LOUISVILLE, Ky. -- The customer entered the convenience store—a Shell-branded site with a 2,200-square-foot box—and was genuinely confused.
“He walked in and he was like, ‘Whoa—where the hell am I?’ ” says Steve Estepp, president of Estepp Energy LLC, Lexington, Ky., a Shell distributor for more than 40 years and owner of the store in Louisville, Ky., with a laugh. “He’s like, ‘I thought I was in a Shell.’ ”
The confusion was understandable. The Shell-branded canopy in front says Big Oil. The Shell Select store in back, complete with its sleek, glass-fronted exterior, chef-inspired foodservice offer, locally roasted coffee, outdoor seating area and ceramic dishware, says high-end convenience.
It’s exactly the kind of reaction Shell is hoping to get from customers as it reintroduces itself as not just a fuel brand but also a retail presence.
“When we see people walking through the door, the first impression they get is, ‘Oh, my God, what is this?’ ” Gyongyver Menesi-Bondar, head of convenience retail for Houston-based Shell Oil Products U.S., told CSP during a recent visit to the first Shell Select in the United States.
“When they come in, it’s a very different atmosphere, look, feel and the lighting. … The format and colors—it’s not as loud as you’d see [at a traditional gas station]. There’s not a lot of different signage and brands.”
In other words, the site, which opened in September 2018, does not resemble the Big Oil c-store of old—no cookie-cutter assortment, large logos or primary colors to be found. Instead, it represents everything Shell has learned about the art of retail across its massive global business, which spans 44,000 branded locations in 80 countries, since it sold its last U.S. company-operated site in 2004.
That year, George W. Bush became president and oil began a multiyear, record-breaking run-up in prices thanks to higher demand and geopolitical tensions. And the Big Oil companies—Shell, BP, ExxonMobil, ConocoPhillips and Chevron—were in the process of selling off the bulk of their once-massive retail empires.
“There are five major oil companies and six private-equity firms in search of the next Thorntons.”
It was a decision driven by retailing fundamentals, says Joe Petrowski, a senior adviser and director of fuels for Yesway, West Des Moines, Iowa, and former CEO of Cumberland Farms and Gulf Oil. This begins with the difficulty of managing real estate from a distant corporate headquarters, sometimes in another country.
“Retail is detail and … tough to manage from thousands of miles away from the local market,” Petrowski says.
Meanwhile, the convenience-store industry was changing, pursuing more sophisticated foodservice offers as demand for tobacco continued to flatten.
“Major oil was especially bad at foodservice, which is critical to modern convenience retailing and was made worse by branding the food and convenience with their brand,” he says. The return on investment on upstream investments, meanwhile, dwarfed retail, especially as oil prices continued to rise.
Most big oil companies sold off sites to their distributors, dealers and private operators, with Chevron being one of the only ones to hold onto a core of sites [CSP—Feb. ’19, p. 24]. “New era” operators—large, regional and privately owned—stepped in to lead on c-store retail.
But a decade later, the fundamentals have shifted back again in U.S. retail’s favor. The reason: Flattening demand for gasoline in the United States and record-setting production runs in 2018 by refiners have created a domestic supply glut. For these refiners, Big Oil companies among them, finding a home for the fuel is becoming increasingly attractive.
“A lot of refiners, if you give them a truth serum … you’d find are envious of the Marathon model,” says Tom Kloza, global head of energy analysis for Oil Price Information Service (OPIS), Gaithersburg, Md. He is alluding to Marathon Petroleum Corp.’s ownership of the Speedway c-store chain, which, with 2,900 stores, will have pushed through an estimated 7.8 billion gallons of gasoline in 2018.
This number will grow as Marathon begins to rebrand the company-owned and -operated sites it gained in 2018 from its acquisition of Andeavor to the Speedway brand. The retail ops also survived a 2016 challenge by an activist investor who encouraged Marathon to spin off Speedway.
“When you have a lot of retail that you can move domestic production of gasoline through, that’s a good thing,” Kloza says. It’s better to sell [gasoline] through retail, where the price can be more tightly controlled, than on the spot market, where refiners may be forced to sell at a big discount.
“Now what major oil misses is the guaranteed and rateable offtake from a convenience chain,” Petrowski says, adding that “the hunt is on” for large chains with large fuel volumes.
BP and ArcLight Capital Partners’ new, nonoperating joint venture to buy the 191-store Thorntons chain can be viewed in this context. Petrowski estimates Thorntons’ fuel volumes at 320 million gallons per year, and he cites its skilled management team and respected brand as assets. (Petrowski partnered with ArcLight on its 2015 acquisition of Gulf Oil from Cumberland Farms, but he played no role in the Thorntons deal with BP.)
“My instincts tell me this isn’t the last deal they’ll do to find a home for gasoline,” says Kloza. “I suspect that as retail comes up for sale, you will see other multinationals and refiners do that.” Many of these companies, he says, “are looking at retail as a temporary crown jewel.”
This is not to say that Big Oil is making a mass migration back to retail; most of them have given no sign they are interested in a return. And not every downstream endeavor will involve company-owned and -operated stores. But even the limited retail maneuvers of a couple of oil giants is enough to cause tremors in the landscape and M&A dynamics of the c-store industry. And as the Shell and BP examples show, there is more than one way to do retail.
Shell Makes A Statement
For Shell, the decision to recommit to retail in the United States is in part a hedge against a future in which its traditional, core product—oil and refined fuels—will be disrupted.
In 2018, parent company Royal Dutch Shell, The Hague, Netherlands, announced it was investing $7 billion to $9billion per year in a downstream strategy to expand its global c-store network by 25% to get ahead of a looming peak in oil demand. As part of this effort, it would aim to reach a 50/50 balance between its revenues from fuels and nonfuels, as it seeks to futureproof itself from disruptive forces such as the electrification of transportation and the mobile-driven, on-demand retail model.
With the United States home to 14,000 Shell-branded sites—the most of any country—it must play a major role in this effort, says Menesi-Bondar of Shell Oil Products U.S.
“That new reality is happening every day, wherever you go, globally, so certainly our interest and intent is to accelerate this rather than slow it down,” she says of the retail focus.
Over the past 15 years, Shell had been growing its branded site count in the U.S. through the wholesaler channel and assorted joint ventures. It also focused on its premium gasoline offer, Shell V-Power Nitro+, growing its Shell Fuel Rewards loyalty program, and even piloting mobile fueling through the Shell TapUp app. But there was a piece of the Shell brand experience lacking consistency: the store, which at most Shell-branded sites is a hodgepodge of distributors’ own brands.
“The brand experience needs to be more than about the branded forecourt and fuel quality,” says Menesi-Bondar. “From the consumers’ point of view, they recognize that a big company and a global brand is behind the offer, and that lends additional credibility to what we’re bringing to the market.”
Enter Shell Select, the company’s retail brand from overseas, which is now making its debut in the United States. The importance of nailing Shell’s reintroduction as a retail brand to U.S. customers—many of whom may still remember the conventional gas station of old—is reflected in the attention given to its design.
“From the outside, because Shell has been gone from the U.S. for so long, we really wanted to do something that was a bit disruptive,” says Joe Bona, president of Bona Design Lab, New York, which created the prototype design. “We had visually needed to let people know that this wasn’t just a gas-station convenience store, that this was something meaningful.” On the outside, that means a sleek, modern design with expansive windows, a natural color palette and an outdoor seating area with free Wi-Fi and piped-in music.
Inside Shell Select, the foodservice offer—Deli by Shell’s freshly prepared sandwiches and espresso-based beverages—is the highlight. The menu includes everything from an andouille sausage hoagie to a vegan Philly cheesesteak wrap, salads, breakfast offers such as the top-selling bacon “sconewich,” and local treats such as gourmet doughnuts from Louisville-based Nord’s Bakery and coffee from Good Folks Coffee Co.
This focus on localization, premium foodservice—think breakfast sandwiches that start at $3.99 advertised on a chalkboard—and a stay-awhile aesthetic are more synonymous with the independent operators who filled in the retail vacuum that Big Oil left and raised the c-store bar. That said, Big Oil can make that reach.
“When you have a lot of retail that you can move domestic production of gasoline through, that’s a good thing.”
“What oil companies have in their DNA of a c-store is different than what a dairy-farm company would have in its DNA for a c-store,” says Menesi-Bondar, referring to privately owned chains with dairy origins and increasingly sophisticated foodservice programs such as Wawa, QuickChek and Cumberland Farms. “Here in the U.S., we are stretching ourselves more toward the dairy farm sort of interpretation.”
Shell’s task is “to start thinking like a regional operator,” says Bona, and he points to examples such as Maverik. “A lot of these regionals … aren’t afraid to fail. They take risks, they watch the pennies, they’re innovative, and they keep moving forward. … That’ll be the biggest hurdle for not just Shell, but any major oil company, because it’s not in their DNA, typically.”
While Estepp Energy owns the first Shell Select and can weigh in on the assortment, Shell’s retail team manages the offer within the store. The consumer value proposition for the brand is fresh and local, says Brian Kuz, Shell’s head of marketing and innovation for convenience retail. This is communicated by the Deli by Shell chef-prepared menu and barista-prepared coffee drinks, which are given priority. For example, after Shell conducted a heat-mapping study with VideoMining Corp., it learned that some gondolas were blocking consumers’ path to the counter area. So the team removed the fixtures and has trimmed down the SKU count overall to keep navigation more open.
Shell has not yet settled on a single brand strategy for the retail concept; it could be Shell Select or Deli by Shell. Regardless, “filling it with content is the real thing,” says Menesi-Bondar. “You can call it anything you like, but what that means and how we deliver that customer experience—is it credible, is it really bringing customers back after their first experience?”
Early figures indicate that Shell is hitting the right notes with the new U.S. store brand; according to its internal research, the customer return rate to the Louisville Shell Select is about 90%. Now the challenge is to develop a proof of concept for Shell Select that it can roll out to its distributor network through a franchise, likely in the next year to 18 months, and that it can maintain control of through direct-ops.
“We are developing the solutions to both because we do have 14,000 Shell-branded locations, and it’s a much confirmed need from
the wholesalers to get more from Shell than just the fuel solutions,” says Menesi-Bondar. “But also for us to be a credible franchisor and play a bigger role in the market, that’s where I think the direct company-controlled operation makes sense as well.”
The next Shell Select, due to open in 2019, will likely serve as a flagship location for the retail concept. Shell is interested in testing larger footprints and features, new trade areas and customer types, and building upon what it has learned at the Louisville location. The store’s foodservice offer will also build on the two different foodservice mission types: grab-and-go and full-service.
“Whatever we’re developing, there’s always that end game in mind, that this needs to be relevant and sticky for the wholesalers as well in the long run,” says Menesi-Bondar.
Estepp sees the Shell Select concept as one way that his company, founded 45 years ago by his father, will last another 45 years. And he believes it will be the winning model for the future of the industry.
“You’ll have your traditional cigarettes, lottery, you know ... beer-type stores, your consumer packaged good-type stores, and then you’ll have the more upscale offerings,” Estepp says. “They’ll both appeal to different customer bases. But I think that this is the way that I would want to go.”
Shell has not set a quota for new Shell Select sites in 2019 and it has not ruled out any modes of expansion, whether organic, a joint venture or even acquisitions. “It’s about getting it right and making sure we have proof of concept in more than just one place—different circumstances, trade areas, market places,” says Menesi-Bondar. “But we do have a strong intent to get into more markets and get a bit more scale, because with scale we will learn different things. So it’s going to come.”
BP’s Retail Move
In contrast to Shell’s direct embrace of U.S. retail as a brand platform, BP is taking a decidedly more nuanced approach—one that lets it benefit from having a dedicated outlet for its fuel but avoid getting enmeshed in the tricky business of retail.
The joint venture in which BP is a minority partner with ArcLight to acquire Thorntons is specifically nonoperating, meaning the store operations will remain in Louisville in the hands of Thorntons’ retail team. BP and ArcLight have teamed up on other acquisitions, mainly in the midstream and upstream, and this represents their first pure retail play. It follows reporting in May 2018
by OPIS that Thorntons had retained the services of investment banker Lazard to shop its store network.
“Major oil companies have proven over the years that their core competencies (and financial returns) are in producing, refining, delivering and marketing quality fuels,” says Ken Shriber, managing director and CEO of Petroleum Equity Group, Chappaqua, N.Y. “It is not necessary to actually manage and maintain the operations. That function is better left to the convenience-store experts like Thorntons.”
The appeal for BP is obvious, Shriber says.
“The Thorntons chain acquisition combines high-volume outlets for BP fuels with a high-quality convenience-store chain sited on a large, visible, accessible and attractive footprint,” he says. “Given the lion’s share of stores surround BP’s corporate Illinois hubs and their Whiting, Ind., and Toledo, Ohio, refineries, the combination is strategically attractive for them.” Thorntons has more than 70 stores in the Chicago market and 191 stores overall. It ranked No. 42 in CSP’s 2018 Top 202 list of the largest c-store chains in the U.S.
According to Michael Abendhoff , BP’s director of media affairs, U.S. downstream, based in Chicago, the sites will retain both the Thorntons store and fuel branding. (BP, Thorntons and ArcLight declined further comment for this story.) This is a nod to the strength of the Thorntons brand and its retail acumen, say industry analysts.
“I believe that many people bidding on Thorntons saw huge value in the fact that the stores were unbranded,” says Dennis Ruben, executive managing director for NRC Realty & Capital Investors LLC, Chicago, which assisted BP in the sale of its last company-owned sites in the late 2000s and represented one of the bidders for Thorntons’ stores in 2018. “There was also a prevalent market perception that the Thorntons name had a lot of value and that the company had done an excellent job of site selection, especially in the desirable Chicago market. Thorntons’ huge fuel volumes certainly became of keen interest to bidders like BP.”
For Thorntons ownership, the deal, which closed Feb. 11, wasn’t a matter of selling out but accumulating the capital needed to grow faster.
“While we are proud of where we are today, our vision extends well beyond 191 stores in six states, and we know this new joint venture will help us to accelerate store growth and serve even more guests every day,” said Matt Thornton, then chairman and CEO of Thorntons, in a press release announcing the deal. (At press time, Simon Richards, head of regional development for Fuels North America for BP Products North America, was appointed the new CEO of Thorntons.)
Thorntons has what one former executive, who requested anonymity, describes as “a results-driven” culture that rewards individuals who exceed expectations. This is especially true of positions from director down to store employees, who are paid competitively in salary and bonus and recognized for their tenure and customer service excellence. Thornton has a servant-leadership approach, known to handwrite birthday cards to Thorntons’ store managers or gift dinners for wedding anniversaries, for example. At the same time, the chain can prove a demanding environment for senior-level executives, and the turnover in its C-suite over the past 15 years—including a 2016 restructuring that saw Thornton temporarily reassume the president position—reflects this.
“To the extent that MLPs were kind of the flavor of the month a couple years ago, I think Big Oil is the flavor of the month now.”
But Thorntons has shown results for this hustle: a respected brand, growing loyalty program and an ability to draw fuel volumes with aggressive pricing. In CSP and OPIS’ 2018 Fuels 50 ranking of the most effective fuel brands [CSP—April ’18, p. 28], Thorntons ranked among the top 20, pricing gasoline 3.58 cents per gallon below its market competition in 2017. (Watch for our most recent list this April.)
While all of the details of the new joint venture are not known, the structure makes sense for BP, says Steve Montgomery, president of b2b Solutions LLC, Lake Forest, Ill., and a former convenience retail manager for Amoco Oil Corp. before it was acquired by BP in 1998.
“The major oil companies began seeking ways to share in the profitably of their c-stores without having to operate them,” he says, pointing to joint ventures in recent years such as the one between Chevron and Jacksons Food Stores, in which the latter will lead the growth on Chevron’s ExtraMile brand.
“There has been a perception that oil companies have been better at the fuel side of the business than the convenience-store side, which probably explains why many of them divested their retail operations in the past,” says Ruben. “However, several of the majors, such as Marathon/Speedway, BP and Shell, have been active in acquiring retail locations recently. For BP, the Thorntons acquisition will certainly provide a solid base for expanding into the retail side of the business.”
Future M&A
There’s an old industry saying: When a major oil is selling stores, you buy; when it is buying stores, you sell. Most relevant to today’s M&A cycle, Big Oil has a reputation of paying very well for assets.
Take the Thorntons acquisition. The terms of the deal were not disclosed, but BP had a leg up on many of its competitors, Ruben says.
“At the end of the day, BP enjoyed a competitive advantage in bidding on Thorntons because it didn’t need a middleman to provide fuel to the company,” says Ruben.
“We have some good deals coming down the road and we’re putting together prospect lists, and the major oil companies that have been buyers are clearly on the list in every deal that we were looking at,” he says.
He sees Big Oil taking the place of master limited partnerships (MLPs) as a dominant buyer in the months ahead. MLPs suffered from years of rampant growth and became overleveraged after rewarding unit holders with higher distributions.
“To the extent that MLPs were kind of the flavor of the month a couple of years ago, I think Big Oil is the flavor of the month now,” Ruben says. “A lot of these MLPs, their stocks [have] been beat up pretty bad. A couple of companies are trying to become MLPs and they haven’t been able to go public yet because of the market conditions.”
Will these future retail maneuvers by Big Oil take a more traditional route—e.g., Shell acquires large c-store chain—or could private-equity partnerships prove popular? Petrowski of Yesway sees advantages with the latter model.
“Private equity has capital to burn, and while it is hard to believe BP, Shell, ConocoPhillips or any of the majors need capital, a partnership with [private equity] can bring not only incremental capital but another set of eyes that know the space,” he says. “I would expect the BP-ArcLight-Thorntons [model] is just the first of several to come. There are five major oil companies and six private-equity firms in search of the next Thorntons.”
Additional reporting by Angel Abcede and Greg Lindenberg
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