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WALKING THE TIGHT-ROPE: THE CHALLENGES FOR A NEW LPG MARKETER IN KENYA

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“Retail is detail”- is one of the famous principles in retail business.

For majority of marketers who have joined the domestic LPG (Liquefied Petroleum Gas) industry in Kenya in the last seven years, this statement is one that they have learned the hard way.

Owing to various challenges that led to intermittent supplies of cooking gas some years back, the government of Kenya, through Legal Notice no.121 of 2009, ‘liberalised’ and regulated the market for domestic LPG market segment. The new rules standardised the LPG cylinders sizes and valves, and made it mandatory for suppliers of domestic LPG to supply a full cylinder to consumers irrespective of the brand the customer would be having.  The new regulation also requires that all LPG marketers (brand owners) can only sell filled cylinders of their own brand, and all empty cylinders of other brands received from customers must be given back to the brand owners, in exchange for their own cylinders or a deposit refund at a pre-determined rate.  This exchange and payment is coordinated through the LPG Cylinder Exchange Pool (the ‘Pool’), whose membership is compulsory for all domestic LPG marketers.

The exchange arrangement was well received by the consumers, who no longer have to go without gas if their brand is not available. Furthermore, there is no need to change regulators when a different brand is bought, unlike the past when consumers with more than one brand of cylinder had to keep a regulator for each one. The retailers, who buy filled cylinders at wholesale price and sell to individual consumers, also welcomed the change, as they could no longer lose a sale merely for not having a particular brand of cylinder held by a customer. 

For new marketers, the rules looked attractive as they allowed quick entry into the market. A new marketer introducing their  own brand does not have to wait to grow their own brand by selling to new customers, a slow and expensive process.  All one has to do is sell a filled cylinder of the new brand in exchange for empty cylinders previously held by the consumer or retailer. Many new marketers came up with their own brands of domestic LPG, and became members of the ‘Pool’. The number of ‘Pool’ members has dramatically grown from the original seven to nearly thirty in only seven years, while the actual volume of gas usage has grown only slightly.

Many of the new marketers are finding the role of the marketer to be a bit murkier than they had expected. The business challenges include too many low value transactions, increased competition from legal and ‘illegal’ marketers, cylinder management issues, cost of setting and maintaining a network, and high ‘exit barriers’.

Too many transactions; low value

Most of the trading in the petroleum business involves a handful of transactions per day.  In the early days, marketers of domestic LPG used to sell a minimum quantity to the retailers, who would go to the depot after making the payments for their requirements in the bank. The new market entrants found that they had to go out and seek the customers, making them flex the minimum quantities and sell as per the customer demand. Indeed, it is not unusual to find retailers, particularly in the residential areas, buying one, two, five, etc., number of cylinders when the delivery truck calls. The sales executives have to make many deliveries and move long distances to make substantial sales, increasing the cost of doing business. Daily reconciliation of sales and cash handled becomes another long process, and employee supervision adds to the cost of business. Furthermore, the vessels (gas cylinders) are valuable whether full or empty, and one has to take care of both filled cylinders, for the gas, and empty cylinders.

Cylinder Management Issues

Cylinder management issues range from operating stocks, cylinder turnaround time, and timely re-ordering until optimum level is reached.

Although the minimum quantity to be licenced as a brand owner is 5,000 cylinders, this number is far too small for a sustainable business venture. This is because once a consumer buys a gas refill (a filled cylinder), it takes time to finish using the gas in the cylinder. A pedestrian view of cylinder utilisation can be misleading; many urban and middle income earners use one cylinder per month, but annual LPG sales and practice in Kenya indicate that on average, a cylinder comes back to the brand owner after about four months.

Apart from the time taken by a consumer, another factor that adds onto the cylinder turn around time is the ‘Pool’. If a customer chooses to buy another brand for whatever reason, the cylinder will be picked by the marketer that has supplied the new gas requirement. The empty cylinder lands at the competitors depot (or warehouse), and may take many weeks before the brand owner is able to collect it. Although the marketers give the weekly stocks to the ‘Pool’ coordinator, it makes commercial sense to wait for the cylinders due for return, to accumulate such that it is economical to collect them. With so many brands in the market, a marketer without enough cylinders spends a lot of time and money collecting whatever cylinders held by the competitors. And since most marketers do not allow vehicles to get into their compounds when they are carrying competitor cylinders, the marketer collecting their own cylinders has to make multiple trips. If the cylinder numbers are few, then the trips end up being uneconomical, eating into the small profits. 

Another challenge from the exchange is new phenomena of ‘fake’ cylinders.  Some marketers have received cylinders believing they belong to certain known and respected brands, only to establish that the cylinders do not belong to the brand owners indicated. Some of these cylinders include brands that have gone out of the market for various reasons, but also cylinders rebranded possibly to give unsuspecting customers their preferred brand. Since those cylinders will not be exchangeable under the ‘Pool’ rules, a marketer who receives such a cylinder is left ‘with a dead baby’, as it were. Moreover, since they will have given their new cylinder in exchange for the ‘scrap’ cylinder, they incur a loss that may take years to recover, considering the refilling frequency.

Competition – Legal and ‘Illegal’

A new marketer expects and embraces competition from established brands.  What many do not expect is the brand loyalty that the older brands possess, and some newer well marketed brands, that are favoured in the customers’ minds. In many cases, customers are willing to pay a higher price for their preferred brand. Retailers will insist on lower prices for new brands, or ask the new marketer to fill for them the empty cylinders of the preferred brands.

Indeed, refilling of brands by other people than the brand owners is now a thriving business, affecting both established and new marketers. While a new marketer may consider their brand safe from illegal refillers, it soon becomes clear that even new brands are affected. Retailers will entice sales executives and drivers to sell them empty cylinders of popular brands once they have sold the gas. In some cases, the sales executives sell all the popular brands and pretend that they have sold cylinders with gas. Moreover, retailers are usually reluctant to give empty cylinders of popular brands, and even other empty cylinders that are new, preferring to have them refilled illegally where the margins are better.

In some cases, illegal refillers will buy a few hundreds of cylinders of a new brand and negotiate a low price. Since they pay cash, the new brand owner will be excited to make the huge sale, but will realise something is amiss when the ‘big customer’ keeps coming back only for new cylinders and no refills.

An unanticipated consequence of the illegal refillers is promoting brands as they have good networks in residential and rural areas, taking the brand out and deep inside faster than a brand owner can do by themselves, at least initially. However, this is costly to a brand owner without adequate cylinders or finances to keep buying back from the other marketers, and also new ones from the cylinder manufacturers.

Looming Crisis

The unexpected crisis arises when a marketer has gas for sale but lacks the cylinders to fill the gas. Needless to say, most of the gas to domestic consumers is still sold in cylinders, and it is not practical to collect cylinders and ask customers to wait for refilling. Customers expect to find filled cylinders in their retail outlets, whether it is the neighbourhood kiosk, estate supermarket or the petrol station. If they do not find the preferred brand, they will quickly make another choice from the variety of options available.

If a marketer does not have enough cylinders and the brand runs out in the existing retail outlets, the customers buy other brands; implying that the marketer will have to buy back their own cylinders from those brand owners. Depending on cash flow, personal ethics, directions from financiers, etc, some brand owners may start to fill whatever cylinders they have, irrespective of the brand ownership. The problems then multiply; they have to wait for their own new cylinders, then buy their own cylinders back, and consequently lose brand loyalty (if any was developing), by supplying these other brands.  Since the new marketer is now filling competitor cylinders, they no longer give the weekly report to the ‘Pool’ coordinator regarding the number of competitor cylinders they are holding.

The other marketers note the sudden change in weekly report; the new marketer has no competitor cylinders to exchange, and neither are they paying for the cylinders that were collected by other marketers. The other marketers advise their dealers not to accept empty cylinders of the particular brand. The consumers get to learn that the brand is no longer accepted. They look for the fastest way to dispose of the cylinder brand, fearing the collapse of the brand. Retailers too start avoiding that brand, and not even low gas or cylinders prices will entice them. Very soon, the owner of the new brand notices a dip in their own sales even with all of their efforts to increase sales.  The new marketer is then forced to focus on giving the customers what they want, which is the well known and respected brands. He starts to operate in a clandestine manner to avoid harassment from police and other authorities who specialise in making money from illegal business activities.

Extracting a gas business from this situation is a long, slow and painful process. In addition, once a customer’s trust is broken, it is nearly impossible to rebuild it. Selling the brand is then considered, but it appears nobody is keen on buying a tainted brand.

For the marketer, the major issue is to ensure cylinder availability, maintain a reasonable cylinder turn-around-time, share an amicable relationship with competitors and patience to wait for the returns which can take up to several months or even a few ye

(LPG Business Review)


Elizabeth-Muchiri

 Elizabeth Muchiri

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