Shell Oil Products turned headslast month when the oil giantannounced it would be disassemblingits multi-site operator (MSO)partnerships across the country to continueits strategy of putting the stake of its retailproperties into its wholesaler’s hands.
This decision was made after the companyrealized the unprecedented success ofa strategy it launched back in 2005 that wasconfigured to help grow retail sites throughwholesalers and newly implemented joint ventures(JV) alike. Now, two years later, thecompany is making a move to sell off thoseretail holdings over the course of the nexttwo years, making a major impact on themarkets that said decision affects.
“In the U.S., the MSO model has met theintended objectives of Shell and Motiva, andwe are pleased with the outcome,” said AnnPeebles, spokesperson for Shell.
The decision to remove the MSO modelas an option going forward in the U.S. marketcame after unexpectedly positive resultsfrom the wholesale-focused strategy. After asuccessful first year with the program, thecompany launched a new initiative in 2006,focusing on building the Shell brand andreputation to new heights by optimizing theportfolio.
The strategy was set to enhance supportfor the wholesaler channel as a meansto actively and profitably manage its assetsand supply relationships, Peebles said. To dothis, Shell introduced a “value proposition” toentice wholesalers to come on-board withthe new initiative. The company also introducedthe JV program.
“We believe that the capital beingemployed could be put to better use elsewhere,”explained Peebles. “At the sametime, we believe that having the sites in thewholesale trade channel would optimize theopportunity for growth of the Shell brand inthese markets.”
Shell also realigned its organizationalstructure to better support the wholesalebusiness. To do this, the company switchedits business structure, moving from a “dealervs. wholesale” structure to a “geographic/regional” structure that can support bothdealer and wholesale.
New Trend for the Industry
With this new strategy, Shell is essentiallyputting a lot more power into the handsof its wholesalers, which have the potentialto create a new variation to the market. Tom Kloza, publisher and chief oil analyst forthe Oil Price Information Service (OPIS), saidthe strategy could catch on.
“In the current climate, we have Shelland a few other companies, such asExxonMobil and Valero, that are taking thiswholesaler route and putting less emphasison the dealers,” said Kloza. “However, atthe same time, companies like BP are movingmore towards supporting the dealerclass of trade and putting an emphasis onfranchisees, so it’s not completely clear yetwhether Shell’s move is going to be followedthroughout the industry.”
Kloza sees the new strategy as a way ofmaking operations much more wholesaleroriented. With the previous model, wholesalersoften played on shakier groundwhen it came to gasoline prices; if theprice changed, the wholesaler would seemore benefit or detriment than the dealers.Giving increased power to the wholesalerspresents a more level playing field, animportant detail for companies like Shell.
“Shell used to always say that it wouldbe wholesaler-focused, and I think whenthey rolled out the MSO program, a lot ofwholesalers felt disenchanted,” said Kloza.“It seemed like the wholesalers took thisas a sort of headfake, since Shell waspursuing severalstrategies withoutbeing certain ofwhich one to follow.”
By ridding theU.S. MSO model ,Shell is also bringinga degree ofconsolidation toits business, Klozaadded. With an MSO model similar to Shell’s,there are plenty of credit risks involved, dueto fact that there are so many stores for thecompany to worry about. By switching theemphasis over to the wholesaler’s side ofthe coin, Shell can delegate the credit riskto a few well-managed jobbers, as opposedto multiple-dealer outlets.
“The typical major oil company doesn’twant to have to worry about the credit ofthousands of dealers, and it make sensefor them to use wholesalers as the middlemanto manage the risk,” said Kloza. “Inreturn, the wholesaler won’t have to worryabout whacky price deals that sometimesenable the dealers to sell gas at pricesthat impact below rack price. So it makessense for both sides.”
It may be too soon to decide whetherShell has made the best decision towardsgrowth. It’s also too soon to label the impactthis move will have on the industry, especiallywith companies like BP moving in anopposite, more dealer-oriented directionthan. Despite that, this new trend has somewheels on it, and as Kloza added, may bethe next evolution in the business.
“It’s a trend that will continue. It’s thenext chapter,” he said. “The first chapterwas major oil companies wanting to possessa lot of the land they operated on.Second, they wanted to divest a lot of thecredit risk they possess by having hundredsof different dealers and putting up with thevagary of price, the vagary of local economyand so on. By turning to the wholesalerclass of trade, they’re consolidating theiroperations. I would never use the term‘win-win,’ but I think this decision makesperfect sense for the company.”
Major Markets Affected
Since the wholesale-focused strategyand U.S. portfolio optimization plan gaveShell better-than-expected results, it inspiredthe company to spread the program. Withinthe first two years of the strategy’s launch,Shell transitioned direct markets in Cincinnati,Denver, Indianapolis and Columbus, Ohio.Motiva transitioned Atlanta; Austin, Texas;Baton Rouge, La., Birmingham, Ala.; Orlando,Fla.; Tampa Fla.; Memphis, Tenn.; and someindividual sites in Connecticut. The transitionsgenerated more proceeds than thegoal, with the wholesalers and the largerJVs performing successfully.
“The programs we’ve introduced toimprove the wholesale value propositionare being well received and the organizationalrealignment has effectively joinedwholesaler and dealer together to bettersupport all classes of trade,” said Peebles.“As a result, we have a long list of wholesalersboth existing and newwho want togrow with Shell.”
As of October 2007, Shell revealed thatit would continue with the forward momentumof the new strategy. With that, additionalmarkets for transition to wholesale wereannounced, which included Philadelphia;southern New Jersey; Fairfield, Conn.;Houston; Dallas; New Orleans; Portland,Ore.; Alaska; Sacramento, Calif.; Hawaii;Washington; southeast Florida; Boston; NewYork State; San Francisco; Chicago; Seattleand its remaining sites in Los Angeles.
