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Sun 17 Jun 2018 02:06 PM

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Inside ADNOC Distribution's turbo-charged growth plans

ADNOC Distribution was always a good business. But now its CEO Saeed Mubarak Al Rashidi and deputy CEO John Carey want to turn it into something altogether bigger and better

Inside ADNOC Distribution's turbo-charged growth plans
ADNOC Distribution CEO, Saeed Mubarak Al Rashidi (right) and deputy CEO John Carey (left).

ADNOC Distribution has had a good start to the year. In May, it announced a 12 percent rise in Q1 net profits to $147.6m year-on-year, with revenues also growing 13 percent to $1.4bn. The results were a clear vindication of the decision to sell a 10 percent stake in the company in an initial public offering (IPO) on the Abu Dhabi stock exchange last December.

These are good times to be in the fuel distribution business. The subsidies that kept petrol prices artificially low are long gone, while an agreement with Urban Foods to refit ten stores with the Géant brand means ADNOC Distribution's non-fuel operations can finally live up to their potential.

Not surprisingly, given all this good news, the company’s CEO, Saeed Mubarak Al Rashidi and his deputy, John Carey were happy to drive from Abu Dhabi to the Arabian Business offices for a 7.30am interview before heading to DIFC for a full day of meetings – and all this during the first week of Ramadan.

“The results were at the top end of what we expected; the rise in oil prices helped us a bit,” says Carey of a whirlwind first few months at the company.

The Irishman only joined last September – his first posting in the Middle East following a long career with BP – and was immediately plunged into readying Adnoc Distribution for the IPO.

“We spent a lot of it overseas talking to investors. So coming into Q1 we’d only really behind our desks from the end of December.”

Indeed, he jokes that “for the first three months, I spent a lot more time with Saeed than I did with my wife.”

Going public

Though the two CEOs seem to make a natural pairing, their backgrounds could not be more different. Al Rashidi’s has been CEO since March 2016, having spent his entire career with Adnoc.

“I joined straight from college, over 20 years ago,” he admits. But even for him the past few months have been momentous.

Asked about how the IPO changed the company, he replies: “The transformation is in the way we think. The majority of our employees are locals and some have been with the company for a long time. Their ability to adapt and change was the most impressive thing.

"Remember that we had the legacy of being a 100 percent national-owned company, so there was a government mentality, and that had to drastically shift. The whole experience of going through the IPO was very exciting for me, even though it was tough and involved some very difficult times during the decline in oil prices.”

The whole experience of going through the IPO was very exciting, even though it was tough and involved some very difficult decisions”

The biggest challenge, he says, was in the changeover of systems.

“To disentangle ourselves from the parent company [Abu Dhabi National Oil Company – Adnoc] was the hardest part from a process point of view. We are working on having our own treasury for finance, for example.

"We used to use Adnoc’s HR policies, grading systems, pay scales... everything was Adnoc’s policies. And then you have all the product and supply agreements. We had to put all our own supply contracts in place.”

Asked what Carey identified as his initial priorities upon starting, he replies: “It was a business that had been subsidised by the government. The gas price was the gas price and whatever Adnoc Distribution did, it did.

"But this is a sector that has an infinite number of opportunities, so it was about which ones to focus on first.

"When I came in partway through the IPO process there was just too long a list of initiatives. So it was a case of: are we measuring everything properly? Do we have a clear set of priorities? Does everyone understand what they are?”

Gas stations ran at a loss for serveral years when fuel prices in the UAE were subsidised

The second task, he says, was to explain this strategy to everyone in the company.

“Suddenly we were opening our books. We were bringing in international investors. There were people like me turning up in the business. Why were we doing this? It was a very good, well-run business. Our safety record was very strong. So why change now? It took a while to answer those questions.”

Next steps to growth

The reason Adnoc Distribution had to change was not because anything was amiss, but rather its parent company, Adnoc, has ambitious growth plans.

Already the 12th largest oil producer in the world with an output of three million barrels-per-day, its 2030 Strategy entails AED400bn ($109bn) in spending over the next five years to expand its portfolio through downstream investments, and develop Abu Dhabi’s unconventional gas resources.

“Dr Sultan [Al Jaber, Adnoc Group CEO and also UAE minister of state] has been very clear about transforming Adnoc into a world-leading company and an IPO accelerates that process,” says Carey.

“It forces you to have a business plan, to have the capability and the governance to deliver on what you say you will do. Without that, with the best will in the world, you will always find ways around it. You aren’t properly accountable.”

Dr Sultan Bin Ahmad Sultan Al Jaber, Group CEO of Abu Dhabi National Oil Company

Delving into that list of priorities, Al Rashidi admits that Adnoc Distribution had always been dependent on the fuel side of the business, to the detriment of the many other rich opportunities that fuel distribution brings.

“I give John the credit for helping us re-strategise. There are significant contributions to be had from the non-fuel aspects of the business together with cost optimisation.”

“We’ve got three buckets in terms of how we run our business,” continues Carey. “There’s the fuel, which has been the mainstay of our business but we don’t want it to be the only cash cow. So the first idea is the introduction of self-service and premium services to grow that part of the business and give customers more choice.

"The second part is premiumisation in the fuel. Our customers are driving better cars and want higher quality fuel. We do have that but it’s a low proportion of the business. And the third piece is expansion into Dubai.”

The second “bucket”, he continues, is the non-fuel business.

“At the moment it is a disproportionately small part of the business compared to any other retail business that I’ve worked in and that’s a huge opportunity. We know the customer wants it, and so the Géant Express agreement is about having the right products and the right look and feel. It would be incredibly arrogant or stupid of us to think we would know best how to do that.

"So how do we work with people? We want to continue to own and operate our sites but it’s about bringing in partners who can help. You only have to look at the successful tie-ups in the UK such as Shell with Waitrose or BP with M&S.”

Finally, he says, targeting greater efficiency is the third major factor in how Adnoc Distribution will grow its business.

“Saeed has been talking about how every dirham counts and how we should spend money like it is our own. We think we can deliver at least a $50m cost saving this year and we’re also aiming for a 40 percent reduction in our capital expenditure for building new sites going forward.”

Ten Adnoc gas stations are now home to Géant Express mini-marts

“There’s a phrase we use in engineering called ‘value engineering’,” continues Al Rashidi. “You have to go back to the beginning. You want the same level of quality, customer experience and safety. But you can look at every detail.

"For example, we used to have walk-in chiller rooms in the store just for the sake of filling in the refrigerators from behind. That’s nice to have but not necessary for the customer experience. There’s also more you can do in terms of maximising use of space. There are a few simple changes like that which will not affect the customer experience but will save us that 40 percent.”

Carey says that, even with these cost savings, over AED100m has been invested in onsite smart technology.

“The payment methods have been improved and we’ve enhanced our rewards programme. It’s really important to invest in technology and human capital.”

We have plans for fast chargers for electric vehicles at ten sites in the next two years”

The bigger picture

Beyond these initial priorities there is still much potential to develop Adnoc stations, even if they will increasingly not just be for petrol.

“They are a great place to capture the customer,” says Al Rashidi. “We don’t want to be constrained by the type of fuel itself. We have plans for fast chargers for electric vehicles at ten sites in the next two years. We’re also considering hydrogen technology. We’re not living in denial and we know what is happening.”

“We’re having conversations and we are always open to partnerships where they can bring capability and new experiences,” adds Carey. “It’s about trying to open our minds to the idea that we don’t have to do everything ourselves.”

They also see growth outside of the UAE for the various parts of the business.

“We have the lubricants and LPG business and we are looking at a number of international markets. But we have clear criteria in terms of the payback, because this is the investors’ money we are spending and there are a lot of near-term priorities first.”

Adnoc plans to add three stations in Dubai before the end of 2018

The lowest-hanging fruit, of course, is the opportunity for new stations in the UAE.

The company, which operates 362 service stations and 238 Oasis convenience stores in the UAE, has big plans to grow this number. It opened 24 sites last year and plans to open 13 more in 2018, including three in Dubai.

Al Rashidi says the expansion to Dubai has taken so long because stations in the emirate were losing money until fuel subsidies were replaced by a fixed margin for petrol distributors in August 2015.

“Up to that time Emarat, Enoc and Adnoc Distribution were all losing money [on fuel sales]. Basically everyone was pushing customers to the other brands.

“We did not do that in Abu Dhabi,” Al Rashidi adds. “We actually expanded. We acquired stations when people were selling. Nobody was interested to expand.”

Carey also notes the potential for profitability in the underserved Dubai market.

“We can do 25 million litres a year per site. In Europe it is more like 10 million. It’s a large amount so you will see more investment coming into Dubai.”

They are more circumspect on plans for Saudi Arabia, despite having been granted a licence to operate.

“We have a very humble plan for Saudi if I’m honest,” admits Carey.

“It’s a big market, but big doesn’t always mean beautiful. We’re developing our strategy but at the moment it is more about making sure we spend time understanding the market, building relationships, building trust. You can’t just turn up and build stations anywhere.”

Wrapping up the interview, Al Rashidi returns to how Adnoc Distribution fits in to the broader plans for how its parent company will turbocharge the UAE’s economic growth.

“Adnoc is willing to invest $45bn to attract business and add to the value chain. That will add 15,000 jobs and an additional one percent to UAE GDP. That means market growth and so many more opportunities by expanding and addressing market needs. We want to be a consumer retail destination. There is a lot of potential to grow.”

And with that, they bid farewell and rush off to DIFC to update key stakeholders on the changes that lie ahead for a company that is set to transform the fuel distribution business – and also the country’s economic future – for good.

Distribution in operation

What are the Flex Plans?

JC: “This is the choice we are giving customers between self-service and our premium service. We’ve rolled it out at over 40 sites to give customers the opportunity to test it. We’ll take that feedback and build on the experience.”

SAR: “In our trials we did something like 1.5 million transactions. And without even charging for a premium about 30 percent opted for self-service. Nobody forced them to do it.”

How did VAT impact the business?

JC: “We probably saw a little bit of pull forward into Q4. On the convenience side across the region VAT seems to have had some level of impact on discretionary sales. But given the transformations we’ve made to our stores we haven’t seen as much of that impact.

"Fuel-wise it hasn’t had that big an impact. You don’t put petrol in your car because you have some spare money. There’s also less of a culture of road trips for pleasure. You use your car to get somewhere for necessities.”

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