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    Burst of Energy

    Tesoro Petroleum boasts c-stores, a dealer network and a relationship with Wal-Mart.

    By John Lofstock

    While many convenience store and petroleum marketing companies try to formulate a strategy to compete with hypermarketers, San Antonio-based Tesoro has carved an enviable niche. It is one of just three new-breed c-store/petroleum companies to develop a much-coveted marketing relationship with Bentonville, Ark.-based Wal-Mart Stores Inc. (Murphy Oil Corp. and Sunoco Inc. are the other two.)

    While Tesoro admittedly has kept a low profile in recent years, don't mistake silence for a lack of passion. This company, which over the past five years has gained a place on the roster of the Convenience Store News Top 50 Convenience Store Companies, continues to grow.

    In May, Tesoro closed on a deal with San Antonio-based Valero Energy Corp. to acquire the Golden Eagle refinery in California, which has a capacity of 168,000 barrels per day, and 70 neighboring Beacon c-stores. The deal was made possible by the Federal Trade Commission (FTC), which forced Valero to sell the units as part of its acquisition of Ultramar Diamond Shamrock Corp. However, at press time, Tesoro said it would sell some assets to strengthen its balance sheet, but declined to say which assets or identify a potential buyer.

    No matter the reason, the deal fit in perfectly with Tesoro's plans to become a dominant West Coast marketer. "Our goal since we first decided to launch retail operations was to stay focused on building an upscale core network of convenience stores that delivers value and great service to consumers," said Richard Parry, Tesoro's senior vice president of retail. "Since we are a refiner, we have the throughput capacity to be very competitive on fuel pricing at convenience stores and the Mirastar stations at Wal-Mart, and supply continued support to a growing dealer network."

    Tesoro currently operates a 260-store chain, of which 108 are branded 2Go. The stores comprise a portfolio that also includes the 64 Mirastar gas stations the company operates in Wal-Mart parking lots along the West Coast and a 450-store jobber and dealer network.

    With the addition of the Golden Eagle refinery, the branded network now accounts for approximately 64 percent of the company's fuel volume. And there is plenty of room to grow. "We are committed to the branded marketing class of trade more now than we have ever been," Parry said.

    "We have the resources and the internal structure to grow the branded business and now we have a strong retail marketing plan and convenience store prototype to leverage as well," he added. "The combined retail package and marketing experience we can offer, we think, is ideal for retailers looking to get ahead in this business."

    Parry, along with Mike Zahajko, Tesoro's vice president of branded marketer sales and development, and John Ramsey, vice president of retail operations, discussed its history, long-term plans and marketing strategy with Wal-Mart in an exclusive interview with Convenience Store News.

    Go West
    Tesoro's retail strategy began in earnest in 1997 when the company decided to focus on refining and marketing in the western United States, Hawaii and Alaska. To that end, the company developed its "treasure burst" retail logo, the 2Go convenience store brand and began pursuing refinery acquisitions.

    The company's first acquisition also came in 1997 (View the Tesoro Timeline) when it struck a deal with Tosco Corp. to acquire a 100,000-barrel storage terminal, three convenience stores and the rights to use the Union 76 brand in Alaska. A year later, Tesoro acquired the assets of BHP Hawaii Inc., which included a 95,000-barrel-per-day refinery and 32 c-stores.

    The company's first large-scale acquisition came last year in a deal to acquire BP plc's Mandan, N.D., and Salt Lake City refineries and an 80-store dealer network. Just a month later, Tesoro reached an agreement with Seattle-based Gull Industries Inc. to buy 46 units, including 37 convenience stores and nine commercial cardlock facilities in Washington, Oregon and Idaho.

    "We identified the West Coast as a core strategic market for expanding retail operations, which are supported by six refineries, and began assembling a retail network to maximize our refining capacity," Parry said. "We have established a retail marketing infrastructure that enables us to supply and operate acquired sites such as these in a cost-effective manner and meet our customers' needs of convenience, value and customer service."

    As part of its expansion strategy in the West, Tesoro Refining also opened its retail headquarters in Auburn, Wash., and a satellite office in California.

    The deal that's helped make Tesoro a major player was its retail agreement with Bentonville, Ark.-based Wal-Mart. In 1997, taking a cue from El Dorado, Ark.-based Murphy Oil, which has a relationship with Wal-Mart stores in the Southeast, the refiner recognized a significant opportunity to develop gas stations for Wal-Mart in the West.

    It approached Wal-Mart with the idea and after months of negotiations and constructive idea-sharing sessions, the two sides agreed to a business relationship that has resulted in the 64 units, with plans to develop hundreds more.

    "Since we initiated talks with Wal-Mart and were able to see our plans come to fruition, it has been a very rewarding process for us," Zahajko said. "From the beginning, it's been a tremendous learning experience that created a major opportunity for us to grow the business."

    But there are some restrictions, according to Parry. For example, Wal-Mart made it clear they don't expect to compete with Tesoro on merchandise other than snacks, cigarettes and beverages. This, in effect limits the SKUs the refiner is selling at Mirastar kiosks.

    Like Tesoro, the Mirastar brand is continually evolving. The current model carries four to eight MPDs, and a 150-square-foot kiosk for core convenience items. The company is testing two full-size Mirastar c-stores, which measure more than 2,000 square feet in Nebraska and Kansas. "The bigger store gives customers a chance to do more shopping and hopefully spur impulse sales," Ramsey said.

    Conflict of Interest?
    Tesoro walks a fine line as it looks to grow the Mirastar brand in the same markets where its branded marketers operate. Smaller retail chains, and even some of the bigger oil firms, have been pointing fingers at high-volume retailers for undercutting fuel prices using a variety of pricing tactics.

    For starters, Tesoro does not engage in below-cost pricing, Zahajko said. The relationship with Wal-Mart, he continued, is not unlike other marketing deals any other oil company has with branded marketers in areas where it also has company operated stores.

    "At the very basic level, that's what it is," Zahajko said. "Strategically, we are developing the Mirastar brand separately from Tesoro because we believe they are two different marketing animals targeting different consumers."

    This "segmentation strategy" employed by Tesoro treats the hypermarket fuel customer as separate from the convenience store customer because "the concepts target two different segments of the market," Zahajko said.

    Tesoro meticulously analyzes each site before it opens a new unit in order to understand the core consumer, volume potential and long-term viability. This helps ensure there is nothing more than a healthy competition between Tesoro-branded stores operated by its dealer partners and Mirastar stations. Zahajko admits the company is concerned about the perception that it seeks to cannibalize sales from marketers.

    "At first look, branded marketers may think we are their competitors because there is a Mirastar brand around the corner," Zahajko said. "But once they study the market, they understand what we are really about and understand that it could be someone else in that Mirastar location that is not concerned about helping them grow their business, and not their supply partner. Then they have a generally different disposition about the situation."

    Zahajko emphasized that the marketing philosophy associated with the Mirastar brand is to target Wal-Mart, and in areas where they share a lot, Home Depot customers. For example, the Marysville, Wash., Mirastar store is visible from the highway, but clearly out of the way for the everyday c-store consumer.

    "If you are going to one of those two stores it's a very convenient fueling option," Zahajko said.

    That strategy appears to be backed up by consumers filling up at the Marysville store. "I make it a point to fill up here when I have shopping to do at Wal-Mart, but this is not my regular gas station," said one consumer. "It's too far out of the way to come to regularly," added another.

    Marketing Matters
    Another impressive attribute of Tesoro's marketing plan is its speed to market. Despite its small size, the company is able to achieve the economies of scale enjoyed by major oil companies, but unlike Big Oil, it can roll out a strategic marketing plan quickly, sometimes in a matter of weeks.

    The company's ability to be proactive is especially important when it comes to landing new branded marketers. With no further refinery acquisitions, Zahajko estimated Tesoro could easily add more than 100 stores to the fold immediately and as many as 100 new stores per year after that. Its growth plans year over year, however, call for adding about 50 units to the network annually.

    Its ability to quickly integrate stores into its network could become a strength for Tesoro as Shell Oil Products U.S. continues its rebranding efforts, which is expected to leave some Shell-branded marketers on the West Coast without a supply partner.

    With six refineries strategically located in the West, Tesoro is in position to gain new business. Zahajko said the company is examining its strategic options and would be interested in working with any company looking to fly the Tesoro banner.

    That doesn't mean Tesoro is willing to grab anything that comes its way. The company said it will continue to be selective in whom it chooses to be its partners. "If we jump into a new business that on the surface looks like a viable strategy, but is really a poor site, it could ultimately hurt our entire network," Zahajko said. "We all have to be a lot more careful selecting sites that aren't positioned for success."

    So how do you identify a site that is positioned for success? Tesoro has a three-pronged attack for determining stores that could be successful: strategic location, volume and ancillary services.

    The company studies a site by looking at where it is streetwise and also where it is geographically to see if it's in one of its priority areas and to make sure customers in that area are familiar with the Tesoro brand.

    "Our aim is to determine whether or not a location can really become a player in the market," Zahajko said. "This is helped not only by fuel volume, but by adding store services, such as a good coffee program and a solid food offering, to balance the value and net return on any given location."

    These factors play into Tesoro's core values for branded marketing partners. For example, the company sets standards for marketers that include a full canopy, credit-card readers and dispensers and clean public restrooms.

    "If you apply these standards to the West Coast, it's not really a problem because competition dictates that you have all of these things already," said Ramsey. "But as we move east, the experience hasn't been the same. Even some of the best brands didn't have those standards. We have had difficult discussions with dealers on the image requirements for the Tesoro brand."

    These conversations are not easy, especially since in some cases a retailer could have run a successful business for 20 years. "Usually their first reaction is to be taken aback," Zahajko said. "But when we start talking about positioning the business for the next 10 years, then even their own self-analysis typically leads them to the conclusion that they need to capitalize on the level of offering that other competitive brands have or our planning to bring into the market."

    West Coast Growth
    The California market is integral to the company's success, and Tesoro has been growing its branded marketing activities there annually with strong year-over-year volume gains.

    Having 70 more stores from the Valero deal that are all strong, high-volume units gives a boost to the validity and the viability of the program in that market. "It's one thing to have success at one or two locations, but once you hit that scale of size you start to see the benefits that could come from it," Zahajko said. "Our strategy now is to recognize these synergies and capitalize on it as much as we can."

    Phil Verleger, an energy consultant and a senior fellow at the Council on Foreign Relations, sees Tesoro as one of the three major independent refiner/ marketers, along with Valero and Philadelphia-based Sunoco, which are primed for growth.

    With six refineries the company is able to blanket key West Coast markets. "Refinery positioning is a fairly big advantage because they can ship product from one refinery to the next," said Verleger. "Some of their competitors like Valero have standalone refineries and do not have that advantage." Adding to the refining synergies of the refineries is that Tesoro has a natural outlet in its branded dealer network to "dump" product at a fairly handsome margin.

    "What Tesoro has done is they've got some nice refineries in markets that are pretty well protected [from Big Oil competitors]. That will let them make money."

    Tesoro's long-term growth, Verleger said, depends on its ability to pare its debt built through acquisitions. "Tesoro is a major player," he said, "The problem they have, as well as the other major refiners, is debt. Nobody has the money to invest in new capacity."

    Unlike national giants Exxon Mobil Corp. and BP plc, Tesoro will likely remain a niche player focusing on the Rocky Mountains and West Coast, Verleger said.

    Eye on Value
    Taking advantage of its size and strength includes leveraging its buying power to increase margins and stay competitive on pricing, rolling out consistent store programs and promotions, such as coffee, fountain and frozen carbonated beverages, and building a strong credit-card base.

    Tesoro is differentiated by its presentation and pushes the boundaries of retail technology by using an interactive security program to attract new business and ensure the safety of its associates. The Internet-based system, developed by Westec Interactive, monitors the store in real time through cameras and microphones. It's capable of interacting with customers to deter illegal activity or make sure everything is in order. The system is available in 20 2Go and Mirastar c-stores and will roll out to dozens more over the next few years.

    As the Beacon stores are rebranded to the Tesoro image, Ramsey is optimistic that Tesoro will grow into a household name. "We are confident that our retail offering and strong customer-service programs will create a positive shopping experience that will drive customers back to the store again and again," he said. "Developing strategies to attract new customers is something we work at every day. Satisfying our existing customers is just as important."

    By John Lofstock
    • About John Lofstock

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