.
In an effort to force out the many smaller competitors, market leader Esso ditched its Tiger Tokens promotion in January and adopted Pricewatch which sparked a full-scale price war. Shell and BP followed suit. BP launched its own “Focus on Price” promotion in an effort to eliminate many of the small players and restore their ability to control the market.
The majors have also begun adopting further strategies to dominate the market. One of these is to develop bigger convenience stores, which go beyond simply offering packaged snack food and offer fresh produce too.
Margins in petrol retailing are extremely tight. Though petrol retailers have sold convenience foods for many years, the pressure is on to do to petrol retailing what the supermarkets did to groceries – cut the number of total stations and focus on high volume “superstations”. The petrol retailers have identified the possibility of using up real estate and targeting shoppers who want to top up their weekly groceries with fresh produce.
According to Marcel Cohen, a lecturer at Imperial Management School, the move is driven by necessity. Petrol retailers are no longer able to differentiate their product on petrol quality. In the past consumers thought there were distinctions, he says. Jet, for instance, was perceived to have poorer quality petrol than Shell or BP. Campaigns such as “you can be sure of Shell” tapped into this perception. However, over the past ten years the distinctions have shifted. “The big point of differentiation now will be groceries and other services,” says Cohen.
Cohen says there is also a noticeable shift in consumer habits. “Whereas in the past they may have used petrol stations to buy food products on impulse, there are indications that they may go on a mission to buy good quality food at reasonable prices,” he says.
Kate Manasian, a principal of Wolff Olins, agrees: “People will drive an extra mile to get the right quality convenience food at a reasonable price.”
Tesco has recognised this in its development of Tesco Express petrol outlets, which include fresh produce, snacks and meals at the same price as the superstores.
Though other petrol retailers have initiated trials with smaller supermarket chains such as Elf with Somerfield, BP is the first petrol retailer to tie up with one of the big four supermarket chains.
BP’s decision to go with Safeway indicates a split in strategy between the petrol companies, with rivals such as Shell deciding to fight it out alone. Shell says it won’t get involved with a third party player. “We did the BP thing several years ago with 7-Eleven and it didn’t work,” says a spokeswoman, “all it does is cause brand confusion on the forecourt.” She says Shell scrapped the idea in favour of developing Shell Select shops. “Shell is such a strong brand we don’t need the assistance of supermarkets to develop our sites,” she adds.
The company developed Shell Select in 1991; it is currently in 850 stores. It is spending 350m over three years on a major redevelopment programme to extend the size of its Shell Select stores.
Although Shell is including Sainsbury’s in its Smartcard membership (MW September 6) along with four other companies, it obviously has more confidence in its brand than BP.
But Shell could be accused of over-confidence. Though it may have felt that it learned lessons from previous joint ventures, it is clear that 7-Eleven does not have the same equity as Sainsbury’s or Tesco.
Manasian, who has previously worked with BP and Safeway, argues that though customers would use the stores to buy confectionery and snacks, it is different for fresh food. “People automatically trust fresh food that they buy from Safeway, they would not trust the quality of food that they buy from any of the petrol companies.
“The quality of the fuel is no longer in question, the quality of the sandwiches and fresh food is.”
The problem lies with the petrol brands themselves. Motorists perceive little or no difference between comp-eting brands. The brands are weak and undifferentiated.
If there were fewer brands on the market it would be easier to differentiate between them.
Cohen says the oil companies have a structural weakness with their brands. BP and others have failed to differentiate the fuel brand from the retail brand.
Oil companies’ retail advertising is notoriously weak and rarely features in ad recall tables. They generally focus on price and promotions.
“Consumers are confused because the same brand is positioned differently – in the retail environment and as a fuel,” he says. The forecourts no lon-ger bare much resemblance to the petrol product itself. He suggests the companies should consider separating the two brands. The stations would have a different brand name from the fuel.
He adds that the oil companies missed an opportunity when the supermarkets started to get involved with petrol retailing.
They could have become dealers for the petrol companies, using their own forecourt livery. Instead they chose to fight the supermarkets, believing their brands to be stronger than they were.
Rather than suggest that the dilution of the BP brand on the forecourts is a bad thing, Cohen suggests that BP should take the Safeway deal several stages further by giving forecourts to retailers.
“BP and others could save a lot of money if they pulled out of forecourt retailing altogether and simply supplied the pumps to those with stronger brand equity,” he says.
The petrol companies need to become food retailers but they can’t. They don’t have the ability to deliver high quality food at cheap prices or the trust and confidence of consumers.
Wolff Olin’s Manasian says the concept is already well developed in the US. Here, the food on offer is the main signage on the site; fuel is the secondary. The grocery store is twice as large as the petrol station.
Rather than containing Safeway, BP should consider giving it greater brand presence on the forecourt. According to sources, it is likely that BP will start to accept Safe-way’s ABC loyalty card next year as part of the deal.
However, it is unlikely that BP would go all the way and allow its forecourt brand to be subsumed into Safeway’s.
If Shell and Esso are to restore control in the market, a better way of eliminating the independent sector maybe to enter significant strategic alliances with the likes of Sainsbury’s, Tesco and Asda on the forecourt. Such deals would benefit oil majors and supermarkets alike, restoring profitability to the sector.
But they should move quickly before the Office of Fair Trading wakes up to the anti-competitive rationale of linking brands in this way.