This market survey focuses on the informal retail of Liquefied Petroleum Gas (LPG) commonly known as Gas. “ Informal “ is in the sense these are comparatively small businesses operating in a relatively relaxed manner as compared to the ‘formal’ like branded petrol stations and their more established agents like supermarkets. The business involves consumers exchanging their empty gas cylinders with a full refilled cylinder at a fee. The retailer takes the empty cylinder to a wholesaler who refills it at an agreed price then sells to the next customer.
Gas retail as of the nature common in estates and smaller towns, where the dealers are independent selling the brands of different oil companies, operates on a legal grey area. Legalities touching on licensing, source of the gas in wholesale, equipment, location and setting. The fact that many are able to acquire county government business permit licenses, survive and thrive does not sanitize the illegal aspects of the business, and if the law was to be strictly implemented many of them would be forced to close or realign their businesses.
In now way does this mean that the business is not viable or that there are no retailers operating within the law. Not at all. As you will see in this survey consumption of gas is growing, and opportunities abound in some locations.
Before we get to the actual figures on Capital, Revenue & Margins, Competition & Survival, Consumer Behavior, Tips, Tricks and more a little background of the LPG business in Kenya will be of help in understanding the industry, legal loopholes, possible opportunities and trends.
LPG Industry in Kenya – A Quick Overview
Trade in LPG is to a very large extent guided by the Energy Act 2009 and regulated by the Energy Regulatory Commission. Others who have a say in different licensing aspects of the business include local authorities and nationwide organizations like National Environment Management Authority (NEMA).
Prior to 2009 Gas cylinders were locked to particular oil companies that marketed them. This was through company specific cylinder valves. For instance a Totalgaz cylinder valve from Total Kenya could only fit a Totalgaz cylinder and so forth. As a consumer it was not possible to interchange a Total Cylinder with a
In 2009 the government through legislation decided that gas cylinder valves were to be standardized. Out went the company specific valves and in came the universal valve which could
fit any gas cylinder irrespective of the brand. The standardization was partially in response to pressure from small independent oil marketers who felt without such a move there was no way they could compete in a market dominated by big well funded multinationals.
Officially though the main purpose of the legislation was to encourage more households to start using LPG as their source of fuel in the process reducing consumption of Kerosene and Charcoal which are deemed bad for health and harmful to the environment.
A universal valve means you as consumer can take your Totalgaz to Kenol Kobil, and in exchange get an equivalent a
Towards the end of 2009 the oil market in the country had started becoming more liberalized, attracting relatively smaller players. This affected the LPG market too. The adaption of the universal valve also lowered the entry barriers in the LPG business.
By 2010 there were smaller players in the LPG market operating at different levels along the supply chain from importation, transport, wholesaling and retail. To brand and market your own brand of gas cylinders required a capacity of only 5000 cylinders. And you also need to join the Cylinder Exchange Pool. Other than the technical requirements to join the pool the most significant in terms of capital is to raise a security bond of Kshs. 50 million.
In March 2014 there were 22 members of the pool six multinationals and 16 local companies. In April two members Pan African Petroleum and Quality Gas limited exited the pool after they were unable to pay for their cylinders owned by other members.
To guard against abuse of the universal valve system where companies could ride on the back of more established, popular or trusted brands and to ensure safety standards were not compromised a set of regulations were laid out. One of the key regulations was that a person shall not conduct a business of wholesale trade in LPG in cylinders without the authority of the brand owner. Simply this means that it is illegal to refill a branded gas cylinder without the authority of the brand owner. You are not supposed to refill a Totalgaz cylinder without the authority of Total Oil Company. Yet this is one of the most contravened rules.
Many legal and illegal LPG traders casually refill gas cylinders without the authority of the brand owners in a practice known as cross filling. As long as it’s a cylinder they refill it. The practice has its own advantages. Brand owners might demand a fee so as to allow a trader to refill the brand’s cylinders. More important, though brand owners will insist on a strict
enforcement of standards before allowing an independent wholesaler to refill the brand’s cylinders. For the wholesaler this would mean extra investment in personnel and equipment, not to mention constant inspection by the brand owners.
To avoid all these conditions and dispose their stock quickly and profitably, some wholesalers refill any cylinder that comes their way without a care whether they have authority of the brand owners or not. The downside of this is that such retailers may not enforce required quality and safety checks. And more importantly for the consumer such wholesalers may only partially refill the cylinders either out of their own cunning or in collusion with retailers.
Even with the universal valve oil companies are responsible for the cylinders bearing their name/ brand. This is one of the reasons large oil companies have been fighting cross filling. One, because they are concerned about the safety standards. Ideally the cylinders still belong to them. They are obligated by law to make sure the cylinders are of the required standards.
A cylinder should be recertified as safe and of good quality every 8 years. But when the cylinders are illegally refilled they are out there and the company which owns the cylinders has no control over them in any manner. The company cannot certify the quality and quantity of the gas in the cylinder bearing their brand is the right one. In case of an accident or incident the authorized brand owner will take the blame since the cross filler may be nowhere to be found. The oil company may be forced to compensate victims, suffer a bad reputation that shakes consumer confidence in them. From a business perspective the practice is deemed as unhealthy competition
Majority of the consumers are not aware of cross filling and other workings of the LPG industry. All they want is gas, and conveniently so.
LPG Importation & Storage
Demand for LPG in Kenya is estimated to be about 60,000 metric tones annually. Other bodies put it at 100,000 or 200,000. Most of the LPG consumed in Kenya is imported from Bahrain and the Middle East and comes by sea. However there is LPG coming into the country from Zambia and Tanzania, some of it through smuggling. This has made it difficult to know the exact amount of LPG that is consumed in the country.
Presently though there is no proper capacity at the port of Mombasa to handle importation and storage of such an amount. Also the port of Mombasa does not have the ability to dock high capacity vessels carrying LPG. Partially this is what has led to the illegal importation of LPG from neighboring countries. Also it explains the occasional fluctuations in supply of LPG. In the last 3 years the government and major oil companies have been working to establish bigger
storage capacity, with facilities spread across the country. This has eased the pressure on storage but not fully.
Big oil companies have started pushing for the reintroduction of company specific valves, quoting safety concerns, revenue leakages and tax evasion by the illegal wholesalers. The government has not shown any indication of reversing the 2009 legislation. Perhaps before a blanket reversal there will be more efforts to have the ERC and other regulatory bodies like NEMA and the police reign in on cross refilling and illegal refilling.
Meanwhile some companies have started experimenting with RFIDs to trace the movement of their cylinders; from their depots to the consumer and back. It’s still early to determine the success of such efforts. Other companies are using universal but self sealing valves, meaning the cylinder protects itself from refilling by other wholesalers. It will take quite some time for these measures to have any impact since many cylinders are circulating within the informal channels.
Despite all the hiccups about 95% of the oil companies who are members of the cylinder exchange pool consider the LPG business profitable. The profits and relatively high in the business will continue to attract illegalities.
LPG Retailer – What The Law Says
As per the Energy Regulations act a person wishing to engage in retail of LPG cylinders shall obtain a license from the ERC. The license application should be accompanied by:
a)Drawings approved by the local authority showing the premises of the business.
b)A valid supply agreement with a person licensed to undertake wholesale business in
Other guidelines include:
∑A retailer should not purchase cylinders from an unlicensed person.
∑A person dealing in cylinders shall not store cylinders in an enclosed area.
∑Every retailer selling LPG must have a properly calibrated weighing instrument in accordance with the Weights and Measures Act for the verification of the net contents of the LPG cylinders.
∑Anyone who wishes to transport more than 40 kilograms of LPG should obtain a license from ERC
∑Also required is a copy of business registration, copy of PIN registration, copy of VAT registration, copy of valid tax compliance certificate, copy of lease
agreement, copy of clearance certificate from chief fire officer i.e. Fire Certificate, authority from brand, copy of a valid certificate of weighing scale calibration from Weights & Measures
What Actually Happens
The above is an ideal situation. More often than not the rules are disregarded either because the retailers are not aware of the requirements in the first place or the authorities are not strict in enforcement.
Many retailers especially outside Nairobi operate only with the county authority business license. They don’t have the Fire Department and ERC licenses. There area also retailers who don’t have weighing machines or have scales which are certified. Weighing machines should be certified by the Department of Weights & Measures which falls under the Ministry of Trade. Usually officials go round in shopping centers checking whether scales being used are certified. A new trader is supposed to be proactive and approach the department to have her scale certified.
Others store the cylinders in enclosed spaces contrary to the ERC requirements. Few care whether the wholesalers they are purchasing from are operating legally or not; as long as the wholesalers are offering attractive prices the retailers purchase from them. Profit is the main driver. For many retailers the increased competition in the business means any short cut that w increases margins are welcome.
Capital, Process and Equipment
To start a LPG Retail business the following licenses are required:
i)ERC Retail License
The conditions to be met before issuance of this license are stated above. Among the key conditions is that the retailer should have a supply contract with a licensed LPG wholesaler. The license costs Kshs. 5000 and takes an average of 30 days to process. You can apply online through the ERC website: (www.erc.go.ke).
An agreement with the wholesaler means you have to get in touch with a wholesaler already licensed by the ERC. (See list below). This could be an independent wholesaler or an oil company. If an independent then he must have authority from the oil company marketing a particular brand to refill on its behalf.
Again as noted many gas retailers operate comfortably without this license. The ERC does not seem to have the capacity legally and in terms of manpower to enforce the rule. However this could change with a new bill coming up (Energy Bill 2014) which seeks to seal such loopholes. There are also plans, though still in the early stages, to establish a body to specifically regulate the LPG trade. Such a specialized body will definitely have more power and capacity in enforcing the existing rules or any other that could come up in future.
So should you acquire the license or not? Presently the ERC seems to be focusing more on illegal wholesalers and less on retailers. So you can survive without the license. For how long will depend on legislation at the national level and efforts by the ERC. You can survive without the license but in the long term it will be to your advantage if you are fully licensed.
Remember when push comes to the shove with the ERC you can’t quote ignorance of the rules as reason for not acquiring the license.
This license is meant to ensure that you have taken necessary measures to avoid the outbreak of a fire, and incase of one you are able to control it. At the minimum you should at least have one fire extinguisher which is inspected and certified. The fire license is acquired from the Fire Department of the local council. In Nairobi the license can be acquired from Fire Station along
Tom Mboya sometimes with quite some bureaucracy especially if you are operating a gas business. Price averages Kshs.3000. It’s advisable to acquire the license for failure to do so will mean constant harassment by county officials.
iii)Local Authority Business License
This is the normal business permit issued by the local authorities. The price will depend on the location, size of business and county. Prices average Kshs.8000. In Nairobi the county government issues the license either through City Hall or decentralized offices in different locations. Sometimes getting the license can be hectic more so if you are operating near a residential building. You might need to bribe the council officials, but eventually you get it.
iv)Weight & Measures Certification
This is certification from the Weights & Measures department that your weighing machine is properly calibrated. Price averages Kshs. 1200.
Like noted above gas cylinders are the property of the oil marketing companies that brand and issue them. The companies import cylinders from countries like Thailand or buy locally from cylinder manufacturing companies like East African Spectre, they brand, fill with gas and then release them to the market.
Selling empty cylinders is not the core business of the oil companies; the cylinders are means to sell gas. Thus they never market “ empty “ cylinders but the gas. However quite many of the branded petrol stations will sell you empty cylinders. The price is usually at a premium of between Kshs.200 and Kshs.1000 of the alternative second hand, unstructured market. Then you may need to move around a bit to get variety and enough quantity.
The secondhand branded empty cylinders come from consumers who for reasons such as financial, moving house or other are disposing their cylinders. This could be through second hand goods dealers, shylocks or brokers of sorts.
Hence the market for empties is very fragmented. However nowadays there are brokers moving around neighbourhoods looking for possible cylinder sources, such as small shylocks and estate
brokers, purchasing from them putting up a shop, yard or something from where they sell in bulk.
Some of these brokers are involved in theft of cylinders from already operational small retail outlets. They steal the cylinders, empty or filled, and resell to people joining the business or even existing ones. Cases of theft of cylinders have increased in the last two years. For instance in 2012 Total lost about 4000 cylinders stolen in 50 robberies across the country. In 2013 about 1000 cylinders stolen from EA Spectre though some were recovered. In 2014 about 70 cylinders have been stolen from petrol stations within Nairobi CBD.
Oil companies have reported cases of pirate cylinders. Usually such are cylinders brought from outside the country or stolen from manufactures then painted the color of a particular brand. There are also retailers when they realize a particular brand is popular and they don’t have enough of those cylinders they repaint the unpopular with the color of the popular. There are also counterfeit cylinders. These are not made by recognized manufacturers rather by some ‘jua kali’ workshops somewhere. They do not meet quality standards as set by the Kenya Bureau Standards. Such cylinders could be underweight and not safe. Usually the fakes are painted with the colours and logos of oil marketing companies.
A number of traders will purchase clean, good and filled up cylinders from the oil marketing companies themselves. For instance as a trader you go to Kenol Kobil and purchase 10 cylinders of
When buying a full cylinder from a gas station prices will range at between Kshs. 4500 and Kshs.6000 for a 6kg. For the second hand empty cylinders the prices are open to negotiations and range between Kshs. 1500 to Kshs. 3000 for a 6kg cylinder and Kshs. 2500 to Kshs. 4000 for a 13kg, of course depending on the source and seller. There are no set prices.
Thus the way to source for cylinders is from a petrol station selling, neighborhood traders or brokers who occasionally advertise in the press and online classifieds. Alternatively you can purchase the cylinders filled with gas from a petrol station.
Types of Gas Cylinders in Kenya
Gas Cylinders for the retail market in Kenya comes in 3 common sizes:
3 kilograms – This is popular in the low income areas and those going for camping.
6 kilograms – This average quantity is the most popular overall
13 kilograms – Preferred by those of middle and relatively high end income.
There are other sizes though not very common; 15kg, 25 kg, 35kg, 45 kg, 50 kg
The 3kg and 6 kg cylinders were a late entry in the mass market which was previously dominated by the 13kg. The lower levels were introduced when the kadogo economy looked like the future of every industry, and every company wanted to tap into the lower income groups.
After few years dealing in the smaller sizes oil companies and some traders started complaining that they were not profitable enough to continue being sustained in the market. Since the cost of the cylinder was fixed and margins calculated per kilogram the profits from the 3kg and 6 kg were not attractive enough. The 3kg cylinder had not proved a hit in the market as some of the companies had expected. Even in relatively low income areas the 6 kg seemed to outperform it. In addition the 3 kg was said to cost more in terms of frequent maintenance.
The 13 kg cylinder was the best option for the companies and traders. Starting 2012 some companies started phasing out the 6 kg. They made blunt offers where they let consumers exchange a 6 kg cylinder with a 13 kg at a subsidized cost. For instance Total was exchanging the 6kg with a 13 kg with burner and grill. Kenol Kobil offered the 13 kg filled with gas and burner at Kshs. 7560, while the 6 kg was retailing at around Kshs.6000.
The companies and traders, including retailers were forced to reconsider their position after the 2013 budget read in June, followed by the financial bill in September of the same year. The government now levied (Value Added Tax) VAT on LPG and other goods thus raising its price. This was accompanied by a rise in average inflation to an average of 7% as a result of increase in the prices of basic commodities. Majority of customers now preferred the 6 kilogram cylinder. The 6 kilogram is the fastest moving in neighborhood gas retail shops (2015) . You can start with a little of each but with a bias towards the 6 kilogram.
Oil companies say that Kenya has a high cylinder float, meaning that there are more cylinders that are issued than are being used. Estimates put the number of cylinders issued by LPG companies at 2.86 million but only 1.5 million are being used.
The reason could be that there are households who bought the cylinders but when their economic situation changed negatively they stopped using LPG and went for alternative fuels. They still hold the cylinders hoping for higher income which will enable them to go back to using LPG. Other households have two cylinders say a 6 kg and 13 kg and depending on the money that is available at any particular time they switch. Sometimes when there are shortages in the market only one particular kind of cylinder is available and just to be safe the households keeps both cylinders even if they are using just one of them.
This is the cage used to place and display the gas. There is no standard price or single source for the structures. Gas retailers order from local blacksmiths and negotiate price depending on the preferred size. Prices quoted range from Kshs. 5,000 to Kshs. 50,000 based on size, design and negotiating skills.
Fire extinguishers can be bought from leading supermarkets, some hardware and motor vehicle spare shops or specialized fire equipment companies like Nimrod Kenya and Dragon Fire.
Prices depend on the size. Standard extinguishers range in prices from Kshs.3500 to Kshs. 20,000.
Digital Weighing Scale
There are a variety of digital weighing machines dealers. Some supermarkets and hardware shops stock them. In Nairobi the area around Nyamakima, Kirinyaga road and lower parts of River road have shops stocking them at relatively low prices
Prices start from around Kshs.20, 000 all the way to Kshs.50, 000 depending on the features and make.
Picking from the above you realize there are two kinds of suppliers:
These are fully licensed by the ERC to conduct business of LPG in wholesale. They include oil companies who market their own brands of cylinders and also independent wholesalers. (We have included a list of licensed wholesalers at the end of the survey.)
The oil companies largely operate through petrol stations and where those are not available through depots, distributors and agents. Although petrol stations were initially hesitant to sell LPG cylinders in wholesale to neighborhood retailer’s competition has made them become hey increasingly becoming flexible.
There seems to be no standards procedures guiding the sale of LPG in wholesale by the stations and it depends on the individual management. There are petrol stations who will agree to refill or sell to you at wholesale but only cylinders of their brands, others will take any cylinder, while others will not sell in wholesale at all and advise you to contact the mother company. Before you start just approach the station in the area and they will advise you.
You can also approach oil companies directly. They will give you terms to do with safety, deposits and obligations. Oil companies will prefer to deal with a retailer who meets the ERC LPG license conditions. Price and discounts will depend on your location and quantities you move every week . They will require you to sign a contract which at times could mean exclusivity- that you will not deal with rival products. Depending on your agreement the company could be delivering the cylinders to your premises. The major advantage of this is that you might enjoy quite high margins . Sometimes margins big enough to allow you to become a sort of wholesaler to other retail outlets. Many retailers are reluctant to deal with oil companies directly for fearing the bureaucracy involved.
The independent wholesalers have depots in various parts of the country. Others deliver filled cylinders to your premises . Some of the wholesalers are not very structured and so depending on your location give them a call and they will let you know the exact location of their depot or distributor. ( Again see list below) . Usually the indepent wholesalers deal in wide range of
Among the legal wholesalers there are also illegalities. Though a wholesaler is supposed to have the authority of the brand owner before refilling a cylinder some disregard that and fill any cylinder that comes their way.
These are illegal either because they are dealing with smuggled fuel or because they are filling cylinders without the authority of the brand owners. Illegal refillers operate from various spaces sometimes even within private homesteads. In Nairobi a number of such wholesalers are found in Nairobi’s Industrial Area, Doonholm, Embakasi and Baba Ndogo. Some don’t even have business names; just a storage tank and refilling facility.
Retailers are attracted to such wholesalers because it’s a walk in walk out affair. No questions asked . Such wholesaler are also flexible enough to collude with if as a retailer you want partial filling.
Some oil companies estimate that about 30% of the LPG that is presently consumed in the country comes from the black market as compared to 10% in 2007. In September 2013, police and ERC official’s confiscated 408 cylinders from an illegal wholesaler in Industrial Area. The
ERC has been promising to crackdown on the illegal wholesalers but nothing significant has been happening.
Ideally authentic cylinders filled by the oil companies themselves or licensed wholesalers, should have a test date engraved on the collar rim, a new sticker from the supplier, as well as a branded seal. However such safeguards are easy to counterfeit and well many consumers don’t know what to look for in order to ascertain whether a refilled cylinder is authentic or not.
So where exactly does one get a supplier:
We have included a list of licensed refillers below both independent and oil marketers. For legal reasons and the sometimes temporary nature of illegal wholesalers we are not able to include a full list of their locations here.
To identify a supplier the first thing to do is contact the neighborhood stations, or oil companies themselves, they will give you a pointer depending on your location. Also get in touch with the independent wholesalers whose contacts we have included. When you start operations representatives of legal and illegal sellers will come to you.
Some wholesalers will pick your cylinders and fill as you wait, while others will exchange with prefilled cylinders. Most of the illegal wholesalers do not deliver to your premises , so you need to think of transport.
Competition & Survival
No. that exist
(Nairobi – Average of 5 per estate.) Other
urban areas average of 3 per estate. These are
averages and the distribution is not even.
No that have opened in the last 1 year
3 in 10
No that have closed in the last 1 year
1 in 10.
Reasons for closing (Sample of 14 previous owners who could be traced)
Reasons For Closing
Poor Sales - 21%
More Profitable Alternatives -
Losses - 16%
Other - 20%
Overall sample biased towards Nairobi but touched Machakos, Kiambu, Nakuru, Kisumu, Embu
-In 2012 and early parts of 2013 it was rare to see a Gas Retail outlet advertised for sale. However in 2014 and 2015 there is an average of one retail outlet is advertised for sale every week through newspaper classifieds. The numbers changing hands privately could be higher.
-Figures include even gas retailers of the very minimal sizes. The least stock noted was 5 cylinders by a retailer in Kayole.
-There are retailers who also act as wholesalers. Usually they could be the dominating retailers in a location who have transport facilities.
Overview of Competition
Competition in the gas retail business has accelerated in the last 3 years. Individual retailers got in the business after 2009 when oil marketing companies were forced to adapt the universal valve. The market opened up and more players came in at different levels including importers, distributors and wholesalers.
Many of the initial retailers played by the rules refilling from respective oil companies or their agents. Slowly as competition increased at all levels, and some crafty entrepreneurs identified loopholes in the market, they exploited them considerably reducing barriers to entry in the business.
Competition has also been driven by an increase in demand for LPG by urban consumers. Again the universal valve and intense marketing by the oil companies played a part in this. The positive economic growth during the Kibaki era increased the number of people who can afford gas cylinders .In the initial days the biggest barrier to entry was the relative bursary of sourcing from the oil companies. However with the rise of numerous legal and illegal independent wholesalers this stopped being a big problem.
LPG retail business thrives in urban areas as compared to rural and peri urban areas. This is because in the rural areas alternative sources of energy such as firewood and charcoal are easily available at a fair price. Income is also relatively low and erratic in rural areas.
The more urbanized a region is the higher the consumption of LPG. In addition to Nairobi other regions which are highly urbanized (according to Kenya National Bureau of Statistics - KNBS) are Kiambu, Eldoret, Mombasa and Nakuru. Towns in western Kenya like Kisumu, Kakamega, Kisii and most of Central Province are also urbanizing at an above average rate.
About 60% of the LPG market in Nairobi, 15% in Mombasa and 25% in growing urban areas – think county headquarters. In Nairobi about 40% of the users use LPG as the primary fuel, meaning they don’t substitute with other fuels. The rest mix LPG with other fuels. The lower the income the higher the rate of substitution with alternatives. For such households LPG is used for cooking light meals, preparing quick snacks for visitors or warming food. The largest segment of LPG users are those in the middle and upper income groups totaling about 2 million people.
Although the use of LPG in rural areas is low it does not provide a very attractive virgin market considering that about 80% of people in rural areas do not purchase fuel at all – they collect freely available firewood or burn charcoal for themselves. Despite rural consumers appreciating the advantages LPG has over firewood or charcoal they are reluctant to incur an extra cost associated with gas.
The biggest potential market for LPG is in places where consumers already purchase fuel of any kind be it kerosene, charcoal or even firewood. Such will make a cost and convince calculation which will make LPG attractive. Growing urban areas, lower middle and low income areas in Nairobi offer long term potential for growth. However the biggest concentrations of consumers already using LPG are in the middle class estates.
Looking at the percentage of any income group using LPG you will note consumption is biased towards the middle and higher income groups:
Income ( Kshs.)
Percentage using LPG
Less than 10,000
10,000 – 20,000
20,000 – 30,000
30,000 – 40,000
40,000 – 50,000
In the Nairobi social segmentation people earning between 20k and 30k tend to live in the same general neighborhoods think Umoja, Highrise. Households earning 10k mostly live in low income but highly populated areas like Kangemi, Kawangware and Mathare. With incomes above 50k the market is a bit segmented. Most of the upcoming estates in Nairobi are targeting households whose income is over 50k.
Outside Nairobi, Mombasa, Kisumu and Nakuru residential areas tend to be segmented in three major ways; those earning 10K and below in the same neighborhood , 10K and 20 K in another and above 20K in the more prestigious areas.
For the low income groups the biggest hindrance to adapting LPG is the initial investment in the equipment. For consumers the barriers to entry in the use of LPG is the initial cost of acquiring the equipment, basically the cylinder and cooker or grill and burner. This is gradually changing with the secondary trade in cylinders. For instance a 6 kilogram
get the same, inclusive of a burner for between Kshs. 4000 and Kshs. 5000. Also as competition in the LPG market becomes intense some oil companies are reducing their prices with the hope of capturing a bigger share of the market.
There are also schemes, though not very consistent aimed at giving soft loans to the low income earners in order to purchase the cylinder and burner. Their impact has not been significant.
By and large most consumers in urban areas and a significant part of the rural are aware of LPG, and the advantages it offers compared to alternatives. To the urban consumers LPG is an aspiration fuel, meaning those who can’t afford it presently because of income will switch when their economic situation improves. For some though the reluctance to use LPG is because of fears about safety, partial filling and contamination of fuel.
At the national level only between
Overall most consumers in urban areas and a significant part of the rural are aware of LPG, and the advantages it offers compared to alternatives.
Competition is on the rise and will continue to do so in the short term. (Until end of 2015). Although increased competition reduces profits and makes a business less attractive to entrepreneurs, LPG retail is continuing to attract more investors. There are markets which are almost reaching saturation with up to 3 retailers serving about 200 households compared to a more likely breakeven point of 300 households per retailer.
Competition in the business will slow down if the ERC decides to strictly implement the regulations governing the sale of LPG. The Energy Bill 2014 has already proposed a fine of 1 million shillings for anyone dealing with LPG illegally. The present fine is Kshs.5000. This will squeeze out the illegal wholesalers who have ensured higher margins and a less bureaucratic way of refilling.
While it might not be possible to fully regulate the market, in about two years time (2016) there will be likely more regulation and bureaucracy in setting up gas retail points, making it an unattractive business for many. Before that happens competition will continue to increase. This will be triggered by copy cat entrepreneur ship: “There are many people starting this business, it must be profitable, let me start it too.” From the outside the energy sector looks attractive to many entrepreneurs. Low entry barriers will make it an option for small scale entrepreneurs seeking investment opportunities.
In the medium long term competition could reduce because of changes in consumer behavior and strategies of the oil companies. The ERC has plans to carry a sensitization campaign on the media that will educate consumers on the need to purchase gas from recognized outlets, the dangers of buying from illegal retailers and what to look for in order to be sure whether a cylinder has been filled legally or not. Already there are b neighborhood gas retailers have acquired a bad reputation due to partial filling, and such a campaign might just tilt a significant number of consumers to reputable outlasts like petrol stations.
There are also plans by some companies, like Hashi, to introduce piped gas in houses. Also a number of oil companies are thinking of developing partial filling mechanisms in estates. This might reduce the margins of existing retailers and make the business less attractive.
Opportunities in the business
Opportunities exist in the business. Opportunities could be by filling gaps in existing locations or (see more below), getting into completely new markets. Locations where the population is growing due to upcoming residential areas or other economic attractions offer an opportunity. And so are upcoming completely new estates.
Prevailing economic growth and inflation rate will determine the viability of the business in areas populated by the lower and middle lower income areas. These groups of consumers radically change their consumption if the inflation rate changes.
A rise in inflation will see them cut their spending and from past trends LPG is one of the causalities. In 2013 the inflation rate was relatively higher compared to the previous year. In May 2015 the average inflation rate was 7.3% compared to 6.4% in April and 6.27 in March a consistent rise in the inflation rate will discourage prospective new consumers from investing in the cylinders. Opportunities in low income areas will be based on service differentiation and more important the ability to compete on price.
Distribution of Competition
In most of the markets there tends to be a dominating gas retailer. This is the retailer controlling more than a fair share of the market (over 40% of the market). Such a retailer could have become dominating because of his marketing efforts, reputation, location or as is
increasingly becoming common having ‘branches’ in all the key positions within an estate or region. Markets with a dominating retailer are harder to penetrate, and so are those with a strategically located formal and bigger outlet like a supermarket or petrol station.
Gas for household consumption per se is not a differentiated product, its more or less from the same source and produces the same amount of heat this means that competition is based not on the products itself but factors influencing how the product gets to the consumers.
At the national level oil companies compete by marketing. They make every effort to hook first time LPG consumers to their brand hoping that they will become faithful in the long run. As for the existing customers they sell the superiority of the brand and service in order to keep them loyal. They also try position their outlets in places as convenient to the customer as possible.
On What is Competition Based On
At the local level, where the retailer is selling all the common brands, competition is not based on brand advantages rather a combination of factors all aimed at making the consumer chose to purchase from the retailer rather than the oil company outlet or the retailer next door. These factors include:
Location is in two forms:
i)Location where there is a critical number of potential customers. This could be in an area where the population is growing due to upcoming buildings, economic attractions such as new company setting up, social attractions such as security or a completely new estate.
It’s also a location where people have adequate income to invest in LPG and where alternative and cheaper sources of energy, like firewood, are not easily available.
ii)Location in relation to the convenience of the customer – Gas often ‘finishes’ without any notice. A customer could be cooking now and the next hour, even before the meal is fully cooked, the gas is over. In such circumstances she will want to purchase the gas soonest possible and from the nearest location. Gas cylinders are also bulky and relatively heavy items. This means few customers want to carry it around especially if they don’t have an own means of transport. Thus there are gas retail outlets which try to locate as near the customer as possible. This could be on the ground floor of a flat, along a path to a shopping center or near a market.
For new retailers location is important. However location on its own is not enough to make a business succeed. If by appearance the new conveniently located outlet does not instill confounded then customers will opt to walk the extra meters to their usual outlet.
B. Reliability and Trust
Among consumers there is already default skepticism about neighborhood gas retailers. Largely this based on whether the gas is of the right quantity. Although many retailers have a weighing scale on which a consumer can confirm the true weight of her filled cylinder, many customers believe that the scales have been tampered with and are not giving a true reflection of weight. The only proof that the Wight is correct is if the gas lasts for the duration she expects it to. The base is usually a refill she had done at a petrol station or supermarket.
Building an element of trust in a market where there is intense competition is crucial for the success of the business. Though at first this may mean lower profits ( as compared to shortchanging customers), it helps build a reputation and a level of faith in case in you decide to shortchange a few customers in future they won’t notice and will blame it on their cooking habits.
A retailer who enters the market and through marketing stresses his cylinders are filled to the correct quantities has a big chance of gaining a fair share of customers keeping all other factors constant.
Reliability is also in terms of opening and closing hours. Why carry a 13kg to a shop only to find it closed? Then if I want gas at 9pm or 7am in the morning can I get it? Consistency in opening and closing hours adds value to the business. If a retailer has erratic working hours then he loses the trust of the consumers.
In addition Reliability has to do with the availability of various brands. There are customers who want to use only particular brands. So if they have a
Service involves the courtesy and attention that the customer receives. It’s also about such practices as picking and delivering the gas where applicable. The latter is increasingly becoming a crucial consideration when making purchases especially in locations where the retailer is located a distance from the customer’s house or if the customer lives on an upper floor of a flat. Staff of some retail shops go ahead and help the customer connect the new cylinder. These simple things are noted not just by existing customers but by potential customers.
Presently there are no radical innovations in service. Picking and delivery are easily copied by competitors if they have the capital to invest in facilities such as motorcycle or extra manpower.
Although marketing may involve all the above efforts we focus on direct marketing efforts like advertising and efforts at branding. Advertising in the business takes some common easily replicable forms. One is to use small billboards pointing to the existence of the gas retailer. Two is the use of stickers in shops, gates, matatu, toilets and any available public spaces. Often such advertisements commonly highlight location, affordable and free delivery.
Few touch on other attributes that are important to the customer: safety, right quantities, late opening and help in connecting. There is room to do crude branding around issues of safety and quantity.
Other forms of advertising include leaflets, posters and in a few cases online classifieds either through free classified websites like OLX or Facebook. The effectiveness of the latter depends on whether the retailer is able to narrow down to the target customer. As well it depends if through the ad the retailer offers the potential customer, say a consumer in Buruburu, something exceptional, not available in the location. Otherwise it will pass just for another advertisement. This is because consumption of gas is on a need basis. A consumer won’t see an ad of discounted gas and rush to buy even when her cylinder is not empty.
A few retailers have used advertising methods/ avenues not commonly used by other retailers. One used a vernacular radio station, another has posters that declared “You can even come with your weighing machine”, another asked customers “not to spend a shilling calling us, just text or flash and we will call you back”, the owner of another moved from door to door giving leaflets and where possible talking to the potential customers about his business.
Branding efforts are aimed at making the customer associate the retailer with some positive attributes is also being used. Simple branding efforts include giving workers branded overalls, clearly branding and naming the business, issuing well branded materials like receipts. A most interesting marketing by a gas retailer in Nairobi is to offer a loyalty scheme where customers earn points with every purchase and if they introducing a new customer. The customer earns a discount when he gets she accumulates points a certain number of points.
Another retailer estimates the duration that it will take a consumer to empty the gas purchased and sends them a text and send them a friendly marketing text a few days to the probable ‘ gas finished ‘ date.
E. Price Based Competition
Price is an important consideration when purchasing gas. This is more so in low and mid income areas. Price based competition is common is some locations. Price differences tend to range between Kshs.20 and Kshs. 100. Where the price is too low as compared to competition customers could be skeptical about the quantity. On the other hand higher prices do not instill confidence that the gas is of the correct amount this is because of the skepticism that already exists. Where retailers are located a considerable distance from the customer’s homes they consider price in terms of the extra services like delivery. If one retailer is offering a lower price and another a slightly higher price but with delivery they may opt for the latter.
Price based competition works if supported by other efforts to win customers, but it’s a good strategy for market entry.
Customer loyalty in the business is not deep rooted and depends on customers’ perception of convenience, reliability and trust of the retailer.
10 % to 30% depending on the source
Average Consumption per month (Household
12 kg per household of average 4 members
using LPG as the primary fuel)
Average consumption per month (Household
using alternative fuels)
Average consumption per individual per month
Average Monthly revenue
Highest Revenue recorded
Lowest Revenue Recorded
Average no of LPG sets sold in a month
(Cylinder plus burner)
Overall sample biased towards Nairobi but touched Machakos, Kiambu, Nakuru, Kisumu, Embu
Gas both at the wholesale and retail level is priced per kilogram. The price per kilogram varies with the source. Still at any one time there are general ranges where price oscillates irrespective of whether you are sourcing from the informal or formal, legal or illegal markets.
Margins range between 10% to 20% per kilogram. At the present ( first quarter 2015) average retail prices of Kshs.216 per kilogram that comes to between Kshs.13 and Kshs.30 per kilogram. The difference in margins depends on the wholesaler Although price fluctuates a retailer makes an average of Kshs.150 for the 6kg cylinder and Kshs.330 for the 13kg . The average range per kilogram is between Kshs.21 and Kshs. 35. A notable exception is when a retailer has a contract directly with the oil company to buy certain quantities every month. Margins in this case range between 25% and 35%
Illegal and informal wholesalers tend to offer slightly lower prices, this by a margin of between Kshs. 5 and Kshs.12 in some cases. However some slightly higher prices after considering the competition in the area and the hassle they are saving the retailer. The best thing is to shop around.
When a retailer is purchasing from an oil company usually through a petrol station the margins tend to be within the same range depending on the market conditions. Some petrol stations will only sell LPG in wholesale when cylinders ‘belong’ to them, however some will refill all cylinders irrespective of brand. When filling those of rival brands they charge between Kshs. 40 and Ksh.60 more per cylinder.
The revenue a retailer makes will depend on the total number of cylinders he sells at the end of the month, his margins and how he is able to control his costs.
The number of cylinders a retailer sells will depend on the factors mentioned in Competition
&Survival, but keeping everything constant it will depend on the resident’s income and the general economic welfare at the national level. The higher the income the less likelihood that the household will use alternative sources of fuel like charcoal and kerosene. This means that they will use higher quantities of gas.
In lower income areas LPG is used sparingly – to warm food and cook light meals. Thus the cylinder lasts relatively longer. Gas retailers located in highly populated areas whether populated by middle or lower income areas record higher revenues.
When inflation rates raise consumers disposable income reduces, meaning that they will reduce their spending. They will try reducing the amount of gas they spend. If they have an option they go for lower quantities. Say if a consumer was using a 13 kilogram but has a 6
kilogram cylinder which was unused before and the inflation rises significantly then she will likely revert to the lower amount.
In higher income areas there are more consumers with 13kg cylinders, these are more profitable per unit.
Gas retail, just like retail shops, depends on high foot traffic. The margins are more or less the same across different retailers, thus the retailer who sells more units makes more revenue. This is more so considering that the quantity of LPG a consumer uses on gas month to month remain more or less the same.
It’s difficult for the retailer to make a customer consume more quantities of LPG. That is a function of economic conditions beyond the retailer’s power.
This implies it’s important for the retailer to motivate customers to purchase from him every time they have to buy. Revenue thus will be influenced by marketing, service and convenience all aimed at attracting more customers.
A retailer who aggressively seeks to win and maintain customers will record higher revenue. One retailer has his ear on the ground and when a new tenant moves in he approaches her with a proposal to start supplying gas to her.
Due to the increased competition in the business the consumer has so much choice to choose from. Consequently a retailer needs to build customer loyalty. This is despite a retailer’s market leadership position or his being without competition. With low barriers to entry there will always be a possibility that a new retailer will come into the market, and if he comes with the right mix of factors then consumers will easily shift. As we had noted above loyalty in the business is not so deeply rooted.
Pricing & Revenue
The price of LPG unlike that of oil is not regulated. Oil companies free to set their own prices largely depending on demand, supply and competition forces. More or less prices tend to be the same throughout the country though the further you go from Mombasa and Nairobi the higher the price. This is due to the cost of transportation of cylinders. In Mombasa the price tend to be lower by about Kshs. 50 as compared to the rest of the country. While in other parts of the country price differences range between Kshs. 500 and Kshs. 200.
Charging prices above your local competition has a negative impact on revenue unless the retailer is offering a significant advantage: For instance if customers trust a retailers quantities are as required, he delivers while other’s don’t or he is conveniently located as compared to the
competition. Without any comparative advantage then a higher price will have negative impact on revenue.
Charging below average market prices also does not have a positive impact on revenue unless the customers trust that the quantities offered by the retailer are right and he does not compromise on service.
Sales tend to be higher towards the end of the month. And it’s good to have enough stock then. This is because in addition to customers purchasing their usual refills, there are those whose gas had finished within the month but didn’t have the money to refill, but now can.
The breakeven point averages 8 months. The length could be shorter if you are in a highly populated middle income location and with little or no competition. But it’s good to plan with the longer breakeven duration. Before you break even, turn a profit and the business becomes sustainable you need to have money to pay rent pay your bills.
Women are the majority of the consumers. Women are more particular about things like checking the weight of the gas than men. Thus reassuring them verbally or with a weighing machine is endearing. Women too will worry much more about picking and delivery of the gas. They are more likely to purchase from a retailer who picks, delivers and where possible helps in reconnecting. That said even men are concerned about the above but to a lesser extent. Right quantities are especially crucial for both sexes.
Often if the customers are dissatisfied they will move on to the next retailer without letting their current retailer know why. Women are more likely to complain, spread the word of poor service to friends and then walk away.
Generally customers seek:
Fair Price – This is not necessarily the lowest but one within market ranges and corresponds to service
Convenience – They want to purchase gas at the most convenient location relative to their homes and time.
Great Service – They appreciate common courtesy, and service additions such delivery.
Average no of employees
Minimum no of employees
Highest no of employees (one outlet)
Lowest salary recorded
Higher salary recorded
In cases where the owner is not running the business himself most of the gas retailers tend to have at least two employees. One is the manager/ cashier sort of, while the other is an assistance, doing the actual exchange of the cylinders. Where the retailer is offering delivery service, the assistant will do it using whatever means that is convenient within the location- trolley, motorcycle etc
There are retailers who have only one employee, other than the owner. Many of such do not offer delivery services. The customer brings his empty cylinder and leaves with the refilled one. How she gets it to her house is her own to work out.
The common reward method is a monthly salary. There are few retailers who pay employees a commission based per cylinder sold. This is more so for those doing delivery. This is between Kshs. 20 per cylinder. In the long run it becomes preferable to hire them on.
The number of employees that a retailer has depends on how busy an outlet is. Few employees in a busy outlet will compromise service as customers will have to wait longer before they are served.
Among considerations while hiring assistants is ability to ride an understanding of the neighborhood, courtesy and trust.
Some LPG Quick Facts
¸The three major legal filling plants in Kenya are in Nairobi, Mombasa and Eldoret. Often LPG is transported in bulk using lorries. The cost of bulk transport is less than that of transporting actual filled cylinders.
¸Premier Gas has launched “Pima Gas” which allows consumers to refill gas for as low as Kshs. 50.
¸National Oil Corporation plans to establish mobile filling units for partial filling. Thus a consumer can fill Kshs. 100, 220 or whatever amount she wants.