Issues & Leaders With Don Longo: Tony Kenney

ENON, Ohio -- 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, started in 2010, Convenience Store News Editor-in-Chief Don Longo explores the most important trends and issues facing the convenience store industry.

This month, Longo interviews Tony Kenney, president of Speedway LLC, the convenience retail division of Marathon Petroleum Corp. (MPC), which was spun off from its parent company Marathon Oil Corp. in July.

With approximately 1,375 convenience stores in seven Midwest states, Speedway is practically a brand-new company today compared to what it was when it was a part of Marathon Oil, which retained all the former company's upstream operations. Now, its nearly 17,000 employees are part of MPC, which also includes the refinery operations, pipelines and transportation divisions.

"As a bigger part of a new public company, Speedway's results are now reported quarterly, unlike when we were a part of Marathon Oil," Kenney said in a sit-down interview at the company's headquarters in central Ohio. "There's an excitement to that and a challenge to deliver on our promises."

Speaking about those results, Kenney said he's extremely happy with its performance over the first two quarters since the spinoff. As reported by CSNews Online, Speedway earned $73 million in its 2011 fourth quarter, an increase from $65 million the previous year.

"Our message to shareholders is that we are focused on growing Speedway both organically and through acquisition," said Kenney, who noted that just before the spinoff last year, the company bought 23 Gas City stores in Chicago and is currently due to close soon on the acquisition of 88 GasAmerica stores in Indiana and Ohio. He said future acquisitions will be both within current markets and outside states adjacent to Speedway's existing market territory.

The chief executive pointed out that MPC is different from most other major oil companies in that it has decided to stay committed to company-owned and -operated retail stores. "Our model is a little different. We've set up a separate brand -- Speedway -- to differentiate us from the Marathon brand, but we still leverage the synergies on the refining and distribution side with MPC," he said.

Active in several industry events, Kenney is a member of the NACS board of directors.

Longo: What do you consider to be the most important trends influencing retailing today?
Kenney: The consumer continues to change and they are becoming much more sophisticated in terms of how you can access and communicate with them via technology. Mobile marketing via your website, through smartphones and Facebook and Twitter is growing. People are seeking out offers by location and this is going to be a growing opportunity in our business.

It's extremely important for a retailer to have the ability to make people aware of your offers at your locations. It's also very important to leverage connections with your vendor partners. This is a major point of differentiation for us. With our Speedy Rewards loyalty program, we have a unique way of working with vendor partners and conveniently providing value to consumers.

Social media is potentially very significant for Speedway. We are always trying to increase our reach to millennials, who are the biggest users of this mobile and social media technology, and a demographic that is underdeveloped in our stores.

Speedway grew up selling gas and cigarettes and is now evolving into foodservice. Foodservice is the fastest-growing category in our stores, but a lot of people still don't know they can get good quality food and a great selection of beverages at our stores. Technology allows us to create a dialog about food and other exciting things going on at Speedway.

We know, by looking at the behavior of our Speedy Rewards members, that targeted offers will get them from the island to the store. Smartphones and mobile payment platforms allow us one-to-one communication that is superior to the traditional pump toppers, window signs, etc.

Longo: Please comment on the most significant developments relating to the convenience store industry and how these specifically impact your company.
Kenney: Traditionally, the two largest revenue areas in our stores are fuel and cigarettes. Look at the trend: demand is flat to down in both categories, and I believe that trend is likely to prevail into the future as far as I can see. So, the question is: how do you continually grow the top line in the face of these demand pressures?

I see this as our challenge. As we continue to evolve into foodservice, we must reposition ourselves in a manner that appeals to the consumer and is appropriate to our product mix. Foodservice represents significant upside for Speedway. We've also had growth around the cold vault with products like specialty teas, waters, energy drinks and low-calorie drinks. General merchandise also represents nice opportunities for us.

We've also benefitted from a lot of innovation by our CPG (consumer packaged goods) partners who have introduced new products in our channel. The fact that all our stores are company-owned and -operated is another strategic advantage for Speedway. When a CPG company wants to test something, we can do it immediately in all of our stores in a consistent manner. I want Speedway to remain at the top of the list when suppliers want to introduce new products.

Longo: What do you see as the biggest challenges for Speedway in the year ahead? And the biggest opportunities?
Kenney: One of our biggest challenges is going to be the impact of high fuel prices on our customers. This is going to continue to put a lot of pressure on their spending and we need to see more certainty around fuel prices.

Another challenge that we continue to do battle against is credit card fees, which continue to represent a disproportional cost in our business. When you deal with customers who only have so much income to spend, the rising credit card fees put even more pressure on our ability to keep prices down as we try to present a value to our customers. It is certainly an impediment to our vision to be "the customers' first choice for value and convenience."

Longo: The challenge to build closer connections with shoppers is a mandate before all retailers today. How have you traditionally marketed your offerings to consumers and what's different about how you do it now?
Kenney: We're just getting into mobile marketing and social media, but I think it can be the next game-changer. We see three legs supporting this marketing opportunity. The smartphone enables communication, mobile payments and electronic coupons. Social media enables retailers to create more of a two-way dialog with their fans. And our Speedy Rewards loyalty program provides us with purchasing behavior for 3.3 million active rewards members that we can use to make relevant offers. We are looking at putting these elements together in a meaningful way so that our active customers will tell their friends about something nice that happened to them at Speedway. I want to use a customer to create a customer.

Longo: Please discuss the role manufacturers play in today's convenience store industry. How has the retailer-supplier relationship evolved over the past five years? How is it likely to change in the next five years?
Kenney: The partnerships Speedway has with our CPG (consumer packaged goods) partners are going to continue to play a large role in furthering sales opportunities inside our stores. They will help us replace the slower growth in fuel and tobacco by developing and introducing new products for the cold vault, in candy and snacks, in foodservice, etc. For the future, we want to build even stronger partnerships with CPG partners.

We rely on the equity in great brands in conjunction with their innovation, our Speedy Rewards program and exceptional customer service to present a very compelling value proposition to our customers. We don't have a big private label program. We have to continue to demonstrate our commitment to handle their brands, because working cooperatively with our supplier partners has far greater growth potential than we could achieve on our own.

Retailer-supplier relationships in the future will likely be centered even more around technology and data. Our Speedy Rewards program provides us and our partners the customer purchasing information we both need to make better business decisions.

Beyond what goes on in the store, I continue to see supply chain improvement opportunities. Eby-Brown is our wholesale supplier, but we still have many DSD (direct-store delivery) suppliers. We are working with all of them on a sophisticated inventory management system that lets us electronically create orders ourselves. If we can push an order to the supplier before the truck leaves, we can have the items we need to be in stock to satisfy our customers with products they want. Stores at the end of the truck's route don't have to settle for whatever products are left in the truck anymore. The stores get the products that they really need. We're in the process of doing this with several DSD suppliers already.

Our performance has improved significantly as we've been able to create specific orders for each store, while at the same time, reducing check-in time at the store, which allows the store manager to spend more time with customers. Anytime we can devote more labor to taking care of the customer, I think it's a home run.

Longo: Switching gears, what are the foremost non-industry specific retailing issues that are on your mind?
Kenney: I'm worried about the fiscal policies of this [government] Administration. I'm worried about the huge amount of debt that the U.S. continues to build and the effect this will have on the GDP (gross domestic product). Without jobs, without disposable income, consumers are going to be under enormous pressure.

I'm looking for a federal policy that is more business-friendly than it has been. The lack of a coherent energy policy, for example, has created tremendous uncertainty around fuel and energy for this country and that concerns me.

On the employee side, I think healthcare is a very important issue. As you know, we are in a labor-intensive industry. Obamacare and what costs may be involved are yet to be determined, but as various elements of the law go into effect, they are going to have impact on our costs.

Healthcare, fuels legislation, government regulations -- like FDA (Food and Drug Administration) and tobacco, and food menu labeling and minimum wage laws on both the federal and state level -- all add uncertainty for business. I think these trends will accelerate the likelihood for more consolidation of the convenience store industry. There is a separation going on between the top-tier companies and the third- and fourth-quartile chains.