A Whole New Game
When Shell Oil decided earlier this year to forfeit control of the convenience piece of its company-run retail outlets, it underscored a seismic shift whose full reverberations have not yet been felt.
Put simply, more and more major oil and refining companies are unloading large chunks of financially frail convenience holdings, marking a trend in a retail channel whose profits have shrunk and is often unable to compete against well-tuned hypermarkets without heavy subsidization.
"There's a secular decline that is provoking increased rationalization," said Mark Gilman, oil analyst at First Albany Corp, justifying Big Oil's downstream divestment. "Viewed in that framework, the retail class of trade — company-run and operated locations — just ain't cutting it nor is it perceived to be getting any better."
A series of dynamics are playing out:
Selloffs. Some petroleum watchers say as many as one-third of Big Oil-controlled fueling stations in the United States are on the block. Included in that grab bag are ConocoPhillips and Shell. The former has put the bulk of its vast East Coast and West Coast convenience portfolio, including 2,000 Circle K locations, for sale. Shell is adjusting its network, eyeing independent entrepreneurs to run what are now company-operated sites. On a smaller scale, Sunoco is shopping its 190 company-run stores in Michigan and Southern Ohio.
Subsidy cuts. Several major oil companies have halted the controversial Temporary Voluntary Allowances, known as TVAs. The subsidy is employed to help dealer networks more effectively compete in margin-eroded markets.
Branding deals. As part of the widespread selloff, several oil companies are instead pursuing supply deals at those locations to preserve the branded flag.
"The integrated companies want to get out of running as much dirt as possible and, in some cases, they don't want to even supply," said Tom Kloza, publisher at Oil Price Information Service (OPIS).
"There's more dirt on the market than I've ever seen and I've been following this business since the 1970s," he continued. "The problem for the oil companies is there isn't much money out there. With the exception of Couche-Tard, nobody is buying. If you're well-heeled and have a lot of capital, there's a lot of stuff out there."
Kloza added, "Marathon was an active buyer at the beginning of this decade and that's clearly changed. I can't imagine any major wanting to buy the dirt. The question is, where's the funding and capital? I don't know if there's another generation of Clay Hamner, Wayne Rogers [both of the now-defunct Swifty Serve] or The Pantry."
Shell-Off
The European market underwent a sea-change in recent years wherein big-box entrants squashed unprepared traditional convenience operators and gas stations. This left a strong impression on one of the world's true oil giants.
So when hypermarkets in the United States started to gobble market share a few years back like a new version of Pac-Man, Royal Dutch/Shell Group wasn't about to stand still.
"Shell has seen worldwide that markets don't return from this level of competitiveness," said Barbara Stoyko, busi- ness model manager for Shell Oil Products U.S.'s new multi-site operator (MSO) program. The MSO initiative shifts responsibility of non-fuel assets at some 1,400 locations from the oil company to fuel jobbers and dealers.
"What Shell is trying to do is learn from Europe," she said. "When the hypermarkets started coming, many players didn't respond quickly enough. We're going through a period of upheaval in the United States. It's important for us to make sure we have our structure right, our network right."
Fundamental to the new mindset is the acknowledgment that retail gasoline margins, once a solid double-digit return, are precarious, with the only question being whether profits will top a dime per gallon.
"We believe the competition in the U.S. will continue to get stronger and that companies who want to stay in the retail business will need to continue to look for ways to drive out structural costs," Stoyko said. As she sees it, properties that do not meet Shell's profit profile can still deliver decent returns for entrepreneurial types not governed by shareholder pressures.
"There's not a ton of money to be made at every site," she said. "But for the MSO, there's not all that fuel volatility because Shell preserves a margin per gallon and gives the operator a fee of $2,000 per location.
"Shell's perspective is how to retain your competitive advantage in the marketplace, not just wishing it will go away. Some majors in other parts of the world ignored these changes, wishing they would go away. They're not and that's why we have no plans to stand still."
Industry For Sale
Confronted by a more assertive marketplace, Shell's changes are not surprising. What remains unclear are the plans of the other major oil companies and what impact, if any, it will render on the convenience and jobber segments.
One obvious upshot, some observers conclude, is that petroleum marketers — the under-recognized wholesalers of Big Oil's product — will play an increasingly larger role in the smooth distribution from terminal to retail.
Another is that jobbers, dealers and convenience operators will be increasingly relied upon to convey Big Oil's branded expectation and public perception.
There are even some observers who speculate whether major oil, in years to come, will even care about its branded retail presence — a concession to consumer buying shifts that place price ahead of brand.
"If you look at the history of the industry, it has been cyclical," said Bob Bassman, general counsel at the Petroleum Marketers Association of America. "There have been periods when the oil companies wanted to run everything. The thing is they were never good at it.
"The old joke is the jobber, who sells to Big Oil at a premium, buys it back when it's cheap and sells it back again to the oil company when the value comes back again. That's the jobber's pension plan."
Unlike previous periods, including the divestment a decade or so ago sparked by talks of a Clinton national health care plan, the current trend is not likely to reverse. Big Oil is not likely to take great interest in stocking large numbers of c-stores anymore.
Indeed, what makes the current divestment likely a permanent strategy is the significant penetration of hypermarkets, which are expected to wield a 15- to 20-percent market share by the end of the decade. Moreover, with dramatic technological improvements resulting in far fewer misses in drilling and exploration, major oil companies see substantially superior profits upstream than they do downstream.
"The oil companies have learned that they can't run the stores," Bassman said. "They're not nimble, they're a cookie-cutter of a one-store model for all 50 states."
Shifting Sands
Underscoring Bassman's sentiment are impact statements by leading oil executives.
ConocoPhillips CEO Jim Mulva in late January said the oil concern planned to "dispose of a substantial portion of our downstream marketing assets." It is understood that the nation's third-largest oil company is actively marketing the Circle K retail chain out West and the former ExxonMobil stations in the East Coast.
In addition, experts say both Shell and BP have stated their intent for jobbers to distribute 70 percent of the product volume to retail locations.
Still, the divestment sweep is not universal. Exxon Mobil Corp. is expected to invest more in company-operated sites while weeding out certain markets, sources say. And Amerada Hess Corp. remains in growth mode and is considered a serious contender for a portion of ConocoPhillips' retail interests in the East.
"We're all evaluating what we own with the intention of downsizing. It's clearly a capital allocation issue and it's also a determination of the size of network you want," said Gary Arthur, senior vice president of marketing at San Antonio-based Valero Energy Corp.
"You've got the majors and companies like ours looking at capital requirements and asking, 'Where am I going to invest my resources?'" he said. "At the end of the day the U.S. downstream doesn't offer the same rate of return they think they can get upstream."
Valero is a prime example of this introspection. The chain only a couple years ago leaped from traditional refiner to a premier refiner-retailer, acquiring the 1,400-unit Ultramar Diamond Shamrock convenience entity.
After assessing what each store location had to offer to the company profile, Valero chose to shut down or sell about 350 stations.
"Over 10 percent of our gasoline moves through our company stores," Arthur said. "We don't see getting out of owning. It's complementary and what it does give us is the counter-cyclicality, knowing that when refining margins aren't particularly good, retail margins are usually excellent."
Furthermore, by owning a percentage of total branded units, the company, be it a major refiner or oil concern, better understands its customer base. With that said, Valero fully expects company-operated stores to dwindle as greater resources are apportioned at the refining end.
Finite Dollars
Echoing Arthur's words, experts say it's not that major oil disdains retail. Rather, limited resources, coupled with lucrative upstream yields, are pulling Big Oil to do what it does best — drill and produce product.
"The options facing integrated oil companies are to upgrade and invest money in their convenience stores or to get rid of them," observed Fadel Gheit, senior energy analyst at New York-based Fahnestock & Co. "You're seeing some get rid of them and you're seeing some invest money in them."
And then there is a company like Sunoco Inc., the independent Philadelphia refiner, which is divesting control of nearly 200 sites in Michigan and southern Ohio at the same time it is expanding its presence along Interstate 95 from the northeastern states to Florida.
"It's like trading players on a baseball team," said Gheit. "Trade me a pitcher and I'll give you a first baseman and an outfielder. It's all tied into what your needs are.
"In this business," he added, "bigger is better, but not necessarily by owning more outlets. Return is the ultimate objective for a company like ExxonMobil — even to the point of closing hundreds of stations if it increases return.
"At the end of the day, in many parts of the country, you're going to see a lot of companies exiting certain markets," Gheit concluded. "What they're telling themselves is this: 'If it hurts your return, get rid of it. If it's impeding your progress, get rid of it."
Put simply, more and more major oil and refining companies are unloading large chunks of financially frail convenience holdings, marking a trend in a retail channel whose profits have shrunk and is often unable to compete against well-tuned hypermarkets without heavy subsidization.
"There's a secular decline that is provoking increased rationalization," said Mark Gilman, oil analyst at First Albany Corp, justifying Big Oil's downstream divestment. "Viewed in that framework, the retail class of trade — company-run and operated locations — just ain't cutting it nor is it perceived to be getting any better."
A series of dynamics are playing out:
Selloffs. Some petroleum watchers say as many as one-third of Big Oil-controlled fueling stations in the United States are on the block. Included in that grab bag are ConocoPhillips and Shell. The former has put the bulk of its vast East Coast and West Coast convenience portfolio, including 2,000 Circle K locations, for sale. Shell is adjusting its network, eyeing independent entrepreneurs to run what are now company-operated sites. On a smaller scale, Sunoco is shopping its 190 company-run stores in Michigan and Southern Ohio.
Subsidy cuts. Several major oil companies have halted the controversial Temporary Voluntary Allowances, known as TVAs. The subsidy is employed to help dealer networks more effectively compete in margin-eroded markets.
Branding deals. As part of the widespread selloff, several oil companies are instead pursuing supply deals at those locations to preserve the branded flag.
"The integrated companies want to get out of running as much dirt as possible and, in some cases, they don't want to even supply," said Tom Kloza, publisher at Oil Price Information Service (OPIS).
"There's more dirt on the market than I've ever seen and I've been following this business since the 1970s," he continued. "The problem for the oil companies is there isn't much money out there. With the exception of Couche-Tard, nobody is buying. If you're well-heeled and have a lot of capital, there's a lot of stuff out there."
Kloza added, "Marathon was an active buyer at the beginning of this decade and that's clearly changed. I can't imagine any major wanting to buy the dirt. The question is, where's the funding and capital? I don't know if there's another generation of Clay Hamner, Wayne Rogers [both of the now-defunct Swifty Serve] or The Pantry."
Shell-Off
The European market underwent a sea-change in recent years wherein big-box entrants squashed unprepared traditional convenience operators and gas stations. This left a strong impression on one of the world's true oil giants.
So when hypermarkets in the United States started to gobble market share a few years back like a new version of Pac-Man, Royal Dutch/Shell Group wasn't about to stand still.
"Shell has seen worldwide that markets don't return from this level of competitiveness," said Barbara Stoyko, busi- ness model manager for Shell Oil Products U.S.'s new multi-site operator (MSO) program. The MSO initiative shifts responsibility of non-fuel assets at some 1,400 locations from the oil company to fuel jobbers and dealers.
"What Shell is trying to do is learn from Europe," she said. "When the hypermarkets started coming, many players didn't respond quickly enough. We're going through a period of upheaval in the United States. It's important for us to make sure we have our structure right, our network right."
Fundamental to the new mindset is the acknowledgment that retail gasoline margins, once a solid double-digit return, are precarious, with the only question being whether profits will top a dime per gallon.
"We believe the competition in the U.S. will continue to get stronger and that companies who want to stay in the retail business will need to continue to look for ways to drive out structural costs," Stoyko said. As she sees it, properties that do not meet Shell's profit profile can still deliver decent returns for entrepreneurial types not governed by shareholder pressures.
"There's not a ton of money to be made at every site," she said. "But for the MSO, there's not all that fuel volatility because Shell preserves a margin per gallon and gives the operator a fee of $2,000 per location.
"Shell's perspective is how to retain your competitive advantage in the marketplace, not just wishing it will go away. Some majors in other parts of the world ignored these changes, wishing they would go away. They're not and that's why we have no plans to stand still."
Industry For Sale
Confronted by a more assertive marketplace, Shell's changes are not surprising. What remains unclear are the plans of the other major oil companies and what impact, if any, it will render on the convenience and jobber segments.
One obvious upshot, some observers conclude, is that petroleum marketers — the under-recognized wholesalers of Big Oil's product — will play an increasingly larger role in the smooth distribution from terminal to retail.
Another is that jobbers, dealers and convenience operators will be increasingly relied upon to convey Big Oil's branded expectation and public perception.
There are even some observers who speculate whether major oil, in years to come, will even care about its branded retail presence — a concession to consumer buying shifts that place price ahead of brand.
"If you look at the history of the industry, it has been cyclical," said Bob Bassman, general counsel at the Petroleum Marketers Association of America. "There have been periods when the oil companies wanted to run everything. The thing is they were never good at it.
"The old joke is the jobber, who sells to Big Oil at a premium, buys it back when it's cheap and sells it back again to the oil company when the value comes back again. That's the jobber's pension plan."
Unlike previous periods, including the divestment a decade or so ago sparked by talks of a Clinton national health care plan, the current trend is not likely to reverse. Big Oil is not likely to take great interest in stocking large numbers of c-stores anymore.
Indeed, what makes the current divestment likely a permanent strategy is the significant penetration of hypermarkets, which are expected to wield a 15- to 20-percent market share by the end of the decade. Moreover, with dramatic technological improvements resulting in far fewer misses in drilling and exploration, major oil companies see substantially superior profits upstream than they do downstream.
"The oil companies have learned that they can't run the stores," Bassman said. "They're not nimble, they're a cookie-cutter of a one-store model for all 50 states."
Shifting Sands
Underscoring Bassman's sentiment are impact statements by leading oil executives.
ConocoPhillips CEO Jim Mulva in late January said the oil concern planned to "dispose of a substantial portion of our downstream marketing assets." It is understood that the nation's third-largest oil company is actively marketing the Circle K retail chain out West and the former ExxonMobil stations in the East Coast.
In addition, experts say both Shell and BP have stated their intent for jobbers to distribute 70 percent of the product volume to retail locations.
Still, the divestment sweep is not universal. Exxon Mobil Corp. is expected to invest more in company-operated sites while weeding out certain markets, sources say. And Amerada Hess Corp. remains in growth mode and is considered a serious contender for a portion of ConocoPhillips' retail interests in the East.
"We're all evaluating what we own with the intention of downsizing. It's clearly a capital allocation issue and it's also a determination of the size of network you want," said Gary Arthur, senior vice president of marketing at San Antonio-based Valero Energy Corp.
"You've got the majors and companies like ours looking at capital requirements and asking, 'Where am I going to invest my resources?'" he said. "At the end of the day the U.S. downstream doesn't offer the same rate of return they think they can get upstream."
Valero is a prime example of this introspection. The chain only a couple years ago leaped from traditional refiner to a premier refiner-retailer, acquiring the 1,400-unit Ultramar Diamond Shamrock convenience entity.
After assessing what each store location had to offer to the company profile, Valero chose to shut down or sell about 350 stations.
"Over 10 percent of our gasoline moves through our company stores," Arthur said. "We don't see getting out of owning. It's complementary and what it does give us is the counter-cyclicality, knowing that when refining margins aren't particularly good, retail margins are usually excellent."
Furthermore, by owning a percentage of total branded units, the company, be it a major refiner or oil concern, better understands its customer base. With that said, Valero fully expects company-operated stores to dwindle as greater resources are apportioned at the refining end.
Finite Dollars
Echoing Arthur's words, experts say it's not that major oil disdains retail. Rather, limited resources, coupled with lucrative upstream yields, are pulling Big Oil to do what it does best — drill and produce product.
"The options facing integrated oil companies are to upgrade and invest money in their convenience stores or to get rid of them," observed Fadel Gheit, senior energy analyst at New York-based Fahnestock & Co. "You're seeing some get rid of them and you're seeing some invest money in them."
And then there is a company like Sunoco Inc., the independent Philadelphia refiner, which is divesting control of nearly 200 sites in Michigan and southern Ohio at the same time it is expanding its presence along Interstate 95 from the northeastern states to Florida.
"It's like trading players on a baseball team," said Gheit. "Trade me a pitcher and I'll give you a first baseman and an outfielder. It's all tied into what your needs are.
"In this business," he added, "bigger is better, but not necessarily by owning more outlets. Return is the ultimate objective for a company like ExxonMobil — even to the point of closing hundreds of stations if it increases return.
"At the end of the day, in many parts of the country, you're going to see a lot of companies exiting certain markets," Gheit concluded. "What they're telling themselves is this: 'If it hurts your return, get rid of it. If it's impeding your progress, get rid of it."