In early March 2013, Hess Corp. announced it would exit the convenience store and gas station industry. At the time, the oil giant had not decided whether it would spin off or sell its retail network, but that did not stop the industry from buzzing about potential buyers.
The usual suspects were named, and Marathon Petroleum Corp.’s (MPC) President and CEO Gary R. Heminger acknowledged during an earnings call later that year that the chain would be a great fit for its subsidiary Speedway LLC. Truer words may never have been spoken.
“In 2013, Hess Corp. was divesting all [its] downstream businesses — refining, terminals, fuels program, retail. It had made it clear it wanted to become an E&P (exploration and production) company. What was known at the time, Hess was looking at spinning the retail into a separate standalone entity. That was the path they were heading down,” recalled Tony Kenney, president of Speedway.
Option No. 2 was a sale. Figuring it ought to take a look and see what a third party would pay for the business, Hess hired an investment bank, which went out to look for interested parties. “Speedway was one company the bank contacted to look at the business, which we did, and the rest as they say is history,” Kenney explained.
The seeds were sown for what would eventually become Speedway’s $2.8-billion acquisition of Hess’ 1,200-plus-store retail network. The deal first made headlines in May 2014 and closed Sept. 30. Not surprisingly, this transaction led Speedway to handily claim the top spot on this year’s Convenience Store News Top 20 Growth Chains annual ranking.
The combination makes sense for several reasons: location, assets and synergies.
“Just look at the geography itself. Speedway is in the nine Midwest states and Hess is up and down the East Coast in 15 states, running from New Hampshire all the way down to Florida. When you put the two chains together, there is virtually no overlap of the business,” said Kenney.
Looking closer at the portfolio, Speedway gained attractive assets. The retailer believes bringing Speedway’s convenience store skills to Hess’ fuel program will be a winning combination.
“There is so much upside inside the convenience store,” Kenney noted. “Hess has done a great job marketing fuels — gasoline and diesel. We recognize there is a big opportunity to bring some of our merchandising and marketing programs to inside the store to create value.”
Add Marathon Petroleum’s expertise to the mix and there’s also some nice synergies on the light product supply side of the business, utilizing or leveraging MPC’s refining capabilities, pipelines, terminals and logistics to supply nearly 3 billion gallons a year to the Hess locations.
The deal also furthers Speedway’s goal to be a $1-billion-a-year-EBITDA business.
NEW KID ON THE BLOCK
Enon, Ohio-based Speedway now has the opportunity to introduce its brand to a whole new customer base on the East Coast. The retailer previously had a presence in the Southeast, a market it exited around 2003 as it turned its focus to the Midwest. So, while it’s been more than a decade since Speedway has been in that region, it does have past experience to draw on. The Northeast, on the other hand, is an entirely brand-new territory for the company.
“We are somewhat familiar with the Southeast. There is nothing down there that would be something unusual that we wouldn’t already know about or be able to apply a lot of the things we are doing in the Speedway core markets,” Kenney said. “The Northeast is really the area of opportunity. We have never been in those states. Clearly, it’s a different type of consumer — driving patterns, shopping behaviors are all a little bit different than maybe what we are accustomed to in the Midwest.”
With that said, he acknowledged Speedway has some learning to do, which it is tackling now. The retailer is spending a lot of time in the Northeast stores, understanding the markets and the consumer behavior in the area. All this is preparing the company to “re-identify” these c-stores and introduce the Speedway brand into the Northeast starting this spring.
“It’s an interesting opportunity. It’s a challenging opportunity. But I think we have a good plan to address that opportunity,” Kenney asserted, pointing out that once you have the basics down in the convenience channel, it shouldn’t matter if you are setting up shop in a new market.
“There are some basic fundamentals in our business. If you get those right, you’re generally going to be a good step along the way to being able to enter new markets,” he said. “Things like paying attention to details that consumers appreciate, such as good customer service and clean stores that are well-lit and safe. In our business, value is a good driver for the type of consumers that shop convenience stores.
“While it’s a new market where we’ve never been before, I think we’ve got a pretty good focus on these fundamentals that drive success in the convenience store business,” he continued. “I think it will go a long way if we get those right and get them in place. Then, we will be a long way down the path of establishing our brand in the Northeast.”
SO FAR, SO GOOD
As with any acquisition, one of the first steps in the process is integration — both at the corporate level and store level. It’s been four months since Speedway officially took ownership of Hess’ retail network and it’s so far, so good, according to Kenney.
On the corporate side, areas such as human resources, benefit programs and payroll are being addressed. In addition, Speedway is lining up consistent contracts for many of the goods and services sold inside the stores in an effort to leverage buying power and synergies across both chains — the legacy Speedway stores and the newly acquired Hess stores.
The company is also progressing with the integration of support services, like information technology, accounting and customer service. “All of those functions corporately are moving along quite nicely,” Kenney noted.
At the store level, much attention has been paid to ensure the integration plan is seamless.
“On the store-level side, the single most important thing we needed to do on Oct. 1 when we took these stores over is to continue to run them the way they have been. Customers were going to show up the next day and we needed to make sure they were all being taken care of,” the president explained. “We were able to accomplish that with very, very few issues at all. Right from the beginning, the operations were running smoothly.”
Speedway is making progress re-identifying the Hess locations, remodeling some locations and taking advantage of merchandise opportunities inside the stores. At the end of January, the retailer had 134 stores out of 1,250 re-identified as Speedway locations.
“We are more than 10 percent on our way. We still have a lot of work to do. We’re going to finish Florida and part of South Carolina by the end of March. Then, we will move up to the Northeast in the spring, summer and fall when the weather is stable up there to do work outside,” Kenney shared. “Ultimately, we will finish up in the Carolinas at the end of 2015 and into 2016. We’ve got a plan and so far, so good.”
MORE THAN A NAME
Re-identifying the stores is more than just changing the banner. Speedway is going into each location and installing a new point-of-sale system, its own back-office system, its inventory management and labor management technology and — most importantly — the technology base for its highly successful Speedy Rewards loyalty program.
“I talk about putting the Speedway name on the store, but really there is much more to it than just the name. In fact, the name and the colors themselves are really the minor part,” Kenney said. “Until they are re-identified Speedway and we really get into the store and put all of our platforms in place, it will still look like a Hess [store] to those customers. Until they are re-identified and we can get in and do some marketing [and] some promotional activity around our loyalty program, it really isn’t going to be any different to those customers.”
As of now, there are no plans to close any of the newly acquired assets. As Kenney said, Speedway is in the business to grow and add stores, not necessarily close them. That being said, when you operate a number of convenience stores, one of the responsibilities you always have is to continually rationalize your portfolio, he acknowledged.
“You’re always looking for underperformers or situations where market or consumer patterns have shifted and a store is no longer profitable, or there is negative cash flow. You are always looking to evaluate those and decide the best course of action. That could be closing or selling certain assets,” he said.
At this point, he believes it’s way too early to make those kinds of decisions about the Hess stores. Speedway is still learning about the assets and wants to give itself the opportunity to get in there with its marketing, merchandising and loyalty programs.
“Maybe it’s a turnaround story with some of these stores that appear to be underperforming, but we want to make sure to give them every chance; that we’re not missing something before we decide to close something,” he said. “One of the attractive features of the Hess stores is they are in great markets. They have great assets and facilities. They have good people running the stores, good locations, good corners. Everything’s right. But if they are underperforming, we want to make sure we’ve got everything right before we decide to close or sell a property.”
While Speedway will certainly be busy with the Hess rebranding this year, it is not the retailer’s sole area of growth. The company continues to invest in its legacy Speedway business from an organic growth standpoint. Even before the Hess pact, it was on its way to a nice growth program with expansion into the Pittsburgh market, as well as Tennessee.
In fact, Speedway added 30 new stores just in its legacy nine states in the Midwest last year and plans for 2015 call for just as many new stores, if not more, in the legacy markets.
“We’ve really got parallel paths here. We’re very focused on what we need to do with Hess to bring that up to where we need to get to [in order] to drive the value for our shareholders,” Kenney concluded. “At the same time, we are not ignoring our Speedway stores in the Midwest. We continue to look for new-build opportunities, we are going to rebuild a number of stores, spend capital on remodeling stores. We are going to continue to drive both pieces in terms of driving overall growth for the company.”
“We still have a lot of work to do. We’re going to finish Florida and part of South Carolina by the end of March. Then, we will move up to the Northeast in the spring, summer and fall. Ultimately, we will finish up in the Carolinas at the end of 2015 and into 2016.”
—Tony Kenney, Speedway LLC
Speedway added 30 new stores just in its legacy nine states in the Midwest last year and plans for 2015 call for just as many new stores, if not more, in the legacy markets.