Has the branded retail business become a house of cards?
By Mark Radosevich
Several major oil companies are expending exorbitant sums to shore up their market positions around the country.
A Southeastern marketer told me recently that the deals being offered to brand-switch one of his 60,000 gallon/month dealer accounts was “simply unprecedented.” Some offers included upfront cash of over six figures and two cents a gallon for 10 years.
Is this offering an anomaly?
It turns out that in many markets, “marginal stores” are garnering these big money payouts with rebates running as high as two and a half cents per gallon for 10 years. Yet, despite these big bounties, larger marketers are demanding the cash but resisting long-term deals.
With upstream revenues faltering and having deliberately divested out of downstream, the future of their respective brands is uncomfortably beyond their control and increasingly uncertain.
In the Atlanta market for instance, QuikTrip (QT), RaceTrac and Kroger have higher market shares than most of the major oil players, which are represented by multi-branded marketers and independent dealers having no brand loyalty and willing to flag-switch on a dime. Many other markets face similar situations.
Mediocrity may be the new watchword as the majors pay heavily to preserve market share and brand relevance in the middle of the pack. Chains like 7-Eleven and Circle K or smaller branded marketers with quality store operations typically have an assortment of stores that range from large to smaller offerings.
In the past, the major brands differentiated themselves by touting the quality of their gasoline, additive packages and marketing programs. This helped create brand differentiation, loyalty and market share when the facility quality of an unbranded competitor was similar.
Today, branded sites are usually the marginal sites in terms of facility size, configuration and quality, with inconsistent operating and image standards. National advertising, product quality and marketing programs conflict with the realities of the brand on the street and have inexorably diluted motorist brand perception and loyalty. This reality raises some serious questions about the future of major oil brands. The long-term viability of the marginal retail sites that the major oil companies are aggressively courting is risky.
It only takes the arrival of an operator like Wawa, QuikTrip or another to render marginal competitors inviable. Central Florida has seen this situation unfold over the past years and other places like Greenville, S.C. are experiencing it right now.
The majors are at a cross roads and some big decisions will have to be made. The high costs to preserve risky retail relationships cannot be logically defended or sustained.
This leaves two distinct avenues: implement a dynamic long-term strategy of brand reinvigoration or primarily focus on refining and distributing unbranded fuels well into the future.
SIZING UP SUCCESS
I don’t believe that the majors are ready to abandon their respective brands and, as such, we may see some dramatic changes coming to the retail petroleum landscape. Success will require a renewed focus on facility size and configuration to ensure that future outlets can stand the test of time.
Operational standards and brand building processes can then be layered into the overall retail developmental effort to enable the brand to compete effectively against the large quality unbranded operators.
It’s been better for majors to align with store operation professionals that have a proven track record of running quality chains at a sizable scale. As such, the joint venture approach seems to be best for optimal brand development and competitiveness into the future. Shell Oil is doing this now in some markets with good results and it wouldn’t be surprising to see that initiative replicated by others.
Given the overriding importance of quarterly earnings, share value and dividend preservation, the house of cards that’s being employed now to retain market share is tenuous for upper management to sleep soundly at night. For simply that reason, I fully expect some big things to be in the offing sooner rather than later.
Possessing over 35 years of downstream petroleum experience, Mark Radosevich is a strong industry advocate. He is president of PetroActive Real Estate Services LLC. Mark can be reached by email at [email protected] and directly by phone at (423) 442-1327 or by visiting www.petroactive.net.