Headline / October 2019

Fueling Long-Term Growth

By Albert W. Nonto Filling stations no longer merely serve as a place to top up a car’s tank, but it have also become a place for relaxation, shopping and more, which create additional revenue. Retail companies have meanwhile also started to set their sights on the sector, as it has become part of its expansion plans. Political stability and relatively resilient economic growth have seen the group come up with a new strategy to take it beyond its conventional business. The government’s current focus on infrastructure development, including the construction of toll roads, has provided the group with an opportunity to embark on new business ventures to cater to the needs of a new generation. The fuel retail business has been attractive so far, which has compelled oil companies to engage in the sector. State energy company PT Pertamina still leads the industry with its more than 7,000 gas stations across the country. Haryanto Adikoesoemo, president director and chief executive of AKR, said the group’s traditional business remains its primary source of income but that there is potential in other sectors. He explained that the company had taken strategic initiatives to ensure growth. These include establishing close cooperation with principals to increase the group’s production capacity in response to soaring domestic demand for basic chemicals. Besides that, Haryanto sees consumer goods, including retail fuel sales, as attractive prospects. Backing this, is Indonesia’s growing middle-class and more disposable income, much of it spent on cars, frequent travels and other luxuries, which has a direct impact on sales of oil and gas. Increasing demand, coupled with the AKR Group’s close partnership with global oil giant British Petroleum and its extensive experience in logistics, Haryanto believes the plan to grow the group’ fuel retail business is viable. The Indonesian Automotive Industry Association (Gaikindo) expects automotive sales growth to remain steady at 10 percent this year, despite a slowdown in consumption. This projection provides further credence to Haryanto’s belief in the potential success of the company’s move to expand its presence in the retail fuel sector. He said the AKR Group plans to build more than 350 fuel stations in Indonesia over the next decade, mainly along the toll roads that are currently under construction on the islands of Java, Sumatra and Kalimantan. The group is currently also working on opening outlets in Jakarta and Surabaya, East Java. To back up the plan, the group has invested heavily in expanding its logistics business, which includes an oil terminal that has seen its capacity tripled to about 736,000 kiloliters over the past 10 years. The company’s involvement in the retail sector started in 2005, when the government allowed private sector companies to sell subsidized fuel. The AKR Group has since then opened 147 gas stations in 12 provinces, mainly in remote areas and catering to small fisherman. The company’s retail industry experience has given it the confidence to expand, targeting a larger market, backed by its extensive network of liquid bulk and dry bulk storage, transportation facilities and port operations across Indonesia. Added to this is the group’s extensive experience and technical knowhow in logistics and supply chain management. Peter Molloy, president director of BP AKR Fuels Retail – a joint venture between the AKR Group and British Petroleum – said the downstream oil and gas business in Indonesia has become very attractive since the government opened the door to any company to engage in the sector. “We want to provide customers with a different experience in this growing market,” Molloy said, adding that the AKR Group’s 60 years’ experience in the industry and better understanding of local conditions gives it an edge over its competitors. Pertamina has welcomed the AKR Group’s involvement in the fuel retail sector, as this will serve as healthy competition and provide the impetus for the state-owned oil and gas giant to raise its service levels and improve the quality its products. Pertamina spokeswoman Fajriyah Usman said the company was pleased to see more retailers in the industry as it gives customers more options, which will indirectly improve the industry. Lifestyle Market While its fuel distribution service aimed at smaller consumers continues to grow, the group’s new filling stations are designed to provide various services, including minimarkets, restaurants, prayer rooms and amusement centers. Despite the services the group offering being similar to those provided by Pertamina, it adds value for other parties to collaborate and establish partnerships. The group invites business partners to set up businesses at its filling stations, but instead of charging them rental fees, the group engages in profit-sharing agreements with tenants. The AKR Group had opened more than 18 filling stations in Jakarta and Surabaya by the end of 2018. Each outlet required investment of between Rp 8 billion and Rp 10 billion ($570,000-$710,000), depending on size. Benny Oktaviano, manager at BP AKR Fuels Retail, said the fuel retail sector still has plenty of room for growth, despite challenges and tough competition. However, he says service quality remains the key to success. While high-grade fuel is essential to automotive performance, additional services at fuel stations are what attract customers. According to the company’s observations, many people visit its fuel stations not only to fill up, but also for other purposes. Benny said half of the motorists visiting the company’s fuel stations do so to rest and eat, while some even hold informal business meetings. “Our research shows revenue from these additional services is increasing,” Benny said. However, he would not provide figures on the financial performance of the company’s filling stations since their opening last year. “But we may see the results over the next five years, as this is a long-term business opportunity with a quite huge investment,” he said. PT AKR Corporindo director Suresh Vembu said the group would be exploring other business opportunities to sell aviation fuel, starting with its first filling station at Maleo Airport in Morowali, Central Sulawesi, this year. He added that the group had strong backing in terms of capital and a distribution network. “We are focused on eastern Indonesia at the moment and soon will be expanding to airports in the western part of Indonesia, including Soekarno-Hatta International Airport,” AKR corporate secretary Ricardo Silaen said. A global decline in commodity prices severely impacted the group’s financial performance this year. Revenue was 13 percent lower at Rp 9 trillion in the first half, while net profit shrank 65 percent to Rp 390 billion. Ricardo said the revenue decline was due to lower sales of chemical products and fluctuating oil prices. “But there is hope, as the curve is picking up this month, so we have a positive outlook for this year,” Suresh added. Competition in the fuel retail sector is quite tight. Pertamina, with its large operations, sells a variety of fuels, from low octane to high octane and at various price points. Total and Shell meanwhile only sell high-octane fuels at higher prices, with some Shell filling stations also equipped with workshops undertaking oil changes and minor repairs. Malaysia-based Petronas tried its luck in the sector in the past, but failed for various reasons, among them offering limited services and price sensitivity among Indonesian customers. Recurring Income Suresh said the AKR Group would still rely on its revenue stream from recurring income derived from, among others, its retail business and its 3,000-hectare Java Integrated Industrial and Port Estate project currently underway in Surabaya. The joint project by the AKR Group and state-owned port operator PT Pelindo III includes an integrated industrial estate with modern facilities and infrastructure. The project, once completed, will earn the group regular income from the sales of electricity generated by its 500-megawatt powerplant, industrial rentals, and supplying water and other logistical services. PT Freeport Indonesia, operator of the Grasberg gold and copper mine in Papua, has already signed a 70-year lease for 150 hectares on the site to build a smelter. “We are happy with the progress and estimate growth of about 20 percent per year from the services the group offers tenants on the site,” Suresh said.