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The Year in Review

The terrorist attacks of Sept. 11 will always be the event of the year 2001, perhaps the dominant and defining historical event in living memory, outweighing even the attack on Pearl Harbor. Even within the context of the convenience store and petroleum marketing industry, the terrorist attacks tend to dwarf other news.

Without a doubt, the convenience retail business was affected in several ways by the attacks. However, there was other news in 2001. For example, the year saw the continuation of the merger-and-acquisition activity that has been reshaping the industry and virtually every major refiner and traditional convenience store operator across the globe.

Other key events garnered headlines throughout 2001 as well. The first year of the millennium was filled with threats of new tobacco legislation both at the local and national levels, and volatile fuel prices, which began the year in many markets above $2 per gallon, then dropped dramatically in some markets to below $1 by year's end.

The U.S. market, which has long included international players such as Royal Dutch/Shell Group, BP and Petroleos de Venezuela S.A., the national oil company of Venezuela, which owns Citgo Petroleum Corp., now includes a new breed of multinational powerhouses: Russian-based Lukoil, which purchased the Getty brand in the United States; Royal Ahold, the Dutch supermarket giant that jumped into the c-store market in 2000 with the acquisition of the Golden Gallon and Tops Markets chains; and two Middle Eastern refiners that caused a stir in the U.S. market.

Those refiners — Alon Israel Oil Co. Ltd. and Delek Energy Group, Israel's top two oil companies — acquired nearly 400 stores and two refineries in the convenience store and petroleum marketing industry in separate deals. With the acquisition of Odessa, Texas-based Southwest Convenience Stores LLC and its 174 7-Eleven convenience units, Alon USA, a subsidiary of Alon Israel, became the first Middle Eastern player to reach American soil. That distinction was shortlived, however. A month after the March purchase, Delek Energy acquired a 198-store network from Tulsa, Okla.-based Williams Cos. Inc.

Alon had already acquired a one-third interest in Southwest Convenience Stores from Total Fina Elf SA, Europe's third-largest oil company, for $150 million. The acquisition yielded a marketing network of 1,700 Fina-branded units, a refinery in Big Spring, Texas, with a capacity of 60,000 barrels a day and Fina's southwestern pipelines and terminal systems. Then, in March 2001, it secured total control of Southwest Convenience Stores.

By virtue of its acquisition, Alon becomes 7-Eleven's top licensee, a recognition not lost on the Israeli company. The company is pleased with 7-Eleven because of the value and brand recognition it offers, according to Morris. "I expect our relationship to continue to grow as we look for good corners and need areas to build new convenience stores," said Alon USA's CEO Jeff Morris, who formerly served as the vice president of southwest marketing for Fina.

Alon is eager to rapidly consolidate a fragmented market and plans to grow its store count to 500 by 2005, expanding from Southwest Convenience Stores' core markets of Texas and New Mexico into Oklahoma, Kansas, Louisiana, Arizona and Arkansas.

Upon closing the Mapco Express deal in April, Delek Energy boldly predicted a quick-strike growth strategy that could net as many as 300 stores by next summer. Headlining the acquisition team is c-store veteran James Alligood, who guided the Mapco stores as an independent chain, and oversaw them as the retail arm of Williams Cos. "[Delek] is eager to continue expanding its convenience operations and I'm sure there will be some opportunities," he said.

Moving South of the Border

Just one month later, in July, Alimentation Couche-Tard Inc., based in Laval, Quebec crossed the border into the United States with the acquisition of Columbus, Ind.-based Johnson Oil Co. Inc.'s 170 stores. The purchase was the first step in the Canadian company's making good on a longstanding promise to expand into the states. Johnson Oil's Bigfoot Food Stores were purchased for $68.5 million.

The midwestern market has been especially competitive over the past year. Oak Brook, Ill.-based Clark Retail Enterprises Inc., for example, has doubled in size to more than 1,300 stores over the past year. The company added to its portfolio in June with the acquisition of Jacksonville, Ill.-based Wareco Service Inc.

With depressed margins, retailers are looking to drive profits through the economies of scale that come with larger store counts. The bigger the chain, the easier to negotiate distribution deals, reduce purchasing costs and slash training costs. Faced with such realities, small and midsize operators have serious questions to ask themselves. As the trend to acquire more stores to gain greater efficiencies continues, industry consultant Dick Meyer pointed out that chains "must crystallize their strategic direction, which includes a resolution of what they want their core business to be. This needs to be done on a store-by-store basis throughout the entire chain."

That strategy was the impetus for Bartlesville, Okla.-based Phillips Petroleum Co.'s $7-billion acquisition of Old Greenwich, Conn.-based Tosco Corp. The purchase creates the second-largest independent refiner in the country and the fifth-largest convenience store and petroleum retailer with a branded network of 12,400 Phillips 66, Circle K and 76 stores and stations.

The deal was especially sweet for Phillips because there were no requirements for divestiture of assets. Jim Mulva, Phillips' chairman and CEO, said the deal combines "two strong, complementary companies into a significant refining and marketing competitor in the United States." Phillips now owns 10 U.S. refinery systems with a combined capacity of 1.7 million barrels per day. The refining headquarters is in Linden, N.J., with marketing headquarters based in Tempe, Ariz.

In September, Valero Energy Corp. closed on its $6-billion bid to acquire another San Antonio-based refiner, Ultramar Diamond Shamrock Corp. (UDS). Valero, which only recently jumped into the retailing sector in 2000 when it acquired 60 company-owned stores and a jobber network of more than 250 sites from Exxon as part of its merger with Mobil Corp., became one of the dominant convenience store players in the country with more than 2,700 stores. The new organization, which remains under the Valero banner, employs 23,000 people in the U.S. and operates 13 refineries with a total throughput capacity of nearly two million barrels a day.

Merger-and-acquisition activity rolled on at a rapid pace in October as two of the convenience store industry's biggest refiners closed major deals. Texaco Inc., which earlier in the year announced its intent to merge with San Francisco-based Chevron Corp., reached a deal to divest its interests in two convenience store and refinery joint ventures to Shell Oil Co. and Saudi Refining Inc. for about $3.8 billion. The deals paved the way for the completion of Texaco's $38 billion sale to Chevron Corp.

Under the deals, Shell and Saudi Refining Inc. bought Texaco's stake in the joint ventures and assumed responsibility for about $1.7 billion in debt. The deals give Houston-based Shell sole ownership of Equilon Enterprises LLC, which operates about 4,500 Shell stations and 4,500 Texaco stations, primarily in the western United States. The other divestiture would give Shell and Saudi Refining Inc., a subsidiary of Aramco Services Co., equal interest in Motiva Enterprises LLC. Motiva, also formed in 1998, operates mostly in the east and includes nearly 4,800 Shell stores, 8,200 Texaco stores and four refineries.

But the deal will have a significant impact on the industry because Shell intends to drop the Texaco marketing brand from gas stations and convenience stores in 2002. Gail Schutz, a spokesperson for the Shell and Texaco brands, told Convenience Store News Shell expects to rebrand the approximately 13,000 stores operated by the Houston-based joint venture companies by 2004.

Shell's announcement was met with disappointment by independent Texaco marketers, who had been trying in earnest to expand their businesses as rumors of this move swirled throughout the industry after Chevron made its bid to acquire Texaco.

Although the rebranding will unquestionably increase Shell's visibility in the United States, analysts also questioned the move. "They're discarding a brand that has a certain following, and they're going to have to handle this very delicately to avoid alienating the people who are Texaco loyalists," said Fadel Gheit, senior energy analyst for New York-based Fahnestock & Co. "Even if you only lose five percent of those customers, that can still be significant in terms of local market share."

Picking Up the Pieces

While analysts mulled Shell's decision globally, the nation held its breath as the Sept. 11 terror attacks unfolded. Collectively, retail chain after retail chain extended a helping hand to those in need in New York, Washington and Pennsylvania by raising more than $50 million in aid for various funds, such as American Red Cross Disaster Relief Fund and the United Way's Sept. 11 fund.

"Our sales associates are on the front line with U.S. citizens every day — they feel the pain, hear the stories, and almost all know somebody impacted in some way or another," said Brandon Barnholt, CEO of Clark Retail Enterprises. "Our corporate employees are busy trying to keep gasoline in the tanks, convenience products on the shelf and generally prepare for the uncertainty ahead. The only thing I am sure of today is that we will get through this and be a stronger nation because of it. Our foundation is too strong and our people too great to allow for any other outcome. Next year will be a year to heal these deep wounds."
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