LOONEY TUNES

British Petroleum (BP) one of the top six global oil and gas companies made a major change in strategic direction at the end of July, 2020.

Its new CEO, Bernard Looney, who worked his way up the organisation since he joined as an engineer, took over as CEO from its previous incumbent, Bob Dudley, in February. One of his first moves was to alter the direction of the company for the next ten to twenty years. The implications of this shift in focus is likely to be precursor to the transformation of the oils and gas business globally.

Why might this be the case?

We are all familiar with the growing focus on the issue of climate change over the past number of years. Pressure for all companies across all industry sectors to grapple with this challenge has emanated from a wide range of diverse sources such as governments, scientists, environmentally conscious consumers and a plethora of activist groups.

Arguably pressure groups such as Extinction Rebellion and individuals such as Greta Thunberg have devised aggressive and creative campaigns to bring climate change to the forefront of attention for governments. Despite some negative connotations associated with their protests, it has worked in so far as it has put even greater pressure on policy makers to harness their thoughts around a coherent strategy going forward.

The United Nations (UN) Secretary General, Antonio Guterres has written to all the heads of state of countries world-wide to encourage them to achieve a position of net zero emissions by 2050. It has supported a “Race to Zero” campaign as part of its diplomatic encouragement to push this forward and to have it formalised in time for the COP26 International Summit to be held in Glasgow in 2021. This was supposed to have taken place in 2020 but was postponed due to the Covid crisis.

Currently it is estimated that one-third of the world’s GDP is already committed to the principles of the Race to Zero.

So far so good, you might say. However some of the major economies have been more reluctant to embrace the various elements of climate change. Donald Trump, to the consternation of many, has adopted a negative attitude to climate change, to the extent that he largely denies its impact. The USA, together with large countries such as India and China continues to rely on fossil energy and hydrocarbons to fuel their manufacturing operations.

What has BP done to generate such publicity about its change in direction?

First some background and context.

BP was established in 1908 and was then known as the Anglo-Persian Oil Company. Over the years it has established itself as one of the top six oil companies in the world. It has experienced good and bad times during its evolution. For instance in 2010 it encountered one of its most dismal periods when it was involved in a major oil spill in the Gulf of Mexico in 2010. It has taken the best part of a decade to recover from this disaster.

In tandem with other oil companies BP has been the recipient of much criticism and opprobrium in the national and global press. Arguably the oil sector is up there with the tobacco and gambling sectors in terms of negative publicity.

This was the environment and context that faced Bernard Looney when he took over as CEO in February 2020.

One of his initial statement was the intention to make BP a net-zero carbon emitter by 2050. In July he put some substance on this overall target. Currently 97 per cent of the BP business is hydrocarbon.

Firstly he promised to make a tenfold increase in investment in green power, from $500 million to $5 billion a year and to develop 50 gigawatts of renewable capacity by 2030. To put this in context, this figure is more than the UK’s entire current capacity.

He also stated that the company would move from 7,500 electric charging points to 70,000.

He promised to reduce investment in oil and gas production, the staple part of its business to around a half of its current spending.

He made the decision to stop exploring new countries for oil and gas development (excluding BP’s stake of around twenty per cent in the Russian oil company called Rosneft.

Looney argued that the company cannot move quickly to a position of being a net-zero carbon company. The existing hydrocarbon business will, in his view, generate the cash to allow for the investment in the initiatives necessary to move it to its targeted position by 2050.

It has already securing and supplying agricultural and bio feed stores to renewable fuels producers and has added renewable diesel production to one of its main refineries.

What are we to make of this change in approach?

As mentioned earlier, the pressure to move away from fossil fuel has been inexorable. On a more practical level, some of the organisations that BP has sponsored, such as the Royal Shakespeare Company and National Galleries Scotland have cancelled their respective deals. Even internally, key managers were leaving, or planning to move from the company because of the toxic publicity and image that it had in the media.

Reducing its carbon footprint in oil and gas exploration by 35% to 40% by 2030 is a not inconsiderable target. It also plans to sell off some of its assets through a rationalisation of its portfolio of forecourts and oil and gas facilities.

We should note that the reduction on oil and gas exploration has clear benefits. Such developments require major investment in drilling, platform development and general infrastructure. Simply pumping out oil on a daily basis, by contrast, is low-cost and the cash goes straight into the company’s coffers. In many ways this will provide the opportunity to pay down the debt that BP has built up from previous acquisition and pay for the various initiatives in the so called “carbon lite” energy economy.

What are the challenges facing BP in general and Looney in particular, as they roll out this new approach? One area that gives cause of concern is the style of management that exists within BP.As you might expect in a long established “heritage” brand employing over 60,000 people world-wide, the traditional principles of hierarchy and command and control procedures. It will now be operating in sectors that require more entrepreneurial skills and attributes. Older senior managers will have to adopt a more creative approach to dealing with the “carob lite” sector, where there is much competition.

Looney identifies three points of differentiation which he feels will make BP a very competitive player in this new environment.

  • Integrated energy systems: along and across value chains, pulling together all of BP’s capabilities to optimise energy systems and create comprehensive value propositions for customers
  • Partnering with countries, cities and industries as they shape their own paths to net zero
  • Digitalised innovation – to enable new ways to engage with customers, create efficiencies and support new businesses.

Delivering the strategy will see BP become a very different company by 2030. By then, BP aims for:

Investment in low carbon energy to have increased from approximately US$500 million to around US$5 billion/y.

Developed renewable generating capacity to have grown from 2.5 GW in 2019 to approximately 50 GW.

Bioenergy production to have risen from 22 000 bpd to more than 100 000 bpd.

Hydrogen business to have grown to have 10% share of core markets.

Global customer interactions to have risen from 10 million to 20 million/d.

Electric vehicle charging points to have increased from 7500 to over 70 000.

Energy partnerships with 10 – 15 major cities around the world and three core industries.

How will BP fare over the next decade? Let’s see.

Discussion questions

  1. Assess the approach adopted by Bernard Looney. In particular focus on whether this has substance. Is it likely to succeed?
  2. Do the outcomes from the new direction in strategy match up with the strengths and weaknesses of BP? To what extent is approach radically different from its main competitors?
  3. To what extent do sectors such as wind and solar energy and hydrogen production represent realistic opportunities for BP? Are there other sectors that it can develop as it goes forward?

FUTURE SHOCK

It is a truism to state that we are living in strange times. How many people have we said that to in the last few months?

The implications for business have been articulated in the business literature and I do not intend to rehash them in this blog.

I have chosen the grocery business to consider how Covid has forced the major global food retailers to reassess their existing business models to take account of changes in buyer behaviour and shifts in shopping patterns.

In truth, Covid has not necessarily caused a sudden tremor for these retailers. For instance there has been an inexorable shift towards online shopping over the past few years.

In the United Kingdom, which is dominated by the “Big Four” retailers: Tesco, Sainsbury’s Morrison’s and Asda, online grocery shopping took some time to make inroads on visits to traditional “bricks and mortar” stores. By early 2020, online grocery shopping captured about eight per cent of all food sales in the UK. Since March 2020, this share has risen to around thirteen per cent. We should not be surprised by this. People who adhered to lockdown measures and restricted their movements availed of online shopping. They found it to be convenient and “hassle-free”.

However we need to take a “big picture” view of longer term trends and developments and their implications for future business models and marketing strategy in this sector.

In particular I am fascinated by the way in which we need to imagine or more specifically “reimagine” how supermarkets will look in five to ten years’ time. Will we see incremental change? Transformational change? I will argue that we are almost certain to see the latter happening.

Recently two brothers: Moshin and Zuber Issa teamed up with a private equity company called TDR Capital, to acquire Asda, one of the “big four” food retailers in the UK. They made their money when the established Euro Garage Forecourts to its present size of 6,000 such operations spread across ten countries.

Walmart, the giant US food retailer acquired a majority stake in Asda as far back as 1999. It continuously struggled to grow this business as it found that the dynamics and operations of the UK food retail sector did not conform to how Walmart operated in its US base.

In October it sold its majority stake to the EG group. We will revisit this purchase later in the blog.

Let us take a broader look at how the food retail sector globally has changed in recent years.

At the outset I argue that supermarket shopping is not necessarily something that most of us look forward to and enjoy. Much (admittedly not all) of the items that we purchase in our visits to the supermarket are functional in nature. There is nothing remotely romantic about purchasing toilet rolls, baked beans and instant coffee. Items such as the aforementioned toilet rolls tend to be commoditised.

This raises questions in my view. Why do we put ourselves through the misery of driving to shopping centres and malls to do supermarket shopping when parking is difficult, costly and that is before you enter the said store or outlet? When you are actively moving around the various aisles you are likely to be assaulted by shopping trolleys, impatient shoppers and screaming kids. Not, in my opinion, a very attractive prospect.

Will we change our behaviour? I believe we will.

Let us try to reimagine the typical large supermarket / hypermarket of the future!

Firstly the way in which such operations are structured and laid out will fundamentally change.

Currently most of the space is allocated to presenting a vast range of items to the visiting shoppers. A typical supermarket will carry anything from 40,000 to 50,000 items. This will be higher in the case of the larger hypermarket format.

With more and more people buying online, is there a need for such an allocation of space? No.

Increasingly the supermarkets of the future will reduce the space allocated to the display and merchandising of items and make more strategic use of space to operate as a distribution hub, a warehouse, a “click and collect” area, charging points for electronic vehicles to deliver online orders, a “drone” area and mobile shops.

Staff (initially) and in the longer term robots, will work side by side with shoppers as they pick items from the shelves for online orders that have been made by customers.

Items that do not require engagement or interaction by shoppers will be positioned in the adjoining warehouse. Only those items that appeal to the senses e.g. perfumes and electrical items, will feature in the display areas.

Supermarkets will redefine their business as operating in the “tech” sector as opposed to retail. We will continue to see the emergence of specialised tech companies such as Ocado. The latter is a good example of such an operation. It commenced operations in 2000 under the generic name of “Last Mile Solutions” and was backed by John Lewis Partnership – a well-known UK retailer.

It was a very significant evolution in my view as it married the basic principles of logistics with a customer-centric philosophy of offering shoppers a wide range of items at low prices. It fundamentally changed the trajectory of retailing: moving it away from the notion of retailing to supply chain management with an intense focus on the customer.

It currently (October 2020) has a market value of £21.7 billion. To put this in perspective, this is higher than Tesco – valued at £19.9 billion as of October 2020.

Some commentators that the global retailers and operators such as Ocado were stimulated into action by the initial move of Amazon into the food retail sector with its acquisition of Whole Foods Markets in 2017.

If we look at the traditional business models employed by the food retailers we can see that generally they have revolved around discounting and low prices, increasing the quality of own brands, diversifying away from food into such diverse areas as finance, pharmacies and insurance.

Arguably the most successful operators in the future will be those companies who sharpen their expertise in logistics and supply chain management. We have already seen upgrades in performance during the course of Covid. For instance Tesco has doubled its online capacity to 1.3 million online order deliveries. Asda has likewise improved its capacity to deal with over 700,000 orders weekly by the end of the summer of 2020. Such developments have led to the creation of thousands of jobs in the picking, packing and delivery areas of the business.

Critics of this development argue that there would appear to be no long term strategy at the heart of the food retailers operations. Some posit the view that it is only a ploy to keep increasingly promiscuous shoppers loyal to that supermarket group.

Others argue that it does not make sense to tie up the assets (bricks and mortar stores) with associated high rents and lease agreements. Instead they should be outsourcing or partnering with third-party operators such as Ocado.

Are we going to see a decline in investment in “bricks and mortar” grocery stores going forward?

The evidence from the UK suggests not. In 2020 developers and food retailers spent over £1.1 billion on investing in such stores. This is slightly lower than the ten year average of £1.4 billion.

Retailers such as Amazon and Alibaba have redesigned their store operations. In the case of Amazon they have developed the Amazon Go concept where shoppers are tracked by lasers and leave the store without having to queue up and pay (money automatically transferred from their accounts). Alibaba has over 200 of its supermarkets redesigned to reflect the changing technology trends. Staff pick items from the shelves, assemble the orders and place them on a track that operates over the heads of traditional shoppers in the store. They are shifted to another area of the store where couriers on mopeds then deliver them to the customers in as little time as thirty minutes.

The trend towards “tech”, “customer-driven” supply chains and robots appears to be inexorable.

Our old friend Asda, under its new owners, intend to insert an Asda format in many of its Euro Garage forecourts and work on the concept of creating mini distribution hubs within its portfolio of physical stores.

Interestingly it has established partnerships with companies such as The Entertainer. This company will take over the aisles that are devoted to toy products in the Asda stores. They will have full control over the ranges to be displayed, merchandising decisions and pricing. It is anticipated that this “test-and-learn” approach will be pursued with other organisations.

Arguably this addresses one of the shifts in consumer behaviour: the trend towards shoppers completing multiple shopping missions in a single trip.

In summary Covid had accelerated the move towards online grocery shopping. Uncertainty about when a vaccine will be readily available to society is likely to exacerbate this trend over the next couple of years.

The scale and size of physical supermarkets and hypermarkets will encourage the major food retailers to reappraise the value and contribution of their vast store portfolio.

Let’s see what happens going forward.

Discussion questions

  1. Are retailers in danger of misinterpreting consumer behaviour when it comes to the food sector?
  2. Are we going too far when we argue that food retailing in the future will resemble distribution hubs as opposed to traditional supermarket formats?
  3. How important are cultural differences in terms of influencing consumer behaviour? Would this supermarket of the future work in your region?