|20 December, 2018

Interview: UAE's biggest fuel retailer still has plenty left in the tank - deputy CEO of ADNOC Distribution

ADNOC Distribution's John Carey says benefits of IPO strategy only just beginning to bear fruit

A customer uses self-service pumps at ADNOC Distribution's Yas North station.

A customer uses self-service pumps at ADNOC Distribution's Yas North station.

ADNOC Distribution/handout via Zawya

In some ways, it was hardly surprising that the initial public offering of a 10 percent stake in Abu Dhabi National Oil Company’s fuel distribution arm this time last year was more than 20-times oversubscribed.

The firm enjoys a 67 percent share of the fuel retail market in the United Arab Emirates. It has a monopoly on fuel stations in the emirates of Abu Dhabi and Sharjah, and owns 90 percent of the fuel stations in northern Emirates (outside of Dubai).

Yet buying the company’s shares was not without its risks for investors. This was still a division of a state-owned enterprise which was retaining 90 percent of the shares (albeit one in the midst of its own transformation), and, according to its deputy CEO, John Carey, it had been loss-making prior to August 2015, when a removal of fuel subsidies across the country shook up the sector.

ADNOC Distribution’s pitch to investors was based partly around efficiency – it is cutting the cost of building new stations by 40 percent, for instance – but was more crucially pitched on growth. The company planned to increase its market share through entry into the Dubai and Saudi markets, introduce charging for customers who want to continue using attendants to fill their cars and overhaul its non-fuel retail to increase customer spend.

“The easier thing to do is to be efficient, the harder thing to do is to grow,” Carey told Zawya in an interview at the company’s headquarters on Tuesday. He joined the firm just ahead of last year’s IPO, after a long career at Castrol and BP, where he had run BP’s LNG arm and a downstream business on the West Coast of the United States overseeing more than 8,000 sites.

Thus far, ADNOC Distribution’s numbers look good, with the company on track to meet its 2018 full-year targets. Results for the nine months to September 30 show a 19 percent increase in revenues to 16.9 billion UAE dirhams ($4.6 billion) and a 28 percent increase in net profit to 1.68 billion dirhams.

The figures have been helped somewhat by an uplift in oil prices – the price of a barrel of Brent crude has increased by 15.4 percent since the start of the year to $72.21. But although the number of fuel transactions at its stations rose by 2.2 percent in the third quarter, the increasing cost of fuel has meant the volume of fuel sold actually declined over the nine month period by 2.3 percent, to 7.18 million litres.

The company has also largely completed the rollout of its Flex Fuel programme, where it has introduced self-service alongside a premium service with a 10 dirham charge for customers who wish to continue having cars filled by attendants.

Although self-service had previously been tried - and failed – in the UAE, Carey believes that ADNOC Distribution’s approach is different.

Buy or DIY

“When it was trialled previously, it was trialled as only self-service. So you didn't give people the choice. Whereas we were really clear, you do have a choice.”

He also said that one thing that hasn’t been clear to customers yet is that customers who use it receive reward vouchers for products worth at least an equivalent amount –  a current promotion offers free bottled water packs worth more than 12 dirhams, for instance.

Within the IPO prospectus, the company gave guidance to investors that it would charge between 5-10 dirhams for the premium service, and predicted take-up among customers of 40-50 percent.

When Flex Fuel was introduced in June, the charge was at the top end of guidance at 10 dirhams, but the take-up among customers so far has been below initial projections, at around 20 percent.

Carey said that he felt the launch of Flex had “gone OK”. Although he is happy with the company’s delivery of the product, he believes its purpose or benefits haven’t been communicated well enough.

“We haven't got our message as clearly across that actually, we're trying to hold costs down,” he said.

He said maintaining the status quo was less efficient than offering self-service and ultimately leads to higher costs for customers.

“It's done everywhere else in the world, there's no reason why this region shouldn't look at self-service and become more efficient. Because what we don't want to do is pass our inefficiencies onto our customers,” Carey said.

He also said that the company had introduced a cheaper (91 octane) grade of petrol for more price-sensitive customers, with a view to “widen the choice we’re giving”.

“If you think, 'I might as well go to a competitor because they're cheaper’, that's just patently not true. We are cheaper with 91,” he said.

A BrandIndex score developed by YouGov, which measures perceptions of a brand’s overall health, initially dropped for ADNOC Distribution between June and September following the introduction of Flex, but has now recovered amongst Abu Dhabi residents to levels experienced prior to the launch. Across the whole of the UAE, however, the Index is still tracking below its pre-Flex Fuel launch, YouGov explained in an email to Zawya last week.

“We see stark differences in ADNOC Distribution’s overall brand health perceptions in its home city of Abu Dhabi versus the wider UAE, with a marked improvement in the scores for the former,” a YouGov spokesman said.

Another service for which the company hopes to be able to charge a premium is a home fuel delivery scheme which has been undergoing trials all year. Although the trials have gone well, Carey said that the company needs to ensure safety protocols and procedures are robust enough before rolling it out.

Its expansion into Dubai has been much more straightforward, with the company announcing the opening of its first fuel station in the emirate at Dubai Investments Park on Monday. A further two are set to follow by the end of the month at Al Qusais and on the Dubai-Al Ain Highway, Carey said.

ADNOC Distribution has said it will target three to five new station openings in Dubai per year in the future as part of an overall expansion that will see around 10 new stations across the country each year.

By the end of September, ADNOC Distribution had opened five new stations in 2018, bringing the total to 364, with eight more planned by the end of the year. Earlier this month, the company opened its first two Saudi stores – both of which are operated through a franchise agreement.

Carey said the franchise model offers the company “a learning curve” with a local partner into Saudi Arabia.

“We shouldn't underestimate going into a new market and we want to build that partnership,” he said, but added that it will also consider company-owned and company-operated sites in the kingdom, stating that it was a big enough market to incorporate all models.

The Saudi market remains very fragmented, he said, with the quality of privately-owned sites varying considerably. He believes ADNOC-branded stations with convenience stores will prove popular, and is more concerned with station standards than ownership models.

“As long as the customer doesn't see the difference between a franchise and a company-owned, we're fine.”

Happy shopper

In terms of non-fuel retail, the company added  six convenience stores to its portfolio by the end of September, bringing the total to 241. It has also increased the average basket size by 22 percent through a mix of better category management, store upgrades and a new partnership with French retailer Geant, with whom it plans to have 13 Geant Express stores open by the end of the year.

“We had a very large product range, of which only the top 10 percent was really selling. So we have rationalised our product range, looked at the top products and given more choice at the top end. We've brought more products into the range, like a new coffee offer, a new bakery and so on.”

Whether this strategy delivers the type of growth required to excite investors remains to be seen.

A note published by analysts from Arqaam Capital on Wednesday suggested it may not. It pointed to the lower fuel volumes experienced so far this year, which it said were the result of muted retail activity in the UAE, an ‘expat exodus’ (Carey argued in an analysts’ call that this could merely be due to a summer lull in Q3 than a permanent population decline) and the dampening effect of higher prices on demand.

It predicted only a marginal growth in volumes of around 3 percent for next year, and said inventory gains made by ADNOC Distribution during the first nine months could be reversed in the final quarter as the oil price has fallen by 30 percent since the end of September. Arqaam Capital maintained its ‘Hold’ rating on the firm’s shares, with a target price of 2.60 dirhams. ADNOC Distribution closed on Wednesday at 2.30 dirhams per share, having declined by 12.5 percent in the year-to-date.

Yet Carey argues that the benefits of the strategy it has been rolling out will filter through to results.

“We've started our own coffee offer, which is a really unique coffee offer, but we've only got it in four of our sites. We've only got 13 Geant sites, so there's a chance for us to grow that significantly,” he said.

He likened the latter to partnerships in the UK, between BP and Marks & Spencer, or Shell and Waitrose.

An attendant offers premium service at ADNOC Diistribution's Yas North station. (ADNOC Distribution/handout via Zawya)

Carey said in the UK such sites are seen as ‘local supermarkets’, as opposed to merely forecourt retail units. So far, he said, the Geant Express sites “have gone very well” where they’ve been introduced, and will be rolled out at Dubai sites.

“Our product range across our whole piece is good. We have tried to be better and more competitive in pricing in some areas (and) I think our rewards programme has brought more people into the stores,” he said.

Overall, he argued that the company’s performance in 2018 has been “strong”.

“We're on track on our business plan for this year,” he said.

Related article: ADNOC Distribution 'ready' to roll out fuel-on-delivery service

(Reporting by Michael Fahy; Editing by Shane McGinley)

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© ZAWYA 2018

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