The panel for the 2008 NPN State of the Industry discussion, held in conjunction with the Society of Independent Gasoline Marketers of America’s Annual Convention held in November at the Fairmont Hotel in San Francisco was picked with a specific goal in mind. SIGMA was celebrating its 50th anniversary and NPN was coming up on its 100th anniversary, and the goal was to pick up panelists who have been around the industry for some time and who could provide some historical perspective on some of the issues we face today.
It's tempting to look upon all challenges as new and unique, but a great many of the issues we face today have been faced a number of times in the past and the industry has overcome the challenges and taken advantage of opportunities and moved forward.
The panelists selected provided the audience with a fair degree of both wisdom and humor. They were:
R.H. "Tod" Butler Jr. – Butler is a member of the Matrix Capital Group’s Energy & Multi-Site Retail Team and is responsible for assisting the managing director in all aspects of transaction management. Butler has 43 years of petroleum marketing experience to Matrix, having served as president and CEO and Mid-States Petroleum, Inc., a large Mid-West distributor of wholesale petroleum products.
Grady Chronister – Chronister is the president and founder Chronister Oil Company and Qik n EZ convenience stores located in Springfield, Ill.
Leo Liebowitz – Liebowitz is one of the founding principals of Getty Petroleum Corp., which as a result of the spin-off of its Petroleum Operations in 1997, has changed its corporate name to Getty Realty Corp. Mr. Liebowitz is Chief Executive Officer, President and Director of Getty Realty Corp., and he is the largest shareholder.
Jack C. Pester – Pester is chairman of the board of Pester Marketing, a retailer of petroleum products and served as the senior vice president of international refining and marketing for The Coastal Corporation.
Tom Robinson – Robinson is the president of San Jose, Calif.-based Robinson Oil Corporation, which owns and operates 34 Rotten Robbie gas stations and convenience stores in northern California.
Moderator – Keith Reid, Editor-In-Chief, NPN Magazine
Question: When you entered the industry, what was the environment like and what were the significant challenges that were on the radar at that time?
Butler— I came into the industry in 1965, and at that time it was all full-service, and as we moved into the early 1970s, the major challenge was to shift everything into self-service. Overall, I think the issues were pretty common throughout the last 40 years and probably cyclical in nature on the order of 10 year cycles.
Pester – I started in the industry in 1958 – I hate to date myself like that – but I was fresh out of college and fresh out of the Army. I built a service station because my grandfather had given me a farm, and I decided I did not want to be a farmer. So I built that store, and the next year I built two, and in the next year after that three. They were “sales” type stores – no bays. Our sign said “Gas For Less.”
I don't think the industry has changed much because it is always revolving and rotating and usually what you see today, you very likely see again as some "new" trend in 10 or 15 years with just a few new bells and whistles.
Chronister – I started in 1966 with a full-service, two-bay station and it's a funny story. I don't know if he knows this, but Jack (Pester) was in Iowa and I was in Illinois and we somehow managed to have a common supplier. And I started watching what he was doing and it was sure working a lot better than what I was doing, so I switched gears and started doing what he was doing and things started working out a lot better (laughter).
To get back to the point, I think things do work in cycles, and not necessarily what was old was good and you do find better and more modern ways to do things. I am concerned about the political issues that are at stake today, I think they're considerably stronger than they were then.
Liebowitz – Well, apparently I am older than all of you – as you can see. I started in 1955 so it's been more than 50 years in the business, and I want to talk about the business from a real estate perspective, which is somewhat different from what my colleagues here have spoken about.
When I started, the majors wanted to have their brand all over; they wanted to own the properties, wanted to control the properties; and what we've seen in the past six to seven years is the divestiture on the part of the major oil companies of their retail. They still want you to continue to sell their brands, and their brands will continue. After all, they still have the refineries and the brands are still valuable. And I see that from a retailer's point of view, he is probably better off today than he was six months ago, especially when you look at margins, where he might have been going out of business.
This is a business where I've not seen retailers go bankrupt—it's been rare. It's a lot of hard work, a lot of aggravation. While it certainly has changed, it’s coming around full circle.
Robinson – I was “born” in 1951 (laughter), which is kind of interesting because in 1948 our partner, Bill Richards, opened the first self-service in Northern California. At that time California was known as a very innovative marketing area for our industry. When I rolled into the business in 1974, some of the very first things that I can remember doing were going to Bay Area Air Quality Management District meetings trying to understand what this new thing, Phase II Vapor Recovery, was and how we were going to install it and whether we could get an extension because the manufacturers said it was available, but it really wasn't.
I mentioned that primarily because we are doing exactly the same thing in California today and that we are trying to get enhanced secondary vapor recovery figured out and installed before the deadline comes up in 2009. Certainly, marketing is important, but the generation that I dealt with, especially in California, has been so regulatory driven and it's such a different perspective than what I know my dad dealt with and what Bill Richards dealt with.
Question: The biggest issue today on everybody's mind is the current financial crisis. Is anything special required to deal with this challenge at retail?
Editor’s Note: The answers to this question were unfortunately garbled in the recording received from the Fairmont Hotel audio visual staff. However, the consensus of the responses was that as long as the retailer ran an efficient operation and provided customers with service and quality and convenience, there was likely little need to make any dramatic adjustments to product mix or operational focus.
Gasoline will remain a necessity, convenience will continue to be important, and product categories like tobacco, snacks and alcohol continue to have a pull on the customers’ wallets. In a part of the recording that was intact, Liebowitz noted that ancillary profit centers are more important today than they have been in the distant past and even the immediate past.
Question: Credit cards have represented both a boon and a bane for the industry since they first started to penetrate our market in the late 1960s. What is your overall take on how credit cards have impacted our business?
Butler – The bank cards probably started in the late 1960s, and at that time you probably had 1 percent of your sales on a credit card. So they weren't really a big issue at first. The issue we've seen today, of course, is not only the fees, but as the prices went up you also saw a significant increase in the number of people that bought using a credit card. People just couldn't afford to have $100 to $150 in their pockets all the time, which had a tremendous impact on the bottom line, obviously. Of course, now that's gone down things have stabilized.
Pester – I marketed for a while in the Baltic States when I was with Coastal, and they had an entirely different credit model. They would never write checks, their banking system coming out of the old Soviet republic was a cash system. They used an ACH style debit card to pay their utilities and wages and buy the automobile—whatever you did. So the card system had pin pads and you did it at the pump or inside, and the cost for the merchant was a heck of a lot less. In the United States, I think one of the greatest things that happened to us was the CRIND, but it was really set up wrong. It was set up for ease to the customer and I think the marketer or retailer pays for the risk that this type of system creates. Something is obviously going to have to be done about it. It's wasteful, and there are easier ways to do it, and maybe when PCI comes through that will help.
Chronister – Credit cards represent a philosophical issue for our industry. As noted, back in the 1960s most of our business was cash and credit cards. To me, and I think to our economy, they represent nothing more than an expansion of available money supply—an expansion of people’s ability to buy. I think credit cards have kind of hit a wall in that regard, recently. And as a result of that, banks are charging higher interest rates, you have these credit limits, and I think there could be a whole change in the way the cards are processed. There could be some competition coming into the credit card market, and this could become a real opportunity.
Liebowitz – I, like many of you, started out on a cash-only basis and we resisted as a private brander going to credit and sold for cash for less. But as credit cards became more and more popular, it was impossible not to start accepting them. The problem today is the fees. And, I know this association and NACS and others are complaining about the same thing and are trying legislatively to change that.
Robinson – I look at that whole plastic thing coupled with card readers as there was probably nothing, at least during my time, that we did that made customers happier. The amount that it increased our efficiency both made it easier for us to sell fuel and made it easier for the consumer. Obviously the big challenge is paying for it.
Jack, you mentioned PCI compliance. We've already paid for some of that, and we're going to pay a lot more as we go. It's a huge, huge hit. If you have these two things, you love what it does for efficiency and for the customer and it even helped support some of the price run-ups where people could still fill the tank by putting it on a credit card.
With the change in credit right now – with the credit card companies clamping down – I'll be interested to see how it sorts out. Are we going to see more consumers going into credit because they will have to cut back because they don't have the same credit lines they used to have? So it's going be interesting to see how that sorts out. I agree with Leo in that I hope we'll get a shot at lower rates.
Question: With the withdrawal of the major oil companies from retail, can you describe how you’ve seen that relationship change between the major oil company, the marketers, the dealers and the customers?
Pester – There are obviously fewer suppliers than we've seen 10 years ago and certainly more than we saw 20 years ago. It could get to the point where it's like Budweiser – everybody's going to sell it except it will say Conoco or Exxon or something like that. It still comes back to location and appearance and really, the facility itself.
If you get fewer and fewer brands, they don't make quite as much difference as they once did. In some parts of the world, to have the Texaco Star on a highway was the most important thing that you could ever have. In some states, maybe a brand like Conoco did great and in the old days in Houston it was Gulf or Shell. I think those days are gone and that the consumer realizes gasoline is a fungible product. And they're kind of wasting away all that advertising on the additives. I don't think the consumers believe that anymore.
Chronister – A brand's a brand. Racetrack has a brand—and that's a real brand. They have their way of doing business, and they've created their model for staying in business. And I think the supplier relationship, branded or unbranded, is to be determined by the marketer and what the marketing plan is.
Liebowitz – Although we haven't been involved in the retail side of business for a number of years now, all of our tenants are and we're very concerned with that side of the business. I have found that the relationship (with the oil companies) has eroded quite a bit. Just as it's tough to get service in many things these days, it's tough to get the attention of motor fuel refiners. There was a time when they all had surpluses and they were all chasing to get your business. There was a time when we had marketing VPs of every major oil company attending SIGMA conventions, and today we only have a handful. That has changed dramatically.
Robinson – I think it's going to be an interesting time with all of the divestitures to dealers. I almost look at it as kind of a deregulation type of time, where we have a very significant shift and so many sites are going out to single site operators and I think it's going to be fascinating to see how that all sorts out. I'm not sure, but I think that is really going to change the industry considerably.
Question (from the audience): Do you see a fall out among many of the single site operators that have entered the market recently with the current economic downturn?
Butler – I don't. I know a lot of guys in here will say they were struggling six months ago, but the dealers were really struggling and most of them I think have gotten reasonably healthy in the past 90 days or so. One thing about dealers, particularly the new Americans, is that they can run these units pretty cheaply if they have to. I don't think you will see a lot of turnover at all, and I think most of them know what they're doing to a degree.
Pester – Smaller businesses can be more efficient than larger businesses. A lot of marketers and jobbers have gotten extremely large themselves and they can perhaps be subject to that same formula. Some of the toughest people that I've ever competed against in my life were really good dealers who knew their customers and knew their location and what they were delivering. I think marketers like us, and we have some dealers now, need to learn how to work with them to give them the tools to become better. That might be almost a lost art.
Chronister – My comment would be that I think people who run good businesses will do okay, and those who don't, won't.
Liebowitz – When I started in this business I was hocked to the hilt. Everything I had was leveraged, everything I had was collateral, and I survived. And, I've seen that with many, many businesses. Times were tough earlier this year and I don't see any mass exodus, any bankruptcies. I'd advise people not to have any more debt than they have to, but if you want to grow, you have to go into debt.
Robinson – Leo, I suspect that you're right in a number of cases. But, I expect that for somebody like us, we're going to have some opportunities. People are going to sell some stuff, and we don't need a lot, but we need a few more. So we're looking.
Question (from the audience): What is your take on the big box retailers?
Liebowitz – As I said earlier, a motor fuels station cannot survive on gasoline alone. You must have other sources of revenue, and if you do, you can compete with the big boxes very effectively. You may not have the margins you would have if you did not have a big box next door, but you still should be able to compete. I don't believe they are selling at a loss.
Pester – Most of these, whether it's a grocery chain or whatever, are publicly traded. They have to have returns for the shareholders. I know Murphy has had a reputation for tearing up markets for quite some time, and what we've seen among the big boxes, particularly the grocery retailers, is that they are very tough competition, but they do have to make a profit. There are some great models out there, companies like Giant Eagle, where you get the loyalty card and it's cumulative and it's just something that has to be dealt with. And so far I think we've done pretty well against it as an industry.
Butler – In many cases when they are starting out, particularly if you are in a smaller community and there are two or three of them, they become somewhat predatory and you have to make sure that you're the guy standing when the other little guys go out of business. And then your business gets better because not everybody wants to buy under the big-box concept where they get an extra few cents off a gallon because they bought lettuce that day. The gasoline customer is in a hurry and the convenience store chains were successful because they were convenient. So you just have to be a better operator and do a better job.
Chronister – I do remember back in the 1960s and 70s—and I think it was nationwide, but certainly up in the Chicago area—you had Sears and Kmart that were very aggressive with the gasoline business. I think the problems that they had were that they found out, after a while, that they really couldn't buy gasoline cheaper than anybody else—it was a commodity. And I think that as time passed they basically faded out.
I don't know if that's going to happen today, but convenience is a commodity by itself and I think the consumer perceives value in convenience. I think they got into that business more on the defensive standpoint than an offensive standpoint, thinking that we were perhaps a bigger threat to them than they were to us to some degree.
Robinson – I hate competing against those guys—it's so annoying. I think that anytime you're going to get somebody that is a strong marketer, that is more deep pocketed, that is willing to subsidize a product for some sort of perceived value and maybe a bit predatory, it is a challenging business at that point. But the light at the end of the tunnel is that I'm sure any one of them that has done a really good job with it does not have any other category that sells more than regular unleaded. I don't think they have a category on the shelf that is generating anywhere near the sales that they are generating out of one grade of fuel.
My theory is that when they first put it in and they were happy because they got a bump in sales, and they saw same sales store numbers go nuts. I suspect that most of them are smart enough to figure out how they are doing with a very significant category that costs a whole lot to put in, and it is really foolish in my opinion to not make money off of it, or what's even worse, subsidized it as a loss leader. When you get these locations that are moving all that fuel and they start going below cost, you just hemorrhage big amounts of money. One thing about our industry is no one really has a buying advantage that is particularly significant for any length of time.
Butler – I think a bigger nightmare is a Carl Bolz, or a Tom Love or a Sheetz or Wawa since they have the same convenience thing. They're tough competition.
Question (from the audience): After all of your experiences, what would you say to your children joining the business today?
Robinson – I'd send them to medical school (laugher). I've obviously screwed up because I have three kids in the business. I don't think that there is any greater opportunity than being in a private family business. The reality is that all family businesses, whether you're a beer distributor or a petroleum marketer or a c-store operator, are dysfunctional. Some are more so than others. And that's okay. With that said, it's a wonderful opportunity, but it requires a significant balancing act. I was very fortunate to go into the family business—I'm third-generation, and I'm certainly not against it. But it's a challenge.
Chronister – I think whether it's our business or any other business, you have your challenges. I have one of my children in the business; I'm very happy with that and I think (they're) happy too. It's an opportunity, and I can't think of anything I’d rather see them doing.
Pester – I think it can make you very proud, but it hasn't happened that way in my family, and I think that all the kids and everybody else are better off because of it (laughter).
Liebowitz – My children are better off having me in the business (laughter that brings the house down and concludes the discussion).