Reshaping the Convenience Landscape

For some marketers and distributors, Exxon Mobil Corp.’s decision to get out of direct-store operations could present the chance of a lifetime; an opportunity to acquire the rights to stores for an entire market, maybe more.

For others, the announcement caused immediate fear and panic concerning the long-term viability of their operations and, in some cases, several generations of the family business.

The Irving, Texas, oil giant put to rest months of speculation by announcing its plan to exit direct-store operations and sell 825 company-owned and -operated stations as well as 1,400 stations leased to dealers. The 2,225 stations make up about one-fifth of the Exxon and Mobil stations in the U.S. Approximately 12,000 Exxon Mobil-branded stations are already owned by other distributors, who are the leading candidates to acquire the divested sites, and dealers.

Texas leads the states with the most company-owned stores with 190. Florida has 170. California, New York and New Jersey all have slightly more than 200 dealer-operates stores that are up for sale, followed by Massachusetts, which has 144.

The oil company, which sells about 14 billion gallons of gasoline annually at its branded U.S. stations, said the sites to be sold would continue to sell ExxonMobil’s family of products. Other than that the details remain sketchy, which has provoked a wide range of emotional responses from branded marketers. Larger operators and distributors seemed intrigued, while smaller dealer-operated chains are bracing for the worst.

"I am extremely disappointed that I’m not going to be ExxonMobil’s first option to buy the site that has been in my family for 51 years," said Tommy Todisco, president of Todisco Inc. in Boston, which operates a Mobil station with an annual volume of 1.5 million gallons. "I’ve been working at this store since I was 12 years old. Now the game is changing and I don’t know what to expect. We’ll have a new landlord, new lease requirements and who knows what else?"

A couple hundred miles south, Levent Sertbas, president and CEO of Sertbas Inc., a Paramus, N.J.-based operator of two Exxon On the Run locations, said he has invested six years building brand equity with ExxonMobil and was devastated to learn of the refiner’s decision.

"I don’t think we have any chance now of purchasing our property from Exxon, which was part of my long-term business plan," Sertbas said. "Right now margins are down and credit card costs are killing our profitability, and now I have to deal with this uncertainty. It’s frustrating and in all the scenarios I can come up with in my head, my business is on the short end."

Todisco and other dealers in New England have been communicating regularly since ExxonMobil’s announcement and even beforehand when rumors first began surfacing that the oil company would follow Shell Oil Co. and BP by getting out of direct-store operations. Speculation among the group is that no matter who acquires the units, they must keep them branded Exxon or Mobil for a minimum of three years.

"After that it’s anybody’s guess," Todisco said. "Once the leases expire my guess is that if the distributor wants to sell the land to a developer to build condos, we could be sitting on the site (of) Boston’s newest housing complex."

Beth Snyder, a spokeswoman for ExxonMobil’s downstream operations in Fairfax, Va., said the company is sensitive to its dealers’ concerns, but urged patience as the company transitions its assets.

"We are still putting the specifics together," Schneider said. "This is a direction strategically that we are determined to go in and as opportunities become available, either for distributors that want to expand in certain markets, or others, we will make them known to the industry."

 

Who Would Benefit?

While smaller operators have a lot to lose, larger regional players have an awful lot to gain.

"For wealthy, financially qualified jobbers, this is a fantastic opportunity," said Tom Kelso, managing director of Matrix Capital, a Richmond, Va.-based investment group that provides merger and acquisition advisory services to convenience store and petroleum companies. "Since these are company-owned properties, we’re looking at good stores in good markets, and, in most cases, Exxon owns the underlying real estate. It adds up to a once in a lifetime opportunity. Once these units are sold it would be almost impossible to duplicate another sale of this size."

Wallis Cos., in Cuba, Mo., and Boston-based Verc Enterprises Inc., are two companies that expressed a serious interest in vying for ExxonMobil’s divested sites. Wallis in particular seems to be a strong fit. The company became a regional powerhouse in 1993 when an acquisition from then Mobil Oil Corp. doubled its c-store and distribution business. The company also is a regional franchise developer (RFD) for ExxonMobil’s On the Run convenience store brand. These types of operators appear to have the first crack at acquiring blocks of stores that could make them among the dominant operators in any given market.

"There is still a lot of information we just don’t have yet, but (the opportunity to acquire ExxonMobil stores) is something we are studying pretty intensely internally," said Wallis Cos. President and CEO Lynn Wallis. "We believe we are well-positioned both in the market from a financial perspective and in terms of our relationship with ExxonMobil to significantly grow our business. Time will tell."

Currently, Wallis has 36 company-operated stores, 19 of which feature the On the Run c-store brand. It distributes to an additional 150 dealer stores.

What interests Wallis the most is the opportunity to grow both sides of the business, retail and distribution. "I understand that a lot of dealers must be concerned about the future of their business right now, but we have several On the Run dealers and our strategy, whether we acquire stores or not, is helping them continue to grow," she said. "Opportunities like this don’t come along very often. When we bought Mobil’s assets 15 years ago it was a transforming experience. Hopefully, it will happen again."

Like Wallis, Leo Vercollone, the president and CEO of Duxbury, Mass.-based Verc Enterprises, welcomed ExxonMobil’s decision and said he’s positioning his company to pounce on stores should they become available.

"I’ve watched ExxonMobil pull out of western Massachusetts, upstate New York, Vermont, Maine and now Boston. This is huge for me," Vercollone said.

Verc Enterprises operates 14 Exxon and six Mobil stores in Boston and recently received permits for its first two On the Run convenience stores. "We have big plans to grow our business. To be able to get another 20 to 25 stores in one shot would accelerate our plans and get us to our goal that much quicker. More importantly, we have been in this market for 35 years. This is where we want to be."

 

Challenges Ahead

While Vercollone and Wallis remain upbeat about their prospects for expansion, Kelso, of Matrix Capital warned that even if stores were made available to them, financing the deals could be an enormous obstacle to overcome.

"There are definitely companies, specifically distributors and large c-store chains that are financially secure, but the challenge is the credit markets," Kelso said. "There are companies that maybe a year or two ago wouldn’t have had any problems financing a large deal like this. Now there are a number of conditions that are making it tougher to close acquisitions. Deals are still getting done, but the prices people are able to pay are not as high as they were two years ago."

Valuations are still very good, Kelso said, but the loan-to-value advance rate is lower primarily because capital is harder to get. The result is a higher loan rate, mainly because less money is made available toward the value of the property.

However, companies that have good relationships with their banks will find "that’s where the funds will most likely come from," Kelso said. "There are some creative forms of financing, but it is expensive. I would expect a vast majority of deals in this situation to come from the buyers’ existing banks."

Ironically, the tight economic conditions in the U.S. and the potential cost required of one company to buy an entire market of stores provide the most realistic shot Sertbas and Todisco will ever have to own the dirt beneath their stores.

Distributors could find themselves in a situation where they are trying to pay down debt and need to spin off some stores to raise capital. Or there may be some units in areas they just don’t want to operate.

"I have spoken to a couple of distributors that service this market and they were hoping Exxon would first offer the stores to the dealers who, in turn, would sign supply distribution contracts with their local distributor," Todisco said. "This would reduce the capital they would have to post up front and potentially increase their supply contracts."

Sertbas is hopeful that a similar situation unfolds in his market. "The way I see it, the only way I am going to ever own my stores outright is if the distributor that acquires them needs to raise money quickly," he said. "That’s the best case scenario. Worst case, since my real estate value is very high, my own stores are sold right out from underneath me to the highest bidder."

 

Follow the Leaders

Few could argue the reasoning behind ExxonMobil’s exodus from direct-store operations. While gas at the pumps is now north of $4 a gallon in most states, retailers have been hard-pressed to turn a profit. As a result, there is a greater emphasis on convenience store operations and niche areas like foodservice.

These programs require intense day-to-day management and, quite frankly, are better off when they’re left to local operators who know their markets and their customers. Or as Oppenheimer & Co analyst Fadel Gheit bluntly put it, "I think (ExxonMobil) arrived at the decision that it’s more of a headache than its worth."

Gheit estimated the stations’ margin was between 10 to 15%, roughly one-third of its margin on crude oil production.

Exxon becomes the third major oil company to pursue a similar strategy focusing on wholesale distribution. Shell and BP unveiled similar strategies two years ago.

Karyn Leonardi-Cattolica, Shell’s external affairs retail channel manager, said the majority of Shell stations are now supplied through wholesalers and joint ventures, and that percentage continues to grow.

In 2006, in an effort to enhance its network and increase the growth of the Shell brand in the U.S., Shell decided to focus on a three-part strategy:

• An enhanced wholesale business. Distributors receive additional support in the form of discounts and incentives.

• Portfolio optimization and asset management. Without having to focus on c-store operations, Shell said it is strengthening its brand throughout the U.S. by closely managing assets and supply relationships. This includes transitioning a number of markets from company-owned and supplied to wholesaler-owned or supplied. This is anticipated to reach completion in 2009.

• Retail structure realignment. Internal resources are now funneled to support Shell’s fuel distribution business.

Shell’s direct markets that have transitioned to wholesale thus far include Cincinnati; Columbus, Ohio; Denver; Indianapolis; Kansas City, Mo.; Portland, Ore.; and Southern California as part of the sale of the company’s refining and terminal assets to Tesoro Petroleum Corp. Motiva, Shell’s eastern U.S. joint venture with Saudi Refining Co., has transitioned Atlanta; Austin, Texas; Baton Rouge, La.; Birmingham, Ala.; Dallas; Fairfield, Hartford and New Haven, Conn.; New Orleans; Orlando and Tampa, Fla.; Philadelphia; southern New Jersey; and Memphis, Tenn.

Since 2005, Shell has transitioned approximately 1,350 stations and supply contracts to wholesale and now has approximately 1,400 company-owned stations left in a network of more than 14,000 branded stations.

Bill Fry, vice president of operations for BP, said his company’s decision to move to a franchise based model wasn’t as big a leap of faith as one might expect.

"The ampm brand has more than 20 years experience as a franchisor in the U.S. and internationally, so we know the model very well and how to make it successful," Fry said.

While Exxon has yet to say what it will do with its retail development team in Virginia, BP’s retail support team remains quite active and has no plans to slow down.

"An essential part of a brand’s success is the support it receives," Fry said. "We still very much develop and control the offer, which begins with gathering consumer insights and test marketing products so we can refine them and roll out a winning program. We understand that success and support of our network begins here and that can never change."

Sertbas hopes that message spreads to ExxonMobil. "I have spent years building the On the Run brand because I believe in it and my customers trust it," he said. "Now my customers are looking me in the face and saying, ‘What’s going to happen to my favorite store?’ I tell them not to worry because we’ll be here for a long, long time, but I think they can tell I’m a little worried."

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