Royal Dutch Shell Plc  .com Rotating Header Image

Market Leader: Managing brands in the oil industry: the case for demerger

BP Wikipedia image Shell Wikipedia image

This article was published by Market Leader in October 2006. The author, a retired Shell Executive, Mr Paddy Briggs, has kindly given us consent to republish it in view of current speculation about mergers and demergers.

By PADDY BRIGGS

INTRODUCTION: The recent call by the respected financial adviser JP Morgan Cazenove for oil giant BP to split itself into two separate corporations, upstream (exploration and production) and downstream (marketing), will have struck a chord with many marketers in the international oil industry, as well as with the financial sector.

In this article ex-Shell brand executive Paddy Briggs explains some of the background to the issue and outlines what the marketing and especially brand advantages of such split for BP, Shell and the other oil majors would be.

While the upstream is their main focus of attention, and their main source of profitability, companies like BP, Shell and ExxonMobil also have substantial marketing assets, strong marketing brands and millions of customers.

THE MAIN ARTICLE

EXPERIENCED MARKETERS know that there are often tensions in companies between those in the factories who produce, and those in the marketplace who sell. But in the best customer-driven companies these tensions are usually resolved by managers making a judgement about what is in the best long-term interest of the brand, and therefore of the consumer. All the world’s great brands do, of course, have to source or produce their products and services – but the manufacturing process is always subservient to the market and must always deliver products that the consumer wants to buy at a price that they can afford. The world’s great brands have reached their prominence by having a  customer-obsessive mindset throughout their organisations – and especially at the top.

Marketing drives production… but not in the oil industry

Consider, for a moment, an oil industry multinational such as BP or Shell. The success of these energy companies over the past 75 years has primarily been built on their technological competence and innovations in the ‘upstream’ and on their willingness to invest heavily in the search for new hydrocarbon assets. This imperative undoubtedly still drives the business today – it is the main source of the companies’ profit streams and it is where by far the largest proportion of the companies’ investments are made. Unsurprisingly, most of the members of the senior management teams of these corporations have been chosen from among their successful practitioners in the upstream.

But most multinational oil companies are also world-scale branded marketing businesses. They are, then, a curious amalgam of a global, branded consumer business and a high-technology raw material extraction, production and processing business. And there is only the very loosest connection (and no interdependency) between these two segments. Shell or BP’s consumer business (most visibly their petrol station networks) is not in any way dependent on their production business for its products, which can be (and are) obtained from any available supply source. While there may be ‘value added’ along the supply chain from production to consumption, this is incidental. There is no need to have a vertically integrated structure in order to realise that value; each segment is independent.

The call to split up BP

Cazenove’s suggestion that BP be split into two quite separate businesses and corporations will probably have been welcomed by BP’s marketers. In all oil majors, managers in the ‘downstream’ struggle daily with the reality that marketing is the poor relation of exploration and production. The consumer end of the business is always subordinate to the upstream search for, and production of, crude oil and gas.

Consumer-driven marketing, and production-driven geology, engineering and technology are quite different disciplines – and there is little evidence that those with talents for the latter field can also be competent in thetheir main focus of attention and their main source of profitability, companies like BP, Shell and ExxonMobil also have substantial marketing assets: strong marketing brands and millions of customers. Shell is the world’s leading branded retailer (in any product category) with around 45,000 petrol stations in around 100 countries (compare this with 30,000 McDonald’s restaurants). But in my experience matters related to this huge business occupied little of the time of the company’s senior management and were rarely agenda items at board meetings.

Successful marketing requires focus on a single skill

Historically, the big players in the oil industry created vertically integrated businesses with marketing as the final link in the chain. In the past, marketing was a core competence to such an extent that many of the most memorable advertising campaigns in both the inter-war years and the post-war decades were from the oil industry. Mention ‘You can be sure of Shell’ or ‘Esso blue’ to a British baby-boomer and he or she will sing you the jingles that went with the campaigns. In the years before the first oil crisis of 1973 we were all ‘going well with Shell’ and believed that the ‘Esso sign meant happy motoring’.

In Britain one of the reasons for this marketing success was the existence of a company, now long forgotten, called ‘Shell-Mex and BP Ltd’. This was a joint venture between Shell and BP to market products under these two brand names in the British Isles which was, for a time, one of Britain’s largest companies. Shell-Mex and BP was ‘only’ a marketing company and it did not even run refineries. The company’s products came mostly from its parent companies, which then substantially left it alone to build its business.

Because it was exclusively a ‘single skill’ marketing business Shell-Mex and BP’s board of directors, and all of its managers and employees, concentrated principally on brand management and on the customer. It was also a very innovative company, creating the concept of self-service at petrol stations and the domestic central heating market among many other customer-led products and services.

Yielding lost value

The likelihood that dedicated marketing companies would more successfully manage consumer brands in the oil industry was no doubt part of Cazenove’s thinking in its suggestion of an upstream/downstream split for BP. Cazenove has suggested that such a demerger could ‘yield £35bn of lost value to shareholders’ – an astonishing sum, but no doubt it has done the math.

Certainly the downstream businesses of the oil majors are huge concerns, with assets, revenues and an international scope that would make them world-class businesses on their own. The most compelling reason for a demerger is, however, not just that the resultant downstream businesses would be substantial, but that the management of them would be 100% focused on the brand and on the customer.

Take the most visible asset that a BP or a Shell has: its worldwide networks of petrol stations. In some markets tentative steps have been taken in recent years to use these assets to market a wider range of goods and services (notably convenience stores). Imagine how much extra impetus would be given if this retailing, rather than being seen primarily as the thing that you do at the end of the integrated oil chain, was the primary focus of the business.

Extracting maximum brand value

The brand implications of a upstream/downstream split for Shell or BP would have to be carefully considered but, coincidentally, each of these corporations has an obvious strategic brand solution readily available.

For Shell the Shell brand and logo and visual identity system could be allocated to the new downstream marketing business. The existing petrol station networks and product brands would pass to the new corporation as its most valuable tangible and intangible assets.

The upstream business could be re-branded ‘Royal Dutch’ – the traditional name of the Dutch part of the Shell Group and a name that is already familiar. (At this year’s first annual general meeting of ‘Royal Dutch Shell plc’ the ‘Royal Dutch’ part of the corporate name was very prominent – along with its ‘crown’ symbol. So, a ready-made corporate brand for the new upstream company is already substantially in place.)

For BP there is also an attractive and fairly easy to implement solution to the brand issue in the event of a split. The BP name and logo could be allocated to the upstream company and the downstream business could be re-branded ‘Castrol’ – exploiting the high brand value and excellent reputation of this famous lubricant brand, which is now part of the BP family. There is no reason why the Castrol name could not be ‘extended’ also to brand petrol stations and other marketing assets and products.

In both companies the refineries would remain separate from the marketing business and could form a third independent business. As we have seen, there is no need for oil marketing companies, however large, to also own and operate production facilities.

Reputation management

Another advantage of a split as suggested is that virtually all the reputation damage that oil companies have received in recent years has come from their upstream not from their downstream activities. But damage any part of an integrated oil company and you potentially also harm the consumer brand. The petrol station is the most visible manifestation of an oil company and can become a focal point for protesters.

Demerge the consumer brand from the upstream business and not only do you remove the risk of this type of brand damage you also put all your reputation management and communication efforts for that branded downstream business into areas that are close to the consumer.

For example, the oil companies’ failures to communicate the rationale for petrol price increases over the years have been directly attributable to their lack of internal focus on developing effective communications with the consumer stakeholder.

More than 20 years ago Tom Peters wrote: ‘The most successful [companies] of all are those diversified around a single skill.’ If ever a business needed to concentrate on the ‘single skill’ of marketing to maximise its business potential it is the oil industry – with the added benefit, of course, that the explorers and the drillers and the refiners could also focus 100% on what they do best. Shell (or rather ‘Royal Dutch’) might even improve its oil reserves, as well as maximising the potential of its brand, if it took the step to demerge.

[email protected]

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

0 Comments on “Market Leader: Managing brands in the oil industry: the case for demerger”

Leave a Comment

%d bloggers like this: