August 15, 2017

Part 2: How Deregulation Pace Shifts Based on Market

Deregulation, Fuel Retailing

By Anila Siraj, EVP of Research and Applied Data Sciences

There are several ways for deregulation to unfold, because markets evolve differently and will be impacted by specific changes to regulation and specific characteristics relevant to that market. But overall, each market will, at some point, move through the phases of market maturity.

In part two of our two-part series on deregulation (read part one here), we'll dive deeper into how different markets have evolved through the various phases of maturity. We'll also explore what all of this means for you within the fuel retail market.

How Can the Pace Shift Based on the Market?

Let's take a look at some examples of how different markets have evolved.

Russia began deregulation back in the 1990s, when price controls were lifted. Within a period of 18 months, fuel pricing was liberalized. But after the Soviet Union broke up, that liberalization reversed. Control was re-established over the industry. In these complicated economies and emerging markets, there are no guarantees price deregulation won't experience a reversal.

In Mexico, the process has been relatively smooth. They announced deregulation in the last quarter of 2014, and that it would begin January 1, 2015 — a short timeframe. The plan was that on that date, the max threshold would be set and retailers would be free to drop prices. Later on, retailers were enabled to fly their own brands, and then purchase from suppliers other than the National company, Pemex. Though the option to freely purchase fuel from foreign suppliers was in place by April of 2016, the duty on imports made it prohibitive. That has since changed and because of Mexico's proximity to the U.S., suppliers from the U.S. began entering the market, driving a quicker pace to deregulation.

Then there are markets such as Brazil, which began deregulation in 1997-1999. Though it was completed in 2000, the Brazil market still is not what we consider fully deregulated, in the sense that a majority of the supply comes from the national oil company, and regulations are still in place for the integration of the distributors with the retailers. The distributor buys at the refinery gate, but cannot sell directly to a consumer. Small retailers have the option to fly the brand of the distributor, or no brand. These 'white pumpers' make up about half the market. Distributors are busy fighting for contracts, with no control over price, which is set by retailers. Brazil is an excellent example of a market that is deregulating vs. fully deregulated.

What Does it all Mean for You?

If your company is already present within, or looking at entering, a newly deregulated or a deregulating market, and you know you are able to compete based on your infrastructural strength, you are in a great position. A position that many companies, or those in the midst of a new expansion, do not often hold. But, in any case, there is a lot to catch up on.

Begin by researching the conditions of the market you are entering. You not only need to understand deregulation itself, at a high level, but also the local economy, consumers and culture and the competitive mix. This understanding must evolve, just as the market evolves and behaviors change. It will be important that you constantly consider how the entry of new competitors into the market will impact not only price range, but also price frequency. You may start with measured and steady pricing, but will eventually need to price more frequently in an unstable, competitive and volatile market, which means you need to factor other aspects of your retail operation into your success.

Ultimately, the move into a deregulated market requires highly specific and informed market intelligence data. It should be clean, actionable and accurate, providing insight from within the market itself. Total immersion is required, and enlisting the support of partners who fully grasp the previously regulated fuel environment and how deregulation unfolds, is invaluable. A global fuel market is complicated; the learning curve is steep and experience counts.

Kalibrate can assess your readiness for deregulation. As you go through the deregulation process, the only thing that is certain is uncertainty. A lot will be changing all around you. As the market becomes more competitive and price changes happen more frequently, you will need to be prepared for the move toward automation. To understand where your people, process and pricing stand today and how you must evolve with the market, contact Kalibrate today.

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