20 minutes from LAX, on Slauson Avenue and La Brea, the swoop of a gas-station canopy transforms the expected into the surprising. It’s part of an architecturally stunning convenience store and car wash that’s stylish and quirky, lavish yet streamlined, irresistibly aspirational while obviously too expensive to replicate.
When the Appel family sold this site in 2014, along with the rest of its formidable West Coast chain of 130 c-stores and gasoline stations—mostly traditional but with a few striking Mediterranean- and Wild West-themed gems—they put that vision on the line. Would the Slauson site be a harbinger or tombstone? Joe Juliano is planning for the former—with less drama, but more of a statement.
Relying on data, best practices and a palpable eagerness to run good convenience stores, Juliano, a former college football player, is tackling barriers of California regulation, land limitation and echoes of major-oil redlining with private-equity backing and a new team of industry veterans and up-and-comers.
The playbook is working. In his first drive at the c-store channel, the 38-year-old Princeton grad has claimed surprising turf. After just a year and a half, a combination of timing, connections and cash has produced a new industry player—United Pacific—and a 321-store company-operated network with enough momentum to emerge as the channel’s newest consolidator.
“I’m still shocked at how the stars aligned,” says Juliano, now United Pacific’s CEO, sitting in an office of mahogany desks and bookshelves filled with photos of his son and daughter and mementos of a life in wholesale fuels.
In an exclusive interview with CSP, Juliano outlines a private-equity growth course that is quite different than that of Texas stalwarts CST Brands and Energy Transfer Partners. He is comfortable playing exclusively west of the Rockies and sees value in the small footprints that dominate his existing portfolio. That’s because many regional, new-to-industry c-store powerhouses see little promise in California today, especially in its dense urban areas, which are notoriously fraught with obstacles.
“It’s a typical, development-restricted market redlined by the oil companies for so many years, no marketer or jobber could build new stores,” says Jim Fisher, CEO of Houston-based IMST Corp. “So the only thing done was direct-dealer locations. But looking at the price of entry today, the inherent cost is prohibitive.”
Leading-edge operators want to enter markets where they can dominate, Fisher says. They don’t want to struggle with building permits or unsupportive community and government agencies, and potentially pay higher labor costs, taxes or real-estate prices.
Longtime Bay Area retailer Tom Robinson, president of Robinson Oil Corp., Santa Clara, Calif., agrees, but cautions not to paint the Golden State with a broad brush. “There’s no doubt California has significant barriers to entry, and particularly in more urban areas,” Robinson says. “At the same time, there’s a lot of California that is not as urban, so there’s no reason you couldn’t put a bigger-footprint [store] in those areas.”
Even in more urban centers, Robinson says, “We’re seeing the likes of Costco or Safeway expanding in urban markets … in the middle of good retail areas.”
In many ways, these barriers make Juliano’s gambit interesting and lucrative. He is backed by New York-based Fortress Investment Group’s deep pockets, and in a relatively short period he has put together a strong operations and category-management team that features veterans with tenures at Circle K, The Pantry and Fresh & Easy. Juliano is also reaping historic fuel margins and impressive yields on tobacco.
In short, he says, “It’s a nice recipe for success.”
The Slauson store is a symbol of where things began with the original United Oil, what Juliano affectionately calls “the crown jewel of Southern California.” His history in Orange County and having known Jeff Appel, United’s former vice president, played critical roles in building the trust Fortress needed to snag the reported $500 million sale of Gardena, Calif.-based United. (Though the amount was undisclosed, a financial source who spoke to CSP on condition of anonymity says that was the initial asking price.)
Just months later, United would draw attention in one of the biggest acquisitions of 2015.
The company's acquisition team had heard rumblings about turmoil at Pacific Convenience & Fuels (PC&F), a growth-minded chain with 251 stores based in Pleasanton, Calif. Though PC&F was not officially on the market, United became part of acquisition discussions—and last summer closed on a deal for an undisclosed sum.
“We were very popular at the NACS Show,” says Doug Hecker, vice president of marketing for United Pacific and one of Juliano’s key retail veterans, who spent more than a decade at Circle K. “Vendors saw new potential with us as low-hanging fruit.”
Starting at the Top
The story of what is now United Pacific—which at press time still operated out of United’s old Gardena headquarters but had begun construction on a new 40,000-square-foot site in Long Beach—starts with Juliano. He began his professional life in sales with fuel wholesaler Southern Counties Oil Co., Orange, Calif., which evolved into SC Fuels. He made a name for himself by improving the company’s Tacoma, Wash., business, and also by marrying the owner’s daughter, Cindy. While the marriage didn’t last, his bond with father-in-law Frank Greinke did.
A stint in Midland, Texas, with a different firm (coincidentally called United Fuel and Energy) brought more professional success, an eventual merger with SC Fuels and Juliano’s return to Southern California.
With upward mobility and a vision of a business to call his own at the forefront, Juliano eventually saw a ceiling at SC Fuels, but he left on good terms and with a safety net of at least one potential investor in Greinke.
Juliano was new to raising capital, having never needed outside investment before. As he dove into the process, he met a group that worked with distressed debt. The model seemed right for c-stores, at least in turning around underperforming assets. Eventually, an alliance with Fortress emerged.
A couple of early deals—a bankruptcy in Missouri and 7-Eleven stores up for sale in Texas—fell through before word came that the Appels were looking to exit.
“I thought, ‘No way,’ ” Juliano says, “But I knew Jeff and his father, Ron, so we called them.”
Fortress wasn’t the highest bidder, but Juliano says the company could write the big check, and he assured the Appels that he would keep the business largely intact, using it as a platform for further growth.
“We didn’t have [basic] administration, technology or processes in place,” Juliano says. “Fortunately, United was very solid in those areas.”
A few months later, the PC&F situation arose. Since owner Sam Hirbod had taken over the chain in 2009, it “struggled,” according to Juliano and others interviewed, having failed at novel merchandising ideas and not capitalizing on programs that were working.
People connected to the chain approached United's acquisition team.
By June 2015, United closed on the 251-unit network with c-stores and gas stations in California, Colorado, Nevada, Oregon and Washington.
In many ways, the two chains were a perfect match of interlocking strengths and weaknesses. (See p. 35.) While United had high ground on fuel and tobacco, Pacific boasted larger stores and more experience with foodservice. Both had lessons to teach on everything from culture to landscaping and, combined, built on scale and territory.
United’s throughput on fuel and tobacco were exceeding NACS averages: two times fuel volumes, and four times tobacco units. Though most of its c-stores were less than 2,000 square feet and lacking in foodservice, coffee and fountain, traffic counts were still high.
At some locations, visual aesthetics even trumped sales strategies. As an example, Juliano says, specially designed counters at the Mediterranean-themed stores favored by the Appels actually eliminated endcaps. Since taking over, United Pacific has put those endcaps back in.
On the Pacific side, Hecker describes a struggle over the basics of convenience retail. Better-for-you options replaced an emphasis on beer and tobacco.
In fact, Hirbod raised prices for those core categories, resulting in below-average sales. At the same time, a lack of advertising to millennials and females exacerbated the better-for-you struggles. “The new audience never knew about the offers,” Hecker says. “Then Bubba comes in and sees higher prices on beer and cigarettes, and says, ‘I don’t eat hummus.’ ”
The result was an overall decline in sales, as high as double digits for about a year and a half, Hecker says. Culturally, both companies had differing versions of “command and control,” Juliano says, with both needing to build an atmosphere of individual ownership and idea sharing. However, within the United culture, there was a motto that Juliano liked: “We got it.”
Juliano and his team are using that mantra as a cornerstone of the company. “It’s about creating a sense of ownership and pride,” says Katherine Reggans, director of human resources for United Pacific, who is developing new training and communication materials for both sides of the new entity. “We want people to feel like what they do makes a difference, that they’re appreciated and respected and allowed to make decisions.”
Finding areas to improve upon—including developing a unified c-store brand—were key reasons to invest in both chains, according to Hecker and Juliano. In addition to the benefits of scale and market diversification, optimizing store-level sales was a strong piece of the future payoff.
The company has had more time to alter store-level operations on the United side of the business but has also made strides on the Pacific end. Priority areas:
Reset the stores. The company invested in new technology to help track products, hired a new team of four category managers and three pricebook staffers and is repositioning shelves to maximize traffic flow and increase impulse purchases.
Optimize the cold vault. In addition to data-based merchandising, the company has begun to review supply agreements to maximize cooler profitability.
Work on foodservice. This includes improving fountain presentations, developing a stronger baked-goods offer and overhauling the coffee program. Hecker says the Appels installed bullet-resistant glass around the checkout in most of their stores, which wasn’t conducive to staff leaving those protective areas to clean coffee bars or handle food. As a test, five enclosed barriers have now come down. Juliano freely admits that there’s a ways to go to understand the right offer to put at each location, but focusing on “getting coffee right” is an initial goal.
Unify under a single c-store brand. An internal team is developing a retail convenience brand that is designed to streamline the chain’s portfolio under one banner. (Click here to read more about United Pacific's new store brand.) That c-store brand conveys more values of speed of service and a clean, quality experience tied to a memorable, powerful name.
With the improvements made so far, Hecker says the company has seen increases of about 7%, which is good news, especially on the Pacific side. “It’s been a difficult 18 months for them,” Hecker says.
Ask Juliano about his company’s rapid rise, and his smile widens. Even he is surprised and confesses that the company has already met its initial goal of 350 to 400 stores in three years. (Mission accomplished in less than a year.) The new “magic number” is 750 stores, possibly in a new three-year time frame.
Financing part of the company’s strategy is a sale-leaseback formula, which United has already undertaken with its two acquisitions. It will plow those profits and any additional private-equity capital toward acquisitions, while using store profit to fund operational improvements.
To that end, Juliano is eyeing further growth through tuck-ins in markets the company already operates in, or by acquiring chains that have a strong presence in new markets in areas such as the Pacific Northwest, Nevada or Arizona.
Of course, when it comes to private-equity groups, with growth comes exit strategies.
“I knew you were going to ask that question,” Juliano says, smiling again.
He offers a few potential options: sale to a larger, strategic competitor; or a public offering.
Many retailers fear private equity, having concerns over loss of control, especially when things don’t go as planned, says Raymond James managing director Scott Garfinkel. Yet, he says, these operators forget that private equity can help a business grow. His favorite example is the former Susser Holdings Corp., the Corpus Christi, Texas-based retailer and marketer that tapped many financial tools, including private equity, to acquire and build stores as well as create its Laredo Taco Company foodservice program.
“[Sam L. Susser] was a great steward of [other people’s] capital and a great operator,” Garfinkel says. “But instead of using all of his own money, he brought in someone else’s to accelerate the growth of his business at less risk.”
For Juliano, Fortress not only offers financial backing, but its vast portfolio can also unlock insights from a broad range of retail verticals. At the same time, Fortress has given Juliano the reins to direct daily operational strategies and a broader retail focus.
Juliano seems to have no intention of being a roll-up consolidator. “For me, retailing has proven to be an outlet for things like marketing, merchandising and facilities development,” he says. “I have a creative side that’s been locked up.”—Mitch Morrisoncontributed to this report.
The United Pacific Union
In an unusually strong match, the pros and cons of two acquired chains appear to marry, with certain aspects bolstering others. How their strengths and weaknesses interlock:
- High-volume fuel, cigarette sales
- High-traffic urban corners
- Legacy of unique architectural, landscape aesthetics
- “We got it” culture
- Los Angeles, San Diego markets
Pacific Convenience & Fuels
- C-store experience, larger breadth of goods, fresh food from Circle K and My Goods Market brands
- Larger store formats
- California, Colorado, Nevada, Oregon and Washington markets
United Pacific and Fortress Investment
- Industry veterans and up-and-comers for c-suite, category management, pricebook
- New, unified brand
- Capital for investment, improvement
- Melding of cultures, best practices
Figuring Out United Pacific
Several numbers tied to United Pacific illustrate its potential, especially regarding sales volumes, store count and room to grow.
321 Number of acquired stores since July 2014, with roughly an additional 60 fee-operated and leased locations
$3.5 billion Annual sales
450 Former store-count goal (by 2017)
750 New store-count goal (by 2019)
No. 28 Rank in CSP’s 2016 Top 101 c-store chains
36 Number of spots United Pacific jumped compared to the 2015 list—the most of any chain
4x United Oil’s tobacco unit sales over NACS averages
2x United Oil’s fuel throughput over NACS averages
7% Improvements in United Pacific sales over the past few quarters
Source: United Pacific
Unveiling a New Brand
One of United Pacific’s more ambitious goals is to unveil a new companywide convenience-retail brand in the first half of 2016. While the name and logo were unavailable at press time, here are a few facts:
- The new name and logo are designed to evoke speed of service, clean stores and a friendly, energized customer experience.
- A small internal team designed the new logo with the help of a branding firm.
- Where United Pacific’s smaller stores won’t accommodate a full offer, officials will implement an “express” version of the brand.
- The network operates under several c-store and gasoline brands, including United, We Got It!, My Goods Market, 76 and Shell.
Fortress Has Its Say
While New York-based Fortress Investment Group is taking a hands-off approach to operations at United Pacific, its intent is to support the platform’s growth, but at a reasonable price.
Speaking at last fall’s CSP Outlook Leadership conference, Greg Shoemaker, vice president in the credit funds group of Fortress, said master limited partnerships (MLPs) have been playing a destabilizing role in the acquisition process—a game that Fortress won’t necessarily play. In addition to being a conservative bidder, a few other characteristics of the company:
- It leans toward properties with sale-leaseback opportunities, with cash flow potentially covering rent.
- It calculates for “normalized fuel margins” as a way to better assess what it would bid on a property.
- While it intends to do a “handful” of ground-ups, its focus is expansion via acquisition, filling in markets in Southern California, Denver and other areas of the West Coast.
- Fortress may purchase assets east of the Rockies, possibly led by other operators beyond United Pacific.
- The group is less interested in “top tier” assets, preferring to develop underperforming ones.