The Indian Automotive Lubricants Market was Largely Price-Sensitive - Management Assignment Help

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CASTROL INDIA LIMITED: AN INNOVATIVE DISTRIBUTION CHANNEL  
Renuka Kamath wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective  or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to  protect confidentiality.  
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It was January 2006, and Rai was just back from the annual sales conference where he had been lauded for  substantial growth in the sales of Castrol MCO 4T. While presenting the sales plans, he had niggling doubts  about his presentation. On his flight back home, he decided to re-examine the numbers. India was showing  great demand for motorcycles (casually referred to as bikes), resulting in 5 million bikes being added on  the road each year. After the 18–24 months of the warranty period, almost all of the bikes came into the  after-market2 for their maintenance service and consequent oil changes. At 3.5 litres per bike per year, the  MCO 4T market was growing by 17 million to 18 million litres per year. Castrol was present in most of the  important outlets in the after-market and had a strong over-the-counter market share. However, Castrol was  adding an average of only 2.5 million litres of MCO 4T per year, which was far less than the demand that  its market dominance suggested. Was there a parallel universe of outlets where Castrol was not present?  Was the data wrong? One thing was certain: over a period of time, Castrol would not only lose market share  but also market dominance. Rai became restless and decided to set up a meeting with members of his sales  and marketing teams to get to the root of this issue.  
INDIA, A GROWING ECONOMY  
India was a fast-growing economy with a large and expanding middle class (see Exhibit 1). The growth  indicators for India’s future pointed toward a stable and market-oriented economy (see Exhibit 2). The total  number of two-wheelers in India was expected to jump from 42 million units in 2004 to 80 million units by  2010 (see Exhibit 3) and was being driven by a combination of factors, including consumers’ increasing  disposable incomes, the aspiration to own a motorized vehicle, and the availability of easy financing. The primary growth drivers were coming from the younger demographic market, which had an entrepreneurial  energy. Competition was increasing, and the capital and financial markets were doing well in India. There  was also considerable growth in demand from rural areas. Opportunities lay in creating employment and  economic empowerment for the next generation. However, there were concerns regarding the poor  infrastructure of roads, insufficient transport networks, and inadequate power supply.  
Newer engine technologies and a shift from two-stroke engines to four-stroke engines would impact  consumer behaviour and choice of distribution channels. Before 2000, when a majority of the bikes had  two-stroke engines, most oil requirements (i.e., 2T oil) were met by petrol pumps and gasoline stations run  by the national oil companies (referred to as forecourts). In a two-stroke vehicle, the lubricating oil was  mixed with the gasoline, and it burned along with the fuel. Most consumers would simply have the gasoline  pump attendant mix the oil with the fuel in their two-stroke vehicle’s tank. In a four-stroke vehicle, the  lubrication system was separate, so the oil needed to be changed only once every 2,000 to 2,500 kilometres.  Consumers would change the oil during a maintenance service, which almost always occurred at a  workshop. This trend led to a complete shift of lubricant sales from forecourts to the open market, referred  to as the bazaar, or high street. The overall lubricants market was growing by 3 per cent per year, while the  MCO 4T market was growing by more than 20 per cent per year.  
CASTROL INDIA LIMITED  
Castrol was globally regarded as the leading lubricant specialist, providing premium lubricating oils, greases,  and related services to automotive, industrial, and marine customers across the world. Founded by Charles  Cheers Wakefield, the company was renowned for its technological innovation and marketing expertise. The  company was headquartered in the United Kingdom and operated directly in more than 40 countries,  employing approximately 7,000 staff worldwide. In nearly 100 other markets, Castrol was represented by  third-party distributors who marketed and sold their products locally. The Castrol delivery network extended  across 140 countries, covering 800 ports and partnering with more than 2,000 distributors and agents.  
Castrol had been in India for more than 85 years, selling lubricants that covered a wide range of automotive  and industrial applications. The automotive portfolio covered engine oils, gear oils, transmission fluids,  greases, coolants, and brake fluids. The industrial portfolio contained a wide range of metal working oils,  high-performance lubricants, corrosion preventives, industrial cleaning chemicals, hydraulic oils, gear oils,  turbine oils, and general lubricating oils.  
Castrol had redefined the lubricant marketing channels in India. In the 1970s, more than 90 per cent of all  lubricant sales occurred at retail forecourts. Following the nationalization of the industry, when  government-owned national oil companies took over these forecourts, Castrol cultivated and developed the  bazaar channel, which eventually contributed more than 65 per cent of the industry’s lubricant sales.  
Being technology leaders, Castrol had many achievements in the Indian lubricants market, including being  first to introduce several new products:  
Multi-grade oils in India in 1982 (CRB)  
A dedicated passenger car oil in 1983 (GTX)  
A dedicated two-stroke oil in 1984 (Super TT)  
A dedicated four-stroke oil in India in 1993 (Grand Prix, later migrated to Activ 4T)  ? New pack formats, including the 40-millilitre pouch (Scootek 2T) and the 50-litre garage pack

COMPETITION  
The Indian automotive lubricants market was largely price-sensitive. Changes in engine design and newer  technology meant that the oil sump sizes were getting smaller, and the periods between oil changes were  longer. These changes led to stagnation in volume growth.  
The market had more than 22 large and small manufacturers, represented by a mix of public sector  undertakings3 (PSUs), multinational lubricant companies (e.g., Shell, Gulf, Valvoline, Veedol, and Elf),  and local manufacturers.  
Castrol faced competition from three large PSUs: Indian Oil Corporation Limited, Bharat Petroleum  Corporation Limited, and Hindustan Petroleum Corporation Limited (see Exhibit 5). These PSUs had the  advantage of owning forecourts, where they could retail the lubricants directly to the consumers at the time  of refuelling. At these forecourts, consumers were either given recommendations to change oil or asked  about their need for an oil change. That opportunity was not available to Castrol because the forecourts  were not allowed to market products from other companies.  
PSUs were the market leaders in the two-stroke oil category, but the four-stroke oil category was a level  playing field (in other words, a market where all players had equal opportunities), which was available  largely in the after-market bazaar trade. Brand awareness, channel advocacy, and distribution determined  the sales and power of the brand. PSUs were investing heavily in setting up a distribution network and  trying to gain market share by giving large trade deals, such as discounts and better credit terms.  
Apart from the lubricant companies, Castrol also faced a growing threat from “genuine oils.” For example,  some motorcycle manufacturers, such as Hero Honda Motors, packaged engine oils under their brand name  (e.g., Hero Honda 4T), which they sold through both their own dealerships and the bazaar trade.  
Technological innovations enabled Castrol to maintain its leadership in the four-stroke category; strong  sales and marketing initiatives ensured its success in the after-market.  
EXHIBIT 1: SHARE OF INDIAN POPULATION IN EACH INCOME BRACKET (%)

EXHIBIT 2: INDIA’S INTERNAL ECONOMIC MEASURES INDICATING A STABLE AND MARKET ORIENTED ECONOMY IN FUTURE  

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