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Slow painful demise of Shell’s refining and marketing business

The Shell “Pecten” was one of the most familiar symbols in the world and Shell gas stations were in more than 120 countries – Shell was by far the market leader

POSTING ON SHELL BLOG: 27 March 2010

(By “Wilt Staph”)

The slow demise of Shell’s refining and marketing business (known as “Oil Products”) has been painful to watch for those who remember, or were part of, the glory days of the Shell brand. At one time Shell was arguably the most ubiquitous consumer brand of all in any sector – certainly on a global scale. The Shell “Pecten” was one of the most familiar symbols in the world and Shell gas stations were in more than 120 countries – Shell was by far the market leader. But over the last ten years or so this position of dominance has eroded and now Shell has announced that it will be withdrawing from around a third of the countries in which it retails automotive products – the beginning of the last phase of Shell’s existence as a marketer is underway and gathering pace. So where did it all go wrong?

The first nail in the coffin was the very creation of “Oil Products” in the early 1990s. This “business” combined Shell’s refining operation with marketing and abolished the separate “Co-ordination” for marketing which had hitherto existed. Essentially the leaders of Shell at the time bundled together everything “downstream” of exploration and production – things that this “upstream-centred” leadership couldn’t understand. The men at the top were not marketers and categorised marketing and trading together as “disposal”. Instead of seeing refining as a totally separate business from marketing (refineries are cost centres whereas marketing businesses are profit generators) Shell combined the two and erroneously measured the performance of this pseudo-business as an integrated whole. Much of the emphasis became cost minimisation driven – arguably a sensible strategy for refinery management but potentially disastrous for an added value marketing segment.

Once cost reduction became the principal goal of Oil Products then staff reductions inevitably followed on a massive scale. This led to the virtual disappearance of local autonomy in country-based operating units – indeed these units have now died the death of a thousand cuts. Shell’s brand strength was built up over decades by developing initiatives centrally but ensuring that the implementation of these initiatives took place at a local level in one hundred or more “Operating companies”. The benefits of this approach were that every marketing plan was local and focused on consumers in individual markets. The stimulus for marketing campaigns in, say, South Africa and Sweden might be the same and emanate from London, but the actual implementation would be local market sensitive. The two countries are not the same either in culture or in respect of Shell’s competitive position so carefully managed fine tuning of the offer took place in Cape Town and Stockholm – and it worked. But when the cost obsession began this historically highly successful model was cast aside. The rationale for change was highly questionable and the chosen route was highly ignorant of the need to respect the truism that “all markets are local”.

As decision-making became ever more centralised strange organisations emerged which whilst much slimmer than what had existed before were far too removed from the marketplace to be effective. Oil Products Marketing began to be managed in a disintegrated way with one segment like Retail (the gas stations) being organised quite separately from another like Lubricants. Indeed in one country, say in the Far East, the direction for Retail could come from someone in Brazil whereas the Lubricants management might be in Europe or the United States. There was insufficient resourcing to integrate locally and no way that such integration could occur centrally – so it didn’t happen. Local managers, even in large markets like Malaysia or The Philippines, had virtually no freedom to act and decisions were made by distant executives who rarely if ever visited the local markets for which they were responsible. This structure was fatal to budgets and the days where a Retail Manager in, say, Shell Malaysia could seek local approval for a major marketing initiative were long gone. The more you aggregate costs at ever higher levels the less sensitive they become to local situations – and the less opportunity there is to develop well-funded local campaigns targeted at local consumers. As budgets disappeared then Shell’s competitive position began inevitably to be eroded. This was a vicious downward cycle of under-investment leading to under-performance and lower profitability. The ultimate result of this niggardly approach was that the operation in a particular market, like Retail, eventually became unviable. Shell has already withdrawn from a number of markets where a greater local emphasis and funding could have made the business viable. This process will now accelerate and Shell will soon no longer be a player in many countries – in some of which the brand once had a dominant position.

The phenomenon underway is another and perhaps the most destructive example of the short-termism of Shell today. There is no appetite at the top to make investments to improve prospects in markets where Shell has lost, by neglect, its competitive edge. Centralised decision-making which operates on only one metric (costs) can easily produce a league table of performance which compares markets and simply cut off support for those at the lower end where the returns are seen as being inadequate. So “discretionary” expenditures (like advertising) are cut from those who need it most – and the viability of such a product/market mixes decline to the point that they become unviable.

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