Gas Retail Scaling - Unique Idea

 

The Present Situation:

So the barriers to entry in the gas retail business have gone down. And everyone has set up a gas retail business. Four cylinders outside your Mpesa shop and you are in business.

In urban areas, gas has shifted from the luxury to a basic necessity.

The demand is there. "Hawa watu wote hakuwezi kosa mtu gas yake inaisha leo."

The margins "si mbaya." Working with a net of Kshs. 80 (slightly over 50% of the gross), you sell 8 mutungis in a day, you have your Kshs. 640 and Kshs. 19,200 per month. Surely not too bad.

But things have been shaky of late especially in highly populated urban areas. Competition has increased at a faster rate than usage.

Additionally, are the new business models, like M-gas, the "gas ya Safaricom", the Koko, and others. In some areas, the new kids are past nibbling the markets of the kawaida gas retailer and are now eating it.

Largely they are solving for “ Nataka kuanza kupika na Gas na sina pesa ya mtungi na burner” and  “ Gas imeisha na sina pesa” problems.

Today, gas retail holds moderate potential. You will still make money, but gradually your profits will shrink. Then there is some notable level of uncertainty about the medium term.

There is talk of price regulation starting 2025, Kshs. 300 gas, sijui a terminal, sijui a gas cylinder manufacturing company and all that.

In these circumstances, then you have to think of making the most hay when the sun shines before your goose is cooked.

You can still make some money in the present, but to make 'pesa mzuri', you have to rethink your approach, a little something on top of the kawaida.

At the basic level, a gas retail business sets up in a strategic location and hopefully sells to break even. Scaling up involves opening more outlets. There is little room to differentiate, other than the basics of location, service, and price.

In these competitive circumstances, how can you get into the gas retail space and scale beyond the 8 or so cylinders per day?

 

Context

·         Increasing consumption of LPG, although fluctuating due to increased consult of living.  ( Per capita consumption in 2012 – 2.3kg, in 2022 – 8kg, 2023 – 6.8 kg. Consumption mainly reduced among the low income. Source Ministry of Energy ). Government talk of subsidizing the cost of LPG to reverse the downward trend.

·         Illegal importation and refilling activities.

·         Rise in the number of LPG wholesalers.  Some relatively small.

·         Proliferation of retailers.

·         Consumer balance between brand and price considerations.

·         Emergence of new business models.

·         High number of households using LPG.

·         Government interest in LPG as a basic fuel in urban areas.

·         Multibillion-dollar investments in the sector.

·         Quick Licensing Stats: ( Transport of LPG in Cylinders – 266, Storage & Wholesale of LPG in cylinders – 156, Storage & Filling of LPG in Cylinders – 91, Transport of LPG in bulk by Road -101, Import, retail of LPG in cylinders – 1801. Many retailers operate without licenses. Source Ministry of Energy 2022)

 

Gas Related Search Numbers  ( Google)

 

Phrase	Average Search Numbers
gas cooker	2300
m gas	2000
m-gas	1,400
gas cooker prices in kenya	1,300
taifa gas	1,100
gas prices in kenya	1000
m gas kenya	800
total gas prices	700
gas burner	600
safaricom gas	600
bio gas	600
koko gas	500
gas cylinder prices in kenya	400

 

Source: Similar web.

There are over 20,000 phrases. Mgas is certainly the most searched phrase at the moment.

 

The Opportunity

The opportunity we look at today lies in new distribution models that facilitate scalability and enable reaching more consumers in the current circumstances. Essentially, the opportunity is based on the question: How can you expand a gas retail business without investing in more outlets?

Why don't all retail shops stock gas just like they stock bread? The barriers include the capital required to purchase the gas, concerns about tying up cash due to poor sales, lack of knowledge about suppliers, security issues, and the hassle of displaying cylinders outside the shop, managing them inside at night, and putting them outside again in the morning.

How can you eliminate these obstacles and encourage more retailers to stock gas through a profit-sharing partnership? This is the essence of the opportunity: utilizing retail shops as distribution points for your gas by reducing the barriers that prevent them from stocking it.

The opportunity is not necessarily in large or high density urban areas. It could also be in growing rural towns where use of gas is increasing. In such locations there is often a single retailer or none, forcing consumers to travel long distance in order to refill. The rural retailer also faces many more challenges in stocking gas than her urban counterpart.

 

(An alternative opportunity, validated by the success or rather demand for mgas is solving for those who want to start cooking with LPG but struggling to accumulate enough to purchase a cylinder , burner or cooker for the first time.

There is also the often common problem of not having insufficient funds to refill gas when it empties.  This problem is however tied to the price of gas. If the price of gas falls such that many can easily afford it then this will not be a big enough problem .)

How It Would Work

You facilitate retailers to sell cooking gas on a profit-sharing basis. Essentially, you approach a high-traffic general retailer, understand why they don't stock gas, and propose a solution: "I will make it very easy for you to stock gas and earn from it."

Generally, it will work like this:

ü  You provide gas to the retailer without any upfront payment.

ü  The retailer displays the gas at their shop.

ü  If a customer buys gas, the retailer receives a commission or profit share.

ü  To make it easy for the retailer, you will provide a well-designed, branded, attractive cage with wheels (or equivalent) for easy handling.

ü  You will provide marketing support through branded materials, advertisements, and activations, addressing key customer concerns such as pricing, delivery, and quantity.

ü  The number of cylinders at the shop depends on foot traffic, storage space, and the retailer's comfort level.

ü  If a customer pays the retailer directly, she sends the money minus the agreed share to your business till number. If payment is made to your paybill, you send her the commission immediately.

ü  For example, if the price of a 6kg cylinder is Kshs. 1000 and you have provided the retailer with four cylinders to sell, and she sells one, the margin is Kshs. 150. Her commission is Kshs. 70, so she gives you Kshs. 930.

ü  The retailer's role is primarily to display the cylinders, provide foot traffic, and leverage existing customer relationships.

ü  The goal is to recruit as many retailers as possible to act as distribution points, maintaining consistent branding across all shops.

ü  Incentives for retailers need to be strong enough to encourage participation in the network.

ü  To be successful, you will need to source gas competitively, manage logistics effectively, and provide compelling incentives to retailers.

The above outlines the basic framework, with room for further refinement and optimization.

Characteristic of the Product

·         Uniform, well-branded, and aesthetically appealing displays.

·         Efficient and effective communication between retailers and the company.

·         Clear processes for seamless operations.

·         Ease of display and storage, such as a wheeled trolley display for convenience.

·         Marketing support, including activations and promotional materials.

·         Proper positioning and brand building to enhance visibility and recognition.

·         Reliable supply chain management to ensure consistent availability of gas cylinders.

·         Flexible payment options for both retailers and customers.

·         Support for retailers to enhance their sales and customer service skills.

·         Regular monitoring and evaluation to maintain service standards.

 

Product Possibilities

A gas retail business that leverages on existing general retail shops as distribution points. This through a profit share partnership.

Revenue Model

·         Margins will be the difference between the oil company wholesale prices and the retail prices.

·         Margins will be shared between the business and the retailer on an agreed ratio.

 

Validation

·         Existing gas retailers.

·         Existing general shops stocking gas.

·         Openness to new business models by general retailers and consumers.

 

Back of the Envelope Calculations
 

Assumptions:

·         Initial investment of Kshs. 1,000,000 in the business.

·         Specialization in 6kg cylinders.

·         Each retailer requires an investment of Kshs. 21,000 for setup (cage, 6 cylinders, branding).

Investment per Retailer:

·         Each retailer's setup costs Kshs. 21,000.

·         Total retailers with Kshs. 1,000,000 investments = Kshs. 1,000,000 / Kshs. 21,000 ≈ 48 retailers.

Average Daily Sales per Retailer:

·         Assuming an average of 2 cylinders sold per day.

·         Monthly sales per retailer = 2 cylinders/day * 30 days = 60 cylinders.

Total Monthly Sales for 48 Retailers:

·         Total monthly sales = 48 retailers * 60 cylinders/retailer = 2,880 cylinders.

Net Margin per Cylinder:

·         Assuming a net margin of Kshs.50 per cylinder.

Total Monthly Profit:

·         Total monthly profit = 2,880 cylinders * Kshs.50/cylinder = Kshs. 144,000.

Annual Total Profit:

·         Assuming consistent monthly profits over 12 months.

·         Annual profit = Kshs. 144,000/month * 12 months = Kshs. 1,728,000.

 

This calculation provides an overview of the potential profitability based on the assumptions made. Actual results may vary depending on factors such as sales performance, operational costs, and market conditions. You can play around with the retailer numbers to view different scenarios.

 

Process

ü  Identify a pilot location with high foot traffic and potential demand for cooking gas.

ü  Initiate conversations with retailers to understand their needs and concerns regarding stocking gas.

ü  Identify reputable brands of cooking gas to stock based on quality, pricing, and customer demand.

ü  Establish relationships with reliable suppliers to ensure a steady and consistent gas supply.

ü  Design and manufacture display props such as branded cages or stands to attract customers' attention.

ü  Define the operational dynamics, including pricing strategies, profit-sharing models, and logistical arrangements.

ü  Source the first batch of gas cylinders from suppliers

ü  Recruit retailers who are interested in participating in the pilot program

ü  Pilot the distribution process in the selected location, gathering feedback and refining the operations based on experience.

ü  Conduct a full launch of the distribution network, expanding to additional locations based on the success of the pilot phase.

 

Challenges

ü  Managing logistics of the whole operation

ü  Encountering resistance from retailers reluctant to stock gas.

ü  Managing relatively low commissions that may deter some retailers.

ü  Ensuring timely and efficient delivery to retailers and consumers

ü  Navigating price-based competition in the market.

ü  Dealing with independent distribution methods adopted by some gas brands.

ü  Adapting to new business models and market dynamics that may impact on the business.

 

Haters

 

Objection: Retailers won’t agree to such a partnership.

Counter: While some may resist, others will be enticed by the low-risk opportunity of consignment sales and the ease of entering the gas business.

Objection: Gas retailers will beat you on prices.

Counter: We will source in bulk and directly from oil marketing companies. We will strive to remain competitive and may even offer better brand trust, appealing to consumers who are skeptical about gas retailers.

Objection: The logistics will be a nightmare.

Counter: Although logistics pose a challenge, many others have successfully navigated similar challenges, and we are confident in our ability to do the same.

Objection: You can’t compete with MGas.

Counter: While mGas is a formidable competitor, there is still a significant market segment not utilizing MGas, providing us with ample opportunity to capture market share.

 

Resilience to economic downturn

Gas is a necessity for many households, especially those reliant on it for cooking. During economic downturns, basic needs like gas tend to remain relatively stable in terms of demand.

Therefore, the consumption of gas is unlikely to be significantly affected by economic fluctuations.

Competition

·         Other retailers.

·         Omc distributing gas independently.

·         M gas.

Purchase frequency

Once a month

Substitutes

·         Charcoal

·         Paraffin

·         Other fuels

 

Critical success factors

·         Retailer incentives: Offering attractive profit-sharing models and support to retailers to encourage participation in the distribution network.

·         Logistical efficiency: Implementing streamlined processes for gas delivery, inventory management, and retailer replenishment to ensure smooth operations.

·         Competitive pricing: Maintaining competitive prices to attract both retailers and consumers while ensuring profitability.

·          Marketing: Implementing effective marketing strategies to promote the benefits of stocking gas and to attract retailers and consumers to the distribution network.

What do you think ? Please leave a comment below.