Issues & Leaders With Don Longo: Jeff Morris

Who are the authorities on the future of the convenience store industry and what can you learn from them? In this series of exclusive one-on-one interviews with c-store industry leaders, Convenience Store News Editor-in-Chief Don Longo explores the most important trends and issues facing the convenience store industry.

This month, Longo interviews Jeff Morris, CEO of Dallas-based Alon USA, a major refiner and marketer of petroleum products. Its wholly owned subsidiary, Southwest Convenience Stores, is the largest 7-Eleven licensee in the U.S., with over 300 stores in Texas and New Mexico.

Morris is a founding member of CSNews' Industry Forecast Council, a frequent industry speaker on economic and oil industry issues, and a huge Jimmy Buffet fan.

Longo: What do you consider to be the most important trends influencing retailing today?

Morris: I still think the big trend to watch is jobs. If people don't have jobs they can't buy stuff. If they don't have jobs, they aren't driving to work and that hurts convenience stores. Employment is a little better now than a year ago, but far below what we've experienced in the past. I don't see the economy coming all the way back until we get job growth. Do I see the light at the end of the tunnel? I think it could take another couple of years before we recover. In our industry, 2010 was better than 2009, and 2011 will be a little better than 2010, but improvement will be slow, gradual and arduous.

Longo: Please comment on the most significant developments relating to the convenience store industry and how these specifically impact Alon USA?

Morris: The big trendline in the industry is still foodservice. If you look at the history of our industry, we started as mini-markets and sold general store goods. Then, 30 or 40 years ago, we transitioned to fuels, and that was great for the industry. Now, we've been in this transition to foodservice for a decade and still have a long way to go. Margins on fuel and other high volume products we sell are not high enough so we've had to move into higher-margin areas like single-serve beverages, foodservice and candy. In our industry, there are retailers ahead of the curve in foodservice, like Sheetz and Wawa. There are middle range players like 7-Eleven and QuikTrip, and there are companies whose foodservice is still developing. Then, there is a very large segment, especially among single-store operators, who are still trying to figure out what to do, but they are going to have to figure it out if they want to survive. Foodservice is our industry's new high margin product and we have to figure out how to do it right. The old standbys of fuel, beer and cigarettes are all mature categories.

Longo: As a major oil refiner, what are your thoughts about current fuel prices and how much higher they are likely to go this year and why?

Morris: Here's my opinion based on years of observation. Ask your readers what they think the value of the dollar will be. Is it going to be stronger, or weaker? If the dollar is going to weaken, then gas will be more expensive. If the dollar's value strengthens, then gas will become less expensive. I've found that there is a higher correlation between the value of the U.S. dollar and crude oil prices than there is for any other variable. Why is that? Because supply and demand are not good predictors any more. Crude oil has become a financial instrument. Every day one billion barrels of crude are traded on the NYMEX. Every barrel in the U.S. is traded over 50 times per day. Supply and demand don't count as much anymore.

Longo: As the largest 7-Eleven licensee in the U.S., your convenience store division operates right in the shadow of 7-Eleven's corporate headquarters. How does that impact your chain's operations?

Morris: Yes, we have an advantage being located in Dallas. The biggest advantage is in margin inside the store. I believe we get a 2 to 3 percent lift because of the value of the 7-Eleven brand in consumers' minds. Over the years, we have bought other chains and seen a 10 to 15 percent increase in volume inside the store after putting the 7-Eleven name up. We've also been able to sell some of the 7-Eleven private label products. As a licensee, we can pick and choose the ones that sell best for us. Being the size we are with 7-Eleven, we have economies of scale, distribution systems and more leverage with the big suppliers. The chains that have the most difficult challenge are the mid-size ones -- 30-to-50 stores. That doesn't mean they can't be successful. It's just really, really hard, and increasing health care costs will make it even harder for them.

Longo: Customers' needs change constantly. What changes have you made at Southwest Convenience Stores to meet customers' needs? How are these changes expressed in your newer store formats?

Morris: We've had a really good past two years. Under Kyle McKeen, who heads our convenience store business, we've seen outside sales grow 15 percent each year while holding margins steady. Inside sales were up 3 percent each year with an increase of 1 percent in margin. We've done it through a focus on better execution, having a clean and inviting store with a clean, well-lit parking lot and welcoming clerks. It's really all about the execution.

Longo: The challenge to build closer connections with shoppers is a mandate before all retailers today. How have you traditionally marketed your company's offerings to consumers and what's different about how you do it now?

Morris: We're still interested in RFID (radio frequency identification) technologies, and we've used texting to reach customers with mobile phone coupons. We're also experimenting with social media networks.

Longo: Please discuss the role manufacturers play in today's convenience store industry and how has the retailer-supplier relationship evolved over the past five years? How is it likely to change in the next five years?

Morris: I'm very optimistic about convenient retailing and suppliers are recognizing that our segment is more resilient than any other retail segment. We need to use that leverage. Some of the big chains have put in their own distribution systems and created more competitive pressure for distributors. The people who are doing foodservice well, for example, are doing their own distribution. The distributors in our business may be under the greatest pressure of anybody. They will have to adjust or more retailers will do it themselves.

Longo: Switching gears, what are the foremost non-industry specific retailing issues that are on your mind?

Morris: This whole swipe fee reform, the cost of credit and banking regulations is going to be real important to us over the next couple of years. There has to be a rebalancing between the credit issuers and the credit users. As these issues play out over the next three to five years, retailers need to remain engaged because the future of transaction fee reform will have a huge impact on us.