Overall road fuels consumption has almost stagnated in the last 5 years, in spite of the significant gap still registered between Romanian average consumption/ capita (~0.3mn tones/ capita) and CEE region(1) average (~0.6mn tones/ capita). Last year brought a slight contraction of demand, currently estimated at ~6mn tones, mainly driven by decreasing sales of gasoline.
Road fuels consumption expected to slowly increase on mid-long term
Last year brought a slight contraction of road fuels demand, currently estimated at ~6mn tones, mainly driven by decreasing sales of gasoline. Following an average annual decline of ~6% in the last 5 years, gasoline consumption is expected to continue its decrease on the short-medium term, but with a significantly lower pace estimated at ~0.5%.
The Romanian fuel consumption mix is following the European trend of ‘dieselization’ – while in 2001 only ~30% of the newly registered cars in EU were diesel, in 2012 the share increased to ~55% and the trend is expected to continue in the upcoming period. In Romania, the share of diesel powered registered passenger cars, both newly bought from the Romanian market and second hand imports, rose from ~37% in 2010 to over 48% in 2013.
While in most cases fuel/ cost efficiency awareness drives decision to acquire diesel cars, recent years have seen an increasing number of LPG (Autogas) powered cars. Although some European countries incentivize LPG usage for environmental concerns (e.g. Italy), Romanian car owners have switched to LPG driven by significantly lower fuel costs. Nevertheless, LPG consumption in Romania registers only ~3% of total road fuels market, with an expected ~6% future annual growth on short-medium term.
The medium term outlook foresees a slow recovery of the road fuels demand at an annual rate (CAGR) of almost 2%, mainly driven by the positive development of 3 important factors: motorization rate, road infrastructure and GDP/ disposable income.
Key market consumption drivers underline positive evolution on medium-long term
Road fuels consumption forecast has taken into consideration the expected development of several key market drivers, with both positive and negative influence on future demand evolution.
? Motorization rate – Considerable gap to other EU countries expected to decrease on the mid-long term outlook
The evolution of the motorization rate in Romania registered a significant ncrease until 2009, mainly due to pronounced optimism of both population and local companies, coupled with high availability and loose conditions of financing opportunities (consumer finance, car loans and leasing options). Recent progress was very modest, driven mainly by import of second-hand cars, while new car registrations plummeted after 2009 and reached similar figures to the year 2000 (~70,000 units sold in 2013 from a maximum of over 310,000 in 2007).
In 2012, Romania displayed a motorization rate of approximately 210 passenger cars/ 1,000 inhabitants, significantly lower than figures illustrated by other EU countries. Considering the significant gap and slowly recovering economic environment, we expect an improvement of the motorization rate on medium term, with direct positive impact on road fuels consumption.
? Road infrastructure – Increased traffic expected following finalization of the main Romanian motorways
By the end of 2013 Romania, only had ~600 km of motorways, an insignificant figure in comparison to the country’s surface and ambitions in the European transport system. Nevertheless, there are positive signs in respect to the pace of constructions and promises from public authorities for a connected East-West Romania until 2018, as well as more than 2,000 km of motorways available until 2020.
Although these objectives seem optimistic when looking at the length of recently finalized motorways, achieving a significant share would considerably improve average speed and thus encourage road traffic, both nationally and internationally.
Considering also the high costs of air traffic for short distances and low average speed of rail transport, road transportation could improve its position within the local and regional transport modes, further contributing to the road fuels demand.
Past experiences have underlined the overall importance of road infrastructure for potential investors, as well as the necessity for an increased level of development predictability. Consequently, the enhancement of road infrastructure is expected to have a positive impact on the development of several industry sectors (e.g. automotive), further increasing road fuels consumption.
? GDP/ Disposable income development – Slow improvement expected following recovery of the European and internal consumption
Both national and international prognosis organizations envisage GDP growth levels at approximately 3% p.a. for the 2014 –
2020 period, mainly backed by gradual European and internal consumption recovery.
Furthermore, disposable income is also expected to have a slight positive development on medium-long term, influencing consumption habits and thus contributing to an increase of road fuels demand.
? Fuel efficiency – Significant improvements following downsizing and efficiency measures
In 2009, the EU adopted performance standards for car emissions, imposing carbon dioxide emission targets for all European automakers – targets are currently set to 136 g CO2/ km, but will be further reduced to 130g CO2/ km in 2015. Since CO2 emissions are closely linked to fuel consumption, most automakers have set on a path to constantly improve fuel efficiency, also motivated by clients’ growing concern for lower fuel consumption.
Endeavors to decrease fuel consumption mainly include engine downsizing, as well as efficiency measures like car weight reduction or Start/ Stop system. The implementation of such measures has allowed for average fuel consumption to decrease by ~20% from 2001 to 2011 (official figures – EU countries) and it is expected to further decrease by additional ~30% until 2020, with significant impact on the road fuels demand.
Nevertheless, a relatively limited impact is expected in Romania on the short term as a consequence of implementing such efficiency measures due to the small numbers of new cars sold. Moreover, imported second-hand cars have a very high average age (in 2013, the average age was more than 11 years), while the phenomenon of cars registered in Bulgaria (usually with high engine displacement and poor fuel efficiency) has increased.
? Fuel prices – Full alignment with EU average practiced prices in sight
Recent years have seen a decrease of the gap between road fuel prices practiced within EU countries. Considering the illustrative sample presented, displaying both Western and CEE countries, diesel prices are almost aligned in a range of ~EUR 75/ 1,000 liters, with Romania approximately in the middle.
Although with lower intensity, the alignment trend is also observed for gasoline products, the gap from the most expensive country to the cheapest one decreasing from ~EUR 430/ 1,000 liters in 2012 to only ~EUR 280/ 1,000 liters in Q1 2014.
Current excise increases, effective from April 2014, will further position Romanian practiced fuel prices in full alignment with European average prices.
Hence, the overall price alignment trend is expected to have a negative impact on road fuels demand due to decrease of domestic purchasing power and reduction of historical price competitive advantage for international road traffic, in comparison with neighboring countries.
? Hybridization and EV(2) penetration – Limited development expected on medium term
Automakers have increased their efforts to improve accessibility and reliability of EVs and hybrids in the recent period, increasing trust in alternatives for the conventional internal combustion engine. Backed up by national incentive policies, as well as upcoming initiatives at EU level (e.g. Clean fuel strategy), the take up rate for partial or full electric powered vehicles is expected to rapidly increase in some EU countries (e.g. Netherlands had ~5% share of hybrid-electric vehicles).
Nevertheless, Romania has a low take-up rate of electric/ hybrid vehicles, with only 560 EVs/ hybrids registered in 2013. Considering also the very limited numbers of pure EV registrations (8 EVs in 2013), the road fuels demand will be insignificantly influenced by EV/ hybrid future penetration.
The current low interest is expected to exhibit limited development on the shortmedium term due to low public awareness, the slow development of publicly accessible infrastructure and the relatively limited incentives awarded by public authorities (both tax and non-tax related).
Gas station network coming to the end of its decreasing trend
Romania currently displays approximately 2,000 gas stations, with a slight network contraction in the last years, mainly on the back of the closures of ‘white stations’(3) and the fuel sites rationalizations of selected large players. The international comparison of site density places Romania, with ~0.5 sites/ 1,000 cars, almost in line with some Western countries like Germany or France, but with considerable differences in terms of the average throughput.
On the short-medium term, a stabilization/ slight increase of the gas station network is expected in accordance with the improvement of the motorization rate, coupled also with a decreased phenomenon of network rationalization.
A throughput analysis underlines significant differences between major players, with white stations clearly lagging behind. OMV is frontrunner in terms of the average throughput, benefiting from better brand perception, fuel station superior appearance and good network consistency, as well as superior non-fuel products/ services offering generating further traffic in the stations.
All major retailers attempt to increase sales through loyalty programs consisting of credit, prepaid or bonus cards (for businesses or private consumers), fuel promotions or price reductions for dry products, but the major challenge consists in reducing the client churn rates.
Limited expansion of networks from existing players – The period in which most market players announced significant investments in their retail networks is long over. Traditional market players have focused over the last years on optimizing operations within their networks to the detriment of expansion. The initiatives of large players included the rehabilitation of selected sites and an increased focus on improving service offering, as well as cost reduction measures and a more rigorous cost control approach.
The current investment strategies are cautiously planned and subject to frequent modifications in some cases due to capital expenditure limitations. Such constraints have led also to shifts of expansion strategies towards more CAPEX light approaches (e.g. dealer owned formats).
Rompetrol bet on a retail network comprised of several formats however, until 2013, it has gradually rationalized ~50 out of the total number of ~450 gas stations it owned in 2009 (Partner and Expres sites). The current strategy envisages re-launching the expansion program at a national level and refurbishing the COCO(4) stations, but also potentially further rationalizing the unprofitable sites.
MOL - only player to target significant growth – MOL is the only existing market player which has constantly expanded its footprint since 2010, in the quest of securing 15% of the total market share until 2015 (from a total estimated market share of ~13% in 2013). Recently (i.e. May 2014) the Hungarian company finalized the acquisition of the entire ENI network station in Romania, therefore adding ~40 stations to its existing network. Through this transaction, MOL will secure its position as the 4th player on the market (in terms of number of stations and retail fuel sales), and will have to effectively integrate the less efficient ENI stations (in terms of fuel sales per station), while managing the potential location overlap with existing MOL stations. Nevertheless, by benefiting also from gaining a very strong position in Bucharest (most ENI stations located in the capital city), the 15% market share target will be achieved by MOL one year earlier than envisioned. The transaction also includes retail and wholesale activities in the Czech Republic and Slovakia, strengthening the group’s position in CEE as well.
New entrants: international oil players with strategic interest in the region – Although the evolution of the road fuelsdemand displayed limited growth in recent period, Romanian market still succeeds in attracting important international players, a clear sign of potential growth considering the medium-long term perspective.
SOCAR entered the Romanian fuel distribution market in 2011 after acquiring an independent network in North-East Romania and has ambitious plans to develop in the midterm a retail network comprised of ~300 gas stations. The decision to enter and afterwards to expand its operations in the Moldavian region was based on the already developed logistic and distribution network in Ukraine. Lately, SOCAR made progress in expanding its footprint to ~27 units in Q1 2014, with recent openings in Bucharest, but also in large Western cities in Romania, targeting 35 units by the end of the year.
NIS Petrol is developing its most important international project in Romania, following significant investments in Pancevo refinery. The current network is comprised of ~15 stations, half of which located in the Western part of the country due to logistic considerations. These logistic limitations are one of the key reasons hindering a more aggressive expansion of NIS Petrol, which has a target to reach 10% market share (equivalent of ~120 stations), considering the midterm outlook.
Both NIS Petrol and SOCAR display the strategic intent to develop regionally, bringing additional weight to their ambitious plans and further emphasizing their local presence.
Downstream activities are crucial for the integrated operation of players benefiting from significant oil reserves and important refining assets. This is the one of the underlying reasons behind the firm decisions of National Oil Companies like KazMunayGas, SOCAR or NIS Petrol to further expand their Romanian footprints.
On the other hand, the endeavors of local players like Bioromoil or Oscar Downstream to develop retail networks had limited success in the past years. This outcome indicates the difficult development of successful retail networks for players present only in the distribution & marketing segment of the value chain, without vertical integration support (E&P or refining capabilities) and/ or without group financial support.
Market challenges in an increasingly competitive environment
The competition on the road fuels market is expected to intensify, generating additional pressure on margins and further affecting the results of downstream activities, mainly driven by the oil product expected overcapacity (at local and regional level) and by the network expansions announced by both exiting and relatively new entrants on the market.
Oil product overcapacity – Following the modernization and capacity increase of Romanian refining facilities, increased supplies of both diesel and gasoline became available for local consumption. Capacity increases targeted diesel fuel in response to the growing demand for this fuel, but also generated additional pressure on gasoline exports.
Additionally, specialized wholesale players like Oscar Downstream significantly increase available product supplies in the market and benefit from higher flexibility due to sourcing through imports from major international traders.
Moreover, when looking at the CEE refining landscape, the competition is expected to further intensify as a result of investments from large integrated companies to increase refining capacities (e.g. Lukoil in Burgas, NIS-Gazprom in Pancevo or Rosneft in Tuapse).
Retail network expansion – The long term outlook foresees the expansions of players’ retail networks, performed partially through the acquisitions of ‘white stations’, and partially through ‘greenfield’ investments. These expansions will influence the average throughput registered by main market players, significantly intensifying competition and forcing players to adapt strategies in order to secure customers.
Emerging trends in fuel retail – Improvement of service/ product portfolio offering and customer focus as key differentiation factor
The increased market competition will positively impact services offered by main players, while the mounting pressure on margins could potentially have a lowering effect on fuel prices, a situation already seen for pricing policies of new market entrants seeking market share gain.
In the attempt of eluding the price war, players are expected to focus on differentiating their value proposition, gradually expanding the product and service portfolio offering in order to meet increasing customer demands. Big data usage will play a significant role in identifying customer needs in terms of products/ services, hence facilitating targeted offerings.
Increasing customer centricity and quality of services/ portfolio offering – Irrespective of the pricing strategy practiced for ‘wet’ products, considered in most of the cases commodities, market players will need to improve customer centricity, looking to secure existing customers and attract new ones.
Consequently, customers will enjoy a gradual increase of the service quality, in addition to the diversification of services, both aimed at improving the overall sale experience.
Increasing focus on value adding services – The importance of value adding services will increase due to the significant impact on both traffic and site profitability. The first movers already benefit from the decision of offering an extended range of
value adding services (e.g. OMV), while the laggards may need to invest considerable resources to make up for the lost start.
The use of existing infrastructure is expected to be an important objective for main market players, with financial services offering as one of the examples that can be added to the portfolio with limited effort and which can potentially improve traffic.
Other illustrative examples of value adding services that could be offered with a relatively limited investment needs include delivery services, oil change services or sport bets, the implementation decision varying on the basis of locations, available area or expected traffic.
On the other hand, the implementation of services like an automated car wash may imply significant requirements in terms of both the investment and the space needed. Hence, market players are expected to carefully prioritize such CAPEX intensive investments.
Shift to innovative concepts
Retail partnerships (e.g. supermarkets) – The quest for increased traffic and non-fuel sales has started multiple successful partnerships between gas station networks and large retailers in Europe (e.g. BP – M&S in the UK, Delhaize Shop & Go – Q8 in Belgium or Shell – 7 Eleven in Scandinavia).
Although partnerships could bring together experience from both players and considerable lower operating costs, so far the Romanian market has seen limited interest for such alliances.
Truck station formats – Currently a limited number of gas stations in Romania offer fully fledged services for trucks similar to Western Europe. Moreover, most of these outlets integrate ‘white stations’ and are not the focus of the main market players.
Potential international traffic growth is expected to increase the need for large format truck stations with associated services (e.g. parking, truck parts shop, truck wash), hence stimulating the interest of market players to develop such outlets.
Timely actions required from market players
The Romanian road fuels consumption is expected to show slow increase on the short-medium outlook. As the announced plans of new entrants begin to materialize, local competition will intensify, triggering decreases in the profitability/ average throughput and requiring actions from market players aimed at differentiation in the eyes of the customers.
The price war on wet products is likely to produce only a limited differentiation in terms of the perceived positioning, while negatively impacting the bottom line. Consequently, market players will need to identify alternative solutions aimed at switching the customer’s purchasing decision to their favor.
In this respect, a series of key success factors need to be considered by market players. A clear strategic positioning is required. Be it premium or mainstream, the positioning needs to be clear to the customers and players caught in the middle who are expected to experience difficulties. Furthermore, the operational efficiency is expected to play a key role as margins further diminish. An additional key success factor of utmost importance is customer centricity and targeted offering. As customers’ expectations increase, market players will need to increase efforts in order to both enhance product/ service offering, as well as to innovate.
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1) Slovakia, Croatia, Bulgaria, Hungary, Czech Republic, Austria, Poland
2) Electric vehicles
3) Gas stations privately owned outside traditional oil companies
4) Company Owned, Company Operated
