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    The Right Choice

    As Big Oil refines its focus, retailers must decide whom to trust with their future

    By Claire Pamplin

    Big Oil is making choices that will have a profound impact on the entire convenience store industry. For the past several years, the percentage of convenience stores corporately owned by major oil companies has been on the decline. Since 2004, the percent of stores owned by the top 4 companies -- BP North America, Shell/Motiva, ExxonMobil and Chevron/Texaco -- has decreased from 17 percent to 12.6 percent, according to CSNews' Top 100 Convenience Stores report, 2004-2007.

    The fact is the trend began some 20 years ago when major oil companies began selling their refineries. They did so because the really big money in the oil business is in exploration and production, not refining and marketing. With discoveries of new sources of oil in far-flung locales such as Singapore, Saudi Arabia and Kazakhstan, the oil companies sought to develop their downstream business nearer the source. It simply made sense strategically to operate fewer U.S. refineries, according to Jeff Morris, president and CEO of Alon USA LP, a Dallas-based refiner and marketer supplying more than 1,200 Fina branded locations and counting 300-plus store Southwest Convenience Stores LLC as a wholly owned subsidiary.

    It's helpful to think of the business of retail motor fuels as an integrated component of refining. Since retail sales of gasoline typically contributes only 1 percent of shareholder value, Morris said the majors began to put less value on refining and retail operations than on upstream activities.

    He said the old-school major oil companies no longer own and operate most of the refineries in the United States. "Companies such as Valero have purchased the refineries and taken on the role of the majors," he said. Morris' company, Alon USA, and Delek US Holdings Inc., headquartered in Brentwood, Tenn., are other examples.

    A little research on the refinery locations of Valero, based in San Antonio; Tesoro, also in San Antonio; Philadelphia-based Sunoco, and others would reveal that the vast majority were once owned by major oil companies, he said. For example, Houston-based ConocoPhillip's Bayway refinery in New Jersey once was the property of Exxon.

    In a landscape no longer dense with major oil company-operated sites, branded retailers must be more vigilant and strategic-minded than ever, watching for weak spots in supply availability. This is particularly true of medium-sized companies, those with 10 to 50 retail gasoline outlets, Morris said -- those who depend on branding agreements and that are supplied by the brand company. The medium-sized companies get hurt when the majors make a change and put their product on the wholesale market. They lose their branded fuel arrangement, he said.

    They must therefore choose brand partners carefully. Retailers should know which refiners actually put the product in the local terminals, Morris said. "If one of those companies has a brand offering in your region, that is the most reliable brand."

    However, another way fuel marketers occupying the middle ground (in terms of size) can get hurt is if a refinery is purchased by a company that does not offer a brand. An example, Morris pointed out, is Houston-based Frontier Oil Corp., which purchased the El Dorado refinery in Kansas from Texaco 20 years ago. Nearly all of Frontier's sales today go to jobbers, with some supply arrangements to retail operations of other oil companies.

    It is apparent that most Big Oil companies -- with few exceptions -- want to leave the complex task of owning and operating a retail outlet to those who do it best, the single store or chain operator. In fact, the large companies' tendency away from retailing has resulted in fresh business opportunities for the small business owners new to the fuel marketing game who have a single store or who want to operate a franchise.

    Dan Gilligan's observations bear this out. Gilligan, president of the Petroleum Marketers Association of America (PMAA), told CSNews, "I think none of the major oils want direct operations anymore. They do not want employees in a store on their payrolls." Gilligan said he sees a strong commitment among big oil companies to build powerful brand images and programs, but that they prefer building those brands through independent operators, dealers and jobber distribution networks.

    Among the Big Oil companies, BP is following what could be described as a multi-channel strategy. The company is building a network that combines company-owned sites, franchised locations, and jobber and dealer operations, according to spokeswoman Valerie Corr, who said the company reviews each retail site carefully, evaluating the marketer, site location and other factors as it fine-tunes its retail network. Corr declined to specify precise decision-making criteria, citing competitive issues.

    BP, whose U.S. headquarters is located in Warrenville, Ill., has its name on 13,000 locations, Corr said, including the company's 2,000 ARCO stations. Eighty percent of the network is jobber-serviced; the remainder represents a mix of supply relationships.

    East of the Rocky Mountains, BP has continued its plan this year of building a franchise network. BP traditionally had owned BP Connect stores, but it announced plans to franchise sites in the south Florida, Chicago, Indianapolis, Pittsburgh and Atlanta markets, including gas stations and car washes where applicable. After the sales are complete, some of those BP Connect stores will convert to BP's am/pm banner, bringing the am/pm concept to the East for the first time. Historically, BP only has had am/pm brand stores in the western part of the U.S. and internationally. The am/pm stores in the West were mostly franchised, but some were company-owned, Corr said.

    BP has also announced plans to sell 37 ARCO locations on the West Coast: 19 in California, eight in Washington, five in Oregon and five in Arizona.

    The company is taking an already-successful model and introducing it into new markets. The Wild Bean coffee concept, previously an integral part of BP Connect stores, will now be seen in am/pm stores.

    Unlike BP's diverse strategy, Shell Oil has been the standard-bearer for the movement away from corporate-owned stores. Shell's goal is "to become the best fuels retailer in the world," said Anne Peebles, a company spokeswoman, and to that end, it shifted focus away from company-operated stores several years ago. Shell's flag flies over 13,000 sites, 2,000 of which are supplied directly by the company.

    In 2005, the company announced it would meet its goal by concentrating on three key areas, an enhanced wholesale business, portfolio optimization and asset management, and retail structure realignment.

    Portfolio optimization and asset management "did include transitioning a number of markets from company-owned and -supplied towholesaler-owned or -supplied," Peebles said, "mainly because we believe that the capital employed could be put to better use elsewhere. At the same time, we believe that having the sites in the wholesale channel of trade would optimize the opportunity for growth of the Shell brand in these markets."

    Peebles added that the retail structure realignment also entailed moving away from a retail vs. wholesale structure to a regional structure that supported both retail and wholesale. "It's important to note thatRetail U.S.'s focusdidnot change," she said. "Rather, wewere increasing our focus on the wholesale channel."

    Shell has exceeded its retail market sales goals, Peebles said. "The programs we've introduced to improve the wholesale value proposition are being well-received and the organizational realignment has effectively joined wholesale and retail together to better support all classes of trade. As a result, we have a long list of wholesalers -- both existing and new -- who want to grow with Shell."

    Shell will continue to look for more wholesale and joint venture (JV) opportunities, she said, particularly JVs, because they offer more effective management of capitol employed, greater flexibility with real estate assets and greater influence on the day-to-day operations and brand presence at the site.

    Demand Good Supply

    Mark Martinovich, COO of Cuba, Mo.-based Wallis Cos., a retail chain and wholesaler flying the flags of ExxonMobil, BP, Amoco and ConocoPhillips, said retailers must keep an eye on the way the large companies seek market efficiencies, as the trend to downsize retail outlets among the Big Oils continues. "Distributors like us must grow with companies with good supply positions in our market areas," he said. Wallis operates 35 convenience stores and serves another 145 through its jobber network.

    Martinovich said the advantages of offering branded fuel are many: supplier reliability, brand strength and customer loyalty. The primary disadvantage is price, he said. The company could get fuel cheaper if it chose to go the unbranded route. Price volatility continues its pressure on fuel marketers. Martinovich said, "We can't adjust street prices as quickly as the rack prices change."

    However, as difficult as product pricing can be, another disadvantage is consumer distrust of Big Oil.

    The gasoline end-user often has no idea that a c-store/gas station is an independent business operation and not the end of the long tentacle of Big Oil.

    A survey commissioned by the American Petroleum Institute this summer confirmed the American public's misunderstandings about the petroleum industry, and specifically ExxonMobil. According to the study, only 8 percent of respondents knew that ExxonMobil, the largest U.S. oil and natural gas company, was not among the 10 largest oil reserve holders. More than one in three people (36 percent) thought ExxonMobil was among the top 3 largest companies.

    Alon USA's Morris said the big oil companies earn a lot of money because finding and drilling for oil is a very complex, sophisticated, high-risk and expensive thing to do. Not only must a company such as Exxon -- which is exploring in the most difficult regions of the world -- invest billions of dollars to find the oil and bring it to the surface of the earth from 10,000 feet down, it must negotiate with foreign leaders such as the president of Kazakhstan. The task is not only a very high-level engineering feat, but it is also an international diplomatic achievement.

    However, consumers seem to notice the earnings reports of a company like ExxonMobil, then see the street price of gasoline go up a few cents, and become incensed. ExxonMobil early this year posted the largest annual profit by a U.S. company -- $39.5 billion. The 2006 profit topped ExxonMobil's own previous record of $36.13 billion, set in 2005.

    No wonder gasoline consumers freak out over prices at the pump.

    By Claire Pamplin
    • About Claire Pamplin

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