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We Will Develop under Any External Conditions

Alexander Krylov

Interview with head of GazproNeft’s Regional Sales Directorate, Alexander Krylov

March 2011. Siberian Oil Magazine.

The network of filling stations is the face of any oil company. It is here that customers form their opinion of the quality of products, and the standard of service says plenty about how progressive an operator is. From a business point of view, retail sales and small wholesale are the most profitable channels through which to sell petroleum products. The head of the regional sales directorate, Alexander Krylov, told us about how 2010 worked out for Gazprom Neft’s sales segment, how 2011 has begun and in what areas they plan to develop.

- What was post-crisis 2010 like for the sales business?

- It was successful in all respects. We saw a recovery in volume in the regional construction industry, industrial enterprises restored their production volumes, and, as a result, POL consumption increased in comparison with the crisis year of 2009. All this allowed us to return to our pre-crisis indicators in terms of the rate at which sales figures increased. In general, we have nothing to complain about.

- And what if you were to express this positive trend in figures?

- The increase in sales in the premium channels was much higher than the market average. It was 22 % in small wholesale, which has already been growing at Gazprom Neft for several years. This is a very serious achievement. In 2007 we sold 2 mln tons by small wholesale, and when we planned the strategy for 2020, we had the ambitious objective of increasing the figures in this premium sales channel for the company by 150 %. We set a target of 5 mln tons of small wholesale sales by 2020. In 2010 we sold 4.6 mln tons by small wholesale – in other words, we almost achieved the strategic goal for 2020.

As for retail trading, we are seeing pretty much the same positive trends in volume growth – up by 21% from 2009, but this is the first time we have recorded such considerable growth.

- What factors led to this sort of growth in the figures?

- The regional network of petroleum bases did not increase in number; moreover, we took a number of measures to optimize and decommission inefficient petroleum bases. Thus, the increase in small wholesale volumes is connected first of all with the action taken by top executives. We have, first and foremost, changed our approach to sales organization. Two years ago, in conjunction with the consulting company McKinsey & Company, we developed and introduced a program to increase sales efficiency at our enterprises, based on the principle of active interaction with customers. Its main aim is to motivate the sellers to go to the customer and look for opportunities to increase sales. As you see, the results did not take long to materialize.

The increase in retail sales figures is, first and foremost, the result of the successful implementation of three projects that are pretty substantial for our network: rebranding, introduction of a loyalty program for individuals and introduction of a corporate non-cash payment system for legal entities. At present, our retail network comprises two segments: fully modernized filling stations that comply with company standards and stations with temporary Gazprom Neft branding which are still to be reconstructed. But all these belong to the Gazprom Neft filling station network, which is well known in every region where we have a presence. We estimate the rebranding project has contributed 15 % of the sales growth at the sites.

The second instrument is the loyalty program “We are moving in the same direction”. According to our estimates, its introduction brought in an additional 5 % to 10 % growth in retail volumes. This result means we can say that our customers have accepted the product. We managed to use our competitive advantage by offering the only bonus loyalty program in the Russian retail fuel market, instead of direct discounts using cards. The program motivates a person to return to our station to use the discount accrued during previous visits.

A considerable increase in the volume of retail sales to legal entities, 29 %, resulted from the new corporate non-cash payment system. This is related both to the general recovery in the corporate transportation market following the crisis and to the instrument itself, which was well thought out and successfully introduced. Gazprom Neft’s corporate fuel card allows people to fill up at over 2,000 filling stations run by Gazprom Neft and its partners, not only in Russia but also abroad. I think that in this segment we will be concentrating on working with large trucking companies, which not only operate in local markets but also transport transit cargo across the whole country and across the former Soviet Union.

But it goes without saying that neither the rebranding nor the loyalty program will work efficiently without introducing and improving standards of service. Actually, I would talk about this whole bundle of issues as a business process of brand management. The brand is not what is depicted on the exterior of the filling station. It is a system that includes everything – from standards to promo-campaigns, from loyalty programs and corporate sales to station cleanliness. The results are clear to see in both literal and figurative senses: we see smiles at the stations and positive responses from customers.

- Is it difficult to teach staff to smile?

- In 2010, the company’s management board adopted the HR strategy for the regional sales directorate, envisaging the creation of a multi-level system for our work with staff – the recruitment, training, development and motivation of employees. We work every day in two areas. The first applies to those who want to work but cannot do everything yet. Besides the interregional study centers we have set up in every region, we have developed a program for these people based on the retail sales experience of our colleagues from the ENI company in Rome. These are so-called mobile brigades. A special minibus, in essence a mobile classroom with a full range of teaching programs and manuals, travels round the filling stations. The staff from the mobile brigade evaluates the work of the station staff, records mistakes and explains to the person what they did wrong and how they should behave. This has absolutely no influence on the salary and motivation of filling station staff. First we thought we would do with just one mobile brigade for each regional enterprise, which would visit all the stations over the course of a month, but now each region has two or even three. In my opinion, we have managed to roll the new standards out quickly and efficiently to each of our stations.

Then, there is the “mystery shopper” system for those who can work but don't want to. Once the results of these checks have been compiled, they have a direct influence on the performance indicators of the station and the enterprise and, correspondingly, on the bonuses awarded to teams.

- But there is one more stage: when someone wants to do the job and can do it, but competitors simply pay more...

- Our HR strategy has sections on recruiting and on monitoring changes in local labor markets. We have relevant information, so we can clearly monitor the situation in the regional labor market. I think that people at our stations get a decent salary compared to average market rates, and there is no point in starting an arms race here. People have to be made to take an interest. A person spends a lot of time at work, so we pay a lot of attention specifically to the life of the team. For example, this year we held a number of different events that generated a great deal of interest: a beauty contest for women working at petroleum products procurement enterprises, mini-Olympics between petroleum products procurement enterprises, a “Best by profession” contest and an open mic show. These are not just competitions that last one day and then everyone forgets about them. They involved preparation, selection tours, worries – this is the life of the team, its unification.

- About a year ago, one more global merger took place – this time it did not concern staff but enterprises. Have the centralization of management and the creation of sales mega-regions brought the expected results?

- The result may be assessed as positive. We reduced costs and introduced unified standards which made management simpler and easier to understand. But from the moment this project was implemented, the development objectives in the company strategy-2020 became a priority. So the decision was taken recently that representative offices with modest staffing would be set up in those regions where we needed to take a big step forward in accordance with strategy-2020. These regions include Krasnoyarsk and Nizhny Novgorod, but the pace of growth must be higher there than on average across the network.

- But you are not planning to return independence to the “absorbed” regions, are you?

- According to our calculations, sales can exist independently if there are 50 stations. If Krasnoyarsk manages to increase its network to 50 filling stations over a year or two, it will become a fully independent sales operation.

- In 2010, the company acquired several independent sales operations...

- Yes, and the year was very productive from this point of view, too. First of all, this is Asia, of course. We acquired networks in Tajikistan and Kazakhstan and strengthened our position in Kyrgyzstan. We are looking closely at Irkutsk, and, as I said earlier, Krasnoyarsk and Nizhny Novgorod. We had drastic changes in Moscow. The market is yet to assess the scale of these changes, but this is really a great step forward for us. After buying Sibir Energy, we suddenly turned from a minor player into a key player in the Moscow market. And there are two important components here: the Moscow oil refinery and a very serious retail trade with huge sales, and well situated stations, which means the asset can be deemed to be one of the best networks in the region. In other words, we now have all the trump cards in the Moscow market in our hands, and the main thing is to make the right use of the advantage that has materialized.

- Besides Asia, Gazprom Neft has one more large foreign market – in the Balkans. How are sales in Serbia going?

- This is a very interesting project – a different market, a different mentality, a new experience for us. In my opinion, all our latest achievements are connected with the successful implementation of the process of standardizing petroleum product procurement enterprises. In this sense, the situation is much more difficult in Serbia, first of all because of the presence of another shareholder with whom you have to reach agreement. This substantially slows down the speed at which changes are introduced. Nevertheless, I think that our proven systemic approach to sales organization will deliver results in Serbia as well in the near future.

- In one other country, Belarus, there is no second shareholder, after sales assets were divided with TNK-BP. Is everything easy there now?

- They have their own peculiarities there. Of the markets where we work, this is the only one which is fully regulated by the state. Consequently, business profitability is regulated, too. There are questions about this, but I would not say that somebody is preventing us from introducing standards.

- Do the latest events in Russia not remind you of Belarus, with its regulated market?

- I think that the things that are happening here at the moment are deceitful. If we need a regulated market, then we probably need to admit that and say: “Yes, this is very important from the standpoint of the country’s development strategy, so let’s determine some price corridors to hedge against a sharp increase in prices.” But instead of this we hear statements about how market-focused we are, in parallel with attempts to influence the situation. It seems to me that the situation in Russia is much less clear than in Belarus. There are rules of the game there, but we don’t have them here.

- What other factors determined the situation on the Russian market in 2010, were there any important changes?

- Many people expected mass sales of sales assets by independent players who had failed to overcome crisis-related problems. But this did not happen: even in the crisis year of 2009, and even more so in 2010, there was quite a high retail margin, which allowed independent players to stay the course. Yes, there are some local changes from the standpoint of the growth of a separate Vertically Integrated Oil Company (VIOC) in some local region. But we cannot say that the crisis has substantially reconfigured the balance of forces in the market.

- Geographically, are the spheres of influence still distributed among VIOCs by regions of oil refinery ownership?

- Now here, I would say there is a trend which is not quite fully formed, but can be seen, and in many ways it is the result of the activities of FAS. Many companies started thinking of leveling out the share of their presence in the regions. That is, we are talking about a certain decrease in the market share in places where it is high and, consequently, an increase in those constituent parts of the federation where they have a modest presence. I would not have believed it if I had been told a couple of years ago that LUKOIL was seriously considering the possibility of entering Omsk Region. Now they are interested in it, even if they are using franchising systems, in the same way as we consider the Nizhny Novgorod market to be strategically interesting.

- Is Gazprom Neft planning to expand its business in 2011?

- The recent events connected with the complaints raised by FAS resulted in the fact that we recorded a sharp decrease in retail segment profitability. In this context, it is fairly difficult to talk about aggressive expansion. But I have always thought that there must be development no matter what. Gazprom Neft has a long-term development strategy which includes all the principal business units, from extraction to processing and sales. Current difficulties must not influence the strategy as a whole. Moreover, against the scale of a vertically integrated oil company, retail is a way of hedging against fluctuations in the prices for petroleum products. The larger the retail share of the oil company, the lower the risks connected with the market situation, and each liter sold from a spray gun is always more profitable for the company than other operations, including export operations. So, in any case, we are going to develop.

- In what areas?

- As you can see from the figures for our results in 2010, it will not be easy to maintain the rate of growth in the small wholesale channel. In the past four years, the volumes have almost trebled, and it will be impossible to grow at the same pace without structural improvements to the quality of the petroleum base logistical system. We need to implement a program of reconstruction and automation of petroleum bases, and this means very serious investment. We took the first step last year by launching a project to hive off our business in transporting and storing petroleum, and so we set up the Gazprom Neft Terminal company. Petroleum bases are gradually being transferred to it, and it is this company that should lead the global program of reconstruction and automation, by starting to supply transfer and storage services to our petroleum product procurement enterprises and offering this service on regional markets, thus becoming another profit center. We are continuing to move in this direction, but at the moment, returning to events in the market, there are certain limitations to project financing.

If we are talking about the retail trade, it is very important for us to develop a project we have already successfully started, to put the new branded G-Drive fuel on the market. In addition, we need to improve the loyalty program. It is now clear that it has certain bottlenecks, connected with database management. In a year, we want to transform the program, making it more flexible, with the possibility of fine adjustment, which means we will be able to offer efficient marketing products.

As for the geography, we will definitely be developing a network in Kazakhstan. This is connected with the growth in high-octane petrol production at the Omsk oil refinery, following the launch of Izomalk, and, in general, the prospects in this country are good and clear. In St Petersburg, we will concentrate on developing existing construction sites for the purpose of building modern filling stations. We also plan to enter the Ukrainian market and strengthen our position there as long as we can. In general, everything suggests that 2011 should be even more successful than 2010.