For Better or Worse?
By Barbara Grondin Francella, Linda Lisanti
Big Oil's exit from direct retail has positive and negative consequences for the industry
In June 2003, Convenience Store News reported on an emerging and dynamic trend starting to take hold in the convenience channel. Headlined "A Whole New Game," the special report stated that major oil companies, faced with a more assertive marketplace, were unloading large chunks of their "financially frail" retail holdings.
At the time, some industry watchers surmised that as many as one-third of the Big Oil-controlled locations in the U.S. were up for sale.
What was uncertain back then was how many oil companies would follow the trend and what impact, if any, this shift would render on the convenience and jobber segments.
Many years have passed since then — yet the game is still in play. What once was an emerging trend has grown into an industry-transforming movement. Unlike in 2003, though, the impact of Big Oil's exit from direct retail is much clearer now.
And as in any game, there are winners and losers.
"Whether or not it's a positive depends on what part of the distribution channel you're in," according to John Sartory, managing director of Petroleum Capital and Real Estate LLC, which has facilitated many of the Big Oil selloff transactions over the years. (Big Oil is the generally accepted industry term for the major international oil companies, including BP plc, Chevron Corp., ConocoPhillips, ExxonMobil and Royal Dutch Shell plc.)
Within the distributor community, Sartory said the winners' circle includes larger jobbers that are using Big Oil's transition to further expand their size and economies of scale, as well as mid-sized jobbers that are turning themselves into "mega jobbers" through multiple acquisitions.
As these regional players continue to acquire Big Oil assets, the Petroleum Marketers Association of America (PMAA) is seeing many of its members become "very big, very quickly," said Dan Gilligan, president of the Arlington, Va.-based association. Traditional petroleum jobbers that were operating 40 stores are buying twice that amount.
"It's an enormous undertaking for them and definitely changing the nature of the business," Gilligan said. "It's an amazing change at the jobber/wholesaler level."
What's more, these newly birthed large regional players now have a very different dynamic with Big Oil than in the past. As the major oil companies exit the direct operation of retail outlets, in many markets they are no longer competing head-to-head with their distributors for retail customers or for real estate.
"For people in markets where they competed with oil companies, the playing field will be a lot more level," said Thomas E. Kelso, managing director and principal of Matrix Capital Markets Group Inc. in Baltimore, Md. "Everyone in a market will be a fuel distributor buying from the refiner or someone who trades refined products. It will be very positive."
Another plus is that for many branded wholesalers, Big Oil's departure from direct retail is giving them access for the first time to major metropolitan markets where higher rack retail margins are available. Before, they were prevented from branding or opening sites in these markets.
"Some jobbers who have had to work more in the peripheral end now have the opportunity through their acquisitions to penetrate into the standard metropolitan areas — markets such as San Diego, Los Angeles, Miami, Chicago, New York and Washington, D.C.," Sartory noted.
LESS WITH MORE
Because it's been difficult over the last few years to secure financing, particularly for c-stores, few people could put their hands on the kind of money needed to pick up packages of 100 to 200 stores. In many cases, this narrowed the universe of players that could bid on Big Oil's assets and ultimately put them in the hands of larger operators, said Dennis Ruben, managing director of NRC Realty & Capital Advisors LLC, which helped BP sell the majority of its U.S. units.
As a result, small jobbers are now at a greater disadvantage than ever. As they watch their competition grow larger, it's becoming harder and harder for them to compete against this new breed of "mega jobbers" — some of whom have emerged practically overnight.
"The small guys are getting squeezed. Up to 100 stores, you don't have enough critical mass," Ruben said. "There are exceptions — niche players that have really good reputations in their markets — but by and large, in the 20- to 50-store range, they are struggling to remain competitive."
The increased consolidation that's resulted from Big Oil's selloffs also has created more barriers for new players looking to break into the industry, according to Ruben.
The various oil companies have employed different strategies when seeking buyers for their sites. ConocoPhillips, Shell and Exxon Mobil put markets or packages together for bidding, resulting in fewer players picking up more locations. BP and Sunoco, on the other hand, conducted sealed bid sales, so its stores wound up in the hands of a variety of different players, he said.
Invariably, the oil companies are entering into long-term supply contracts with their buyers. The mandatory supply contracts most often call for the stores to retain the Big Oil retail brand for the contract's duration. "So not only do they want to maximize the proceeds of the sale, but they're also concerned with who is going to protect their brand," Ruben noted.
With this in mind, petroleum marketers and c-store operators that are aggressively competing for Big Oil's prime locations are doing their homework, PMAA's Gilligan said.
While the full impact of these acquisitions on convenience retailing is still playing out, many in the industry believe getting these sites out of the oil companies' hands can only be a plus.
"I don't think oil companies were very good at company-operated convenience stores," said Kelso of Matrix Capital. "On the whole, I think most of the buyers will be better retailers. The new owners may not directly operate stores; they may lease them to dealers. But the dealers will be better operators because of what I perceive as the lack of expertise in the oil industry operating c-stores."
Just because they own the brand doesn't necessarily mean oil companies are best-suited to operate the stores. "A franchisee or dealer can oftentimes operate more efficiently than the oil companies. With many of our clients who have acquired stores from Big Oil, they've been able to quickly see improvement in the stores upon taking them over," said Ruben of NRC Realty.
Among the companies that have been successful in acquiring Big Oil assets are:
• Pacific Convenience & Fuels LLC
As of early January, the company had 520 locations, 250 of which are company-operated. Another 75 sites are fee-operated with PC&F controlling the fuel; the rest are dealer-operated.
PC&F President and CEO Sam Hirbod said handling such rapid expansion depends on being prepared for the business. "If you want to have rapid growth, you cannot leave holes in knowledge. You have to anticipate where you're going to be. You have to prepare your foundation, your human capital, which I think is the most important," he said.
This readiness enabled his company to make significant progress over the last two years refreshing the stores, which were already Circle K branded, and implementing changes in design and merchandise to achieve its ultimate goal of catering to a wider demographic.
In terms of the competitive landscape, Hirbod said acquiring ConocoPhillips' network of stores has allowed PC&F to compete in the metropolitan markets and even lead in some.
"It's put us in a whole different category," he said.
While there's no doubt Big Oil's conversion has benefited PC&F, Hirbod believes it's still too early to tell whether the same can be said for the industry as a whole. The transition to a non-oil-owned sector has yet to be completed, he noted, and a lot of players are still trying to figure out which direction will provide their top dollar return.
"Retail has become the upstream of our industry. Before oil companies used their retail outlets for throughput, and bottom-line dollars were not the most important thing. But now companies have to make sure everything makes sense," Hirbod explained. "There's going to be some rationalizing that will continue, and there will be some cleansing that takes place."
In fact, PC&F announced in late January it is divesting 94 sites, including locations with convenience stores and/or fueling stations, closed sites with fueling capacity, and land banks. The assets no longer fit PC&F's long-term portfolio goals, according to the company.
As for gasoline and margins, Hirbod is optimistic that long-term market forces will make it a better platform to be in retail. "That's being shaken out as we speak," he said.
• Englefield Oil Co.
January 2011 marked a change in the company's retail operations, as the petroleum marketer began converting the ampm locations to its existing Dutchess Shoppe store brand.
"It was difficult for us to operate under two different brands and two different systems," Ben Englefield, co-president, said of the decision to rebrand. "It was very inefficient."
BP allowed Englefield Oil to drop the ampm name with no penalty in exchange for Englefield Oil agreeing to switch to BP gasoline at seven stations where there was another supplier.
The company's most recent acquisition of 43 BP sites last year brought the chain's store count to 138, making Englefield the No. 2 c-store operator in central Ohio, with more than 60 stores.
Having already completed four other acquisitions, the Englefield team had plenty of experience accessing capital and managing resources to close the deal. "We were able to absorb these last 43 rather easily — not to say we didn't have a lot of people working really hard for a month to do it. The economies of scale helped a lot. We were able to add those units without a lot of overhead in many departments," Englefield noted.
Altogether, "the [BP] acquisitions have helped us grow much more rapidly, on really good corners, than we could have in tens of years," he added.
In Englefield's opinion, the purchase of Big Oil retail sites by marketers and regional players should make the convenience store business stronger overall, as smaller operators can better cater to local customer bases and offer more meaningful specials. "Smaller marketers are way more nimble and better able to react to retail customers and dealer customers' needs and wants," Englefield told CSNews. "They communicate better with their customers."
And with better reaction time will come a more competitive price landscape, he said.
• Global Partners LP
The Waltham, Mass.-based company, which closed the deal in September, was interested in the locations primarily for the income stream generated by the wholesale supply of fuel to the stations. In addition, the sites were attractive given their location and brand recognition, according to Global Partners President and CEO Eric Slifka.
"High-quality commercial real estate is precious in New England. These 190 stations are in prime, high-traffic-count locations that would be difficult — if not impossible — to replicate," he said.
The Mobil affiliation was another important factor. "Our business relationship with ExxonMobil dates back many decades, and we truly appreciate the company's reputation for providing safe, reliable, high-quality transportation fuels," Slifka said. "Consequently, we entered into a long-term branding agreement with ExxonMobil to retain the right to supply Mobil-branded fuel to these sites and operate them under the Mobil banner."
Global Partners outsources the day-to-day management and operation of the locations — 145 of which have c-stores — to a third party. Alliance Energy LLC is an experienced retail operator with significant knowledge of fuels marketing and convenience store operations.
Since acquiring the sites, Slifka said they've made some merchandising improvements within the c-stores, while maintaining a seamless experience for consumers.
"ExxonMobil built the premier brand and a superb dealer network, and our focus is on maintaining those high standards," he explained, noting the purchase of these locations increases Global Partners' earnings power and enhances its long-term growth potential.
Posed with the question of whether Big Oil's divestitures have been good or bad for the industry, Slifka said he could only speak for Global Partners. "Obviously, we see it as a positive because we have the skill set, wholesale supply infrastructure and resources to capitalize on the business opportunity."
• RM Petroleum Inc.
As BP, ExxonMobil, Shell and others sell their retail locations in his market — and as petroleum marketers buy up these retail sites along with the distribution rights to lessee and/or dealer locations — Stambolic foresees healthier margins ahead for all.
Retailers who were formerly buying directly from the Big Oil companies no longer have a "babysitter," Stambolic said. "Now, for dealers who no longer have that Big Oil relationship [but are buying from a jobber], if a pump breaks down, Mobil won't come to fix it. If the whole market is inverted, the jobber now supplying that site will not support a price break with a rent decrease, as a Big Oil company with deep pockets may have. The jobber they are buying from now will not lose 8 cents per gallon to help the retailer remain competitive with Big Oil-operated sites."
With the major oil companies out of the retail pricing business too, gasoline retailers will have to pay attention to the market and margins "and try not to kill each other on street price, which has always been the nature of the business," he said.
To attract customers in this environment, Stambolic has already invested in the Shell sites he owns, adding car washes to two locations, upgrading pumps at three and making them all PCI compliant. "The oil companies weren't really spending a lot on these Chicago sites, knowing they were going to sell them. But Chicago is a great market; we're doing really well and once all of the Mobil company-owned sites are sold, retailers will be competing at the same level."
Going forward, the petroleum marketer said Speedway's company-operated stores and parent Marathon Oil Co.'s inherent pricing advantage will represent one of his biggest competitive challenges.
Marathon's recently announced plan to spin off its downstream businesses, creating an independent Marathon Petroleum Corp. that will include the Speedway operation, makes no mention of the future of its retail sites. But Stambolic predicts the locations will end up for sale.
"Those sites are selling gasoline, at times, below cost. You see Speedway at $3.21, while Shell retailers are at $3.29," he said. "Once they sell their sites, it will be an even more level playing field."
• OTHERS TO FOLLOW
While it certainly won't happen overnight, PC&F's Hirbod foresees a day when the industry will no longer include oil-company-owned retail sites. "I do think that long-term, all the oil companies will find it's better for them to sell their retail assets," said Hirbod.
Sartory of Petroleum Capital and Real Estate also believes it's just a matter of time before all the "major international oil companies" get out of directly operating locations. He said the only exception now is Chevron Corp., which remains a big player on the West Coast.
For the time being, however, Sartory said there will be a two- to three-year period where the acquirers of these Big Oil sites rationalize their assets and determine which course of action to take. He expects some of the sites to be put back on the market, change class of trade, or be sold for alternative use (banks and drug stores are willing to pay high multiples).
The better units will be kept by the jobbers and enhanced, or new stores will be built on the sites. "In these instances, you'll see more innovation," he said. "Everybody knows the innovation has been driven by the jobber end of the business, not the major oil companies."
When and if the day comes when all oil companies divest their retail facilities, Ruben of NRC Realty said he still doesn't see the oil companies ever walking away completely from these sites; most of the companies will maintain ongoing relationships with the buyers.
"They're always going to have one foot in and one foot out," Ruben said.
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