How did Turkey’s Autogas refuelling network get to be the world’s biggest?
A wide distribution network has always been one of the key growth factors of every developing industry and this is particularly true of Autogas. Turkey has taken advantage of this fact to boost its autogas sales through years and now has the world’s largest autogas refuelling network as measured by the number of dispensing sites. This can also be seen as a chicken-egg problem, since an extensive network would be expected to go hand in hand with a big market and Turkey is the world’s second-largest Autogas consuming country. However, there are other reasons why the network has grown so much. The industry has gone through several stages to reach this position and further expansion of the network is expected with continued growth in Autogas demand.
In 1997, when Turkish Autogas market was about to take off, no one expected how big the market would turn out to be and how fast it would grow. At that time, the Autogas business was handled by LPG distribution companies, which were used to supplying LPG in cylinders and in bulk to industry. The first step was to build stand-alone Autogas refuelling stations, selling just Autogas. The early years of market expansion were characterised by a struggle to satisfy demand. In order to achieve this goal, the business model that was deemed most appropriate was the Dealer Owned Dealer Operated (DODO) model. With that model, the distribution firms could widen their network rapidly without having to invest huge amounts in fixed assets. At that time, gasoline still accounted for most passenger car fuel consumption.
Being in the shadow of gasoline and diesel, Autogas did not attract the interest of the traditional gasoline distribution companies at first. With the efforts of the LPG distributors’ efforts to meet growing demand, Autogas consumption increased enormously, from zero in 1997 to 1.3 million tonnes in 2000. This success eventually caught the attention of the gasoline distributors and they started to add Autogas to their stations’ product range. However they were still reluctant to invest heavily in this business, effectively letting LPG distribution firms do the job for them and sharing a small amount of the profit with them.
After several years, the paradigm of the gasoline distribution firms had shifted. The Autogas fleet was still growing very rapidly and those companies started to become concerned about their gasoline sales and profit margins. That led them to establish their own LPG distribution firms. As a result, the LPG distribution companies realised that a growth strategy based on running stand-alone Autogas stations was no longer viable in the face of competition from the traditional gasoline distributors. For the gasoline distributors, this involved relatively small amounts of new investment in their existing refuelling stations, yielding large additional profits and greatly boosting their Autogas market shares.
The gasoline distributors’ interest in developing their own Autogas business gave new impetus to the growth of the Autogas station network. The number of Autogas refuelling stations increased by 65% in the five years to 2011 (Figure 1). Most of this increase was down to the addition of Autogas to the product range at existing gasoline stations. In 2006, only half of the gasoline refuelling stations offered Autogas; today, more than 75% of them have Autogas pumps.
Table 1 – Autogas dispensing stations and availability rates in Turkey, 2006-2011
During the period of rapid market expansion, the availability of LPG increased significantly. But this led to another problem: as many stations began to operate side by side, profit margins began to come under pressure from the increased competition between stations – despite rising overall Autogas consumption. The 11 countries worldwide with Autogas consumption of more than 500 000 tonnes per year are shown at Table 2. Turkey has the most Autogas dispensing sites, but it also has the lowest average consumption per site after the United States and Poland.
Table 2 – Autogas consumption and dispensing sites in leading countries
Increasing competition and falling sales per site led the dealers to press for higher profit margins, which resulted in new business operation models being introduced to the industry. The DODO model worked when the market was taking off, but it suffered from the drawback that it effectively splits the profit margin into two between the distributor and the dealer. On top of this, in 2010, the government revised the law, limiting the maximum period for dealerships to five years. This change has led the dealers to demand higher transfer fees when the contract terminates.
Some distribution firms decided to shift to Company Owned Company Operated (COCO) and Company Owned Dealer Operated (CODO) models. These models have the advantage of keeping the whole margin but firms have to invest much more in fixed assets. In the fourth quarter of 2010, a new player entered the market using those models and gained market share with a strategy of cutting prices. But it had to stop opening new stations after a while, simply because it ran out of cash to finance new investment. The former owner of an existing gasoline distribution company has just become the majority shareholder of the new entrant, with a plan to continue the expansion strategy through more investment. If it proves successful, other new players may break into the market and price competition may intensify.
To add to the pressure on Autogas distributors’ margins, the government has been pushing them to cut their profit margins even further in order to keep prices at the pump down. To help achieve that, the government banned all promotional campaigns except credit card and loyalty programmes. This left the fuel distributors with two options: they could either cut prices or they could focus on the permitted campaigns and try to offer more value-added services in the stations. Some chose the first option and competition on price began to intensify. In contrast, the big firms decided to go down the second path, recognising that for the customer, price is not the sole criterion in choosing where to refuel.
Turkish people are generally very demanding when they buy a product or a service. Self-service stations are common in many European countries, but not so in Turkey. Most Turkish consumers prefer to be served and to pay without having to get out of the car and they look for other services, like having the car cleaned or receiving a promotional gift or offer. Since the ban on promotional campaigns was introduced, they have become even more demanding. In response, the refuelling stations are expanding the range of services on offer within the stations, such as bakeries, restaurants and bazaars. Those services are intended to encourage people to visit a specific station and hopefully buy the fuel when they stop by. In addition, gasoline distributors are trying to extend the product range in their stores and keep prices competitive. Ando some free services are now being offered, including free wi-fi, computers with internet access, massage chairs, soup and beverages.
Life may not be easy for the distributors, whose profits are coming under pressure, but the consumer is getting the benefit. The key to survival in a still-growing Autogas market is recognising that the customer is king and serving him like one.
For more information about Autogas in Turkey, please contact Burak Pala by email at: firstname.lastname@example.org.