PC&F's Next Step

TWO YEARS AFTER ACQUIRING ALL OF CONOCOPHILLIPS' U.S. RETAIL MARKETING ASSETS, PACIFIC CONVENIENCE & FUELS REVAMPS TO APPEAL TO A MUCH WIDER DEMOGRAPHIC

Ask Sam Hirbod, president and CEO of Pacific Convenience & Fuels LLC, who the biggest convenience store operator in the United States is, and he won't say 7-Eleven.

Instead his response is Starbucks, and that's because while c-stores have focused on meeting the needs of Bubba, Starbucks has gone and captured all the other demographics, he said.

“When people disagree with me that Starbucks is a c-store, I say to them, ‘Tell me something Starbucks carries that we don't.’ There isn't anything,” he said. “Why do they want to be on the best corners like we do? What they deliver is identical to what our customers want. And why is it that our industry cannot offer the quality and consistency of product Starbucks does?”

The reason, according to Hirbod, is because the convenience industry isn't trying hard enough to appeal to the Starbucks customer. But he and his team intend to change that.

Two years after acquiring and integrating all of ConocoPhillips' U.S. retail marketing assets, Pleasanton, Calif.-based Pacific Convenience & Fuels (PC&F) is revamping its stores so they have a look and feel, as well as a merchandise mix, that appeals to a much wider demographic.

“We're starting to see the mix change. Whenever we do a test of our new concepts, we see the customer base grow. So, we know it's welcomed by our customers,” Hirbod said.

To get to this point, the company spent the last two years focused on the integration, optimization and rationalization of the assets it acquired in January 2009. At the start of 2011, Pacific Convenience & Fuels had 520 locations — 250 of which were company-operated; 75 feeoperated; and the rest dealer-oper-ated. The retailer, which primarily operates in southern and northern California, Oregon, Dallas, Denver and Washington, is in the process of divesting 94 stores and/ or vacant sites that no longer fit its long-term goals.

When PC&F took over, the in-store margin at the ConocoPhillips stores was less than 24 percent — the lowest of any national chain. Under PC&F's guidance, margin was up nearly six points after the first year. Today, Hirbod said it's increased nearly eight points, while retaining volumes. The gains have been made through procurement, renegotiating supply contracts and rebates, SKU rationalization and optimization, and retooling the product departments in the stores.

The company continues to “refresh” the acquired locations. These refreshes are aimed at transforming the former ConocoPhillips stores through aesthetic and product changes, and ensuring the same high standards are applied throughout the entire PC&F retail network.

To date, about 80 percent of the stores have been refreshed. While Hirbod's original target was to have all of them completed by the end of 2010, he's now anticipating being done this June. “The reason we took our time was because we wanted to make sure we captured all of our customers' needs for the future,” he explained.

Also, after doing some deeper dives into its store-level needs, the company realized it had to refresh its car washes as well. As of this January, close to 50 of its 110 car washes were completed. In some cases, PC&F demolished the old car wash and put up a new one.

Now that the first phase of his plan is nearly accomplished, Hirbod is wasting no time moving onto the next step, which he describes as “implementing our full marketing tactics and gaining the scalability of having the right products in the right markets.”

To guide this new direction, PC&F added a director of marketing to its executive team. Pervez Pir, who joined the company in January, is the former executive vice president of Famima!!, the California c-store chain from Japan's FamilyMart. For years, he was also a merchandise manager for fresh foods at 7-Eleven. “[Pervez] has a fast, deep knowledge of the direction c-stores have to go in, and he comes from a company that is used to taking risks,” noted Hirbod.

Pir believes the future of convenience stores — and the future of PC&F — is in fresh foods.

“I am passionate about fresh foods. I have seen [the potential] at Famima!! where fresh foods were 40 percent of sales,” he said. “I truly believe the c-store customer is not happy with what they see today. They've just accepted what there is, because that's all they know.”

GETTING AWAY FROM THE ‘ME TOO’ MODEL

Where Pacific Convenience & Fuels' stores excel today is in delivering solid execution and excellent customer service, according to Pir. Where they lack, though, is in innovation. “Right now, they look like a 'me too' to everything else. Customers are coming in because it's convenient, but they don't see it as a destination for unique items,” he said.

One of the key focuses of the company's new marketing plan is to differentiate and broaden the product assortment in its stores not only through fresh foods, but also greater variety in its center-store offering. Recent additions include better-for-you items such as wasabi peas, edamame and an assortment of dried fruit snacks that were being sold in schools. Hi-Chew, a fruit-flavored chewy Japanese candy, can now be found in the candy section, while in the coolers, there are aloe drinks, superfruit beverages, coconut waters and sweet tea.

“It's going around section by section, and expanding somebody's horizons,” Pir explained.

As part of this process, Hirbod said they're revisiting all of the major in-store categories and viewing them through the lens of customers' current needs and potential needs, while also analyzing the contribution of each category by the square footage it occupies.

“Do we really need 88 SKUs of candy bars?” the CEO said, noting the type of questions they're asking. “Everything is up for question. There is nothing that's sacred anymore.”

On the fresh foods side, Pir said PC&F has been falling into the same “me too” trap. Now, most stores use their cooler doors to hold wholesaler-delivered Deli Express sandwiches, and they have freeze-and-thaw sandwiches in a warmer. They don't offer any hot foods program.

About 10 to 15 stores feature a standalone deli case, but these are filled with the same wholesaler-delivered sandwiches — not fresh food that comes in daily from a commissary, said Pir.

“In order to exceed expectations, we have to first get in the game,” he noted.

To start, Pir plans to implement a true fresh food model that involves commissaries, bakeries, daily delivery, etc. The marketing director envisions every PC&F location having a standalone deli case positioned at the front of the store, as well as gondolas with wheels so employees can move product around to target different dayparts — for instance, morning fruit and evening wine. Stores also will be equipped with a MerryChef oven where they can prepare hot snack foods, such as chicken nuggets, buffalo wings and mozzarella sticks.

“We will be looking region by region and testing different programs because the demographics of each are so different. If I did a mirror image, I think it would fail miserably,” Pir said, noting the biggest challenge will be finding the right partners in each of its five operating states.

He hopes to start a 20-store test by this summer to capture the peak selling season.

At the same time, PC&F will be enhancing its coffee program — something for which Starbucks is well known. Although there are limitations, given that the majority of PC&F's company-operated stores (222) are branded Circle K, the company plans to tweak its existing coffee program to ensure it is meeting the needs of the full spectrum of customers.

“The needs and demands in a c-store are much wider than at a Starbucks,” Hirbod said. “We're not going to leave anyone behind. We want to show that we're committed to coffee.”

In the few months he's been with the company, Pir said he often hears from customers, “Your coffee is OK.” Such a statement means there's definitely room for improvement.

What the stores offer now across the board is attracting 70 percent male shoppers vs. 30 percent female shoppers. While PC&F is being cautious not to lose its existing base, the executives said there's a demographic mix that's not coming to the stores today, which they must tap.

The new marketing plan is aimed specifically at Generation Y and women.

“They have the money to spend,” said Pir.

He believes the key to attracting Gen Y is to give them unique items they can make their own. They're not stuck on name brands or labels, and instead like to experiment with new things. Meanwhile, females will spend the money if the quality of product is good. Both groups want to shop convenience stores more often, but just aren't getting enough reasons to do so.

“You have to make the customer a believer,” Pir added.

GETTING AWAY FROM THE SERVICE STATION FEEL

The saying, “seeing is believing,” certainly applies to Pacific Convenience & Fuels' new strategy.

As Hirbod noted, a key factor in the company's success will be making sure the common Mr. and Mrs. Jones feel comfortable walking into one of its locations and buying fresh goods without thinking, “I am buying it at a gas station.” This is why the CEO said they don't want to throw fresh foods into a box that looks and feels like a service station.

The retailer recently unveiled a new prototype that features more neutral colors, cleaner graphics and “fresh” imagery — for instance, photos of fresh foods adorn the walls as opposed to pictures of soda pop. As of press time, the first of these ground-up locations was to open in April in Northern California, with a second expected to open in June in Colorado.

Unlike most of the company's existing store base, these new locations are not opening as Circle K stores and instead are sporting a new proprietary brand, “My Goods Modern Market.” Pacific Convenience & Fuels plans to use these stores to test out new concepts.

While the new prototype stores are better, Pir said they're not fully where they need to be yet. But he added, it's only a matter of time until all of their marketing and merchandising plans are fully implemented and the stores reach the next level. Just how much time?

“If you ask me right now how long this will take, I couldn't tell you. It might take 10 years, or it might take two years,” Pir said. “We'll be testing and fine-tuning until it works.”

To read how PC&F is managing these changes on its front lines, go to the Special Fetaures section of www.csnews.com.

Readying for More Growth

Pacific Convenience & Fuels recently put 94 sites up for sale, but President and CEO Sam Hirbod said that certainly doesn't mean the company isn't interested in growing.

“We knew from day one that we would be divesting these sites,” he said of the properties, which are spread across 13 states and include a mix of sites with convenience stores and fueling stations, closed sites with fueling capacity and vacant land banks. “They're great assets. It's not like they're bad assets. They just don't fit our core business for one reason or another.”

By rationalizing its portfolio, Hirbod said the company is also able to undergo a recapitalization. The remaining sites “have really strong averages, which positions the company so we can recapitalize and take advantage of today's financing markets and rates,” he explained.

In terms of growth, the company is pursuing both acquisitions and new construction.

Pacific Convenience & Fuels is working to acquire two “major portfolios,” which Hirbod said will “add substantially” to its store count. While the chief exec couldn't release many details, he did reveal that both portfolios are in major metropolitan areas, and at least one is in the West. “They include some major metro areas that we're already in, as well as some that we're not in.”

At the same time, plans for new construction call for two to four ground-up locations to be built each year. The company also continues to convert service bay-only locations to full-scale convenience stores. Five conversions were completed last year, according to Hirbod.

When asked if there's an ideal store count he hopes to attain, Hirbod said the platform they've put in place is strong enough to leverage its management and back-office system for up to 1,000 sites. “We're really a formula-based company, so we will be getting ourselves ready for opportunities and continue to bolster our management team and our systems, so when there are opportunities, we can execute efficiently and integrate efficiently,” he concluded.