All In On Gasoline?


For several years, SEI and its publicly held parent company have been on something of a buying spree of gasoline based assets. As far as we know, this trend began in December 2010 with the acquisition of 183 properties from Exxon Mobil Corporation in Florida, followed by entry into the wholesale fuel business with the 2012 acquisition of the assets of TETCO. The next year saw the acquisition of 145 stores and a wholesale fuel dealer business through multiple transactions for just under $150 million. In November 2015, SEI announced the acquisition of retail sites in Florida. Then came the January 2018 blockbuster acquisition of 1,030 Sunoco convenience stores located in 17 states for $3.3 billion in cash, the largest acquisition in the history of the company.

This strategy has very much turned 7-Eleven in the United States into as much a gasoline retailer as a convenience store company. It has made very clear SEI’s intention to grow that portion of the business, and the parent company’s willingness to devote massive amounts of capital to growing the gasoline business. Comparatively, crumbs from the table go to improving the existing franchised stores. According to SEI’s parent company, capital expenditures on existing U.S. stores “and other” as a percentage of total revenue of SEI fell from 2.9 percent in 2016 to 2.25 percent in 2017 and 1.82 percent in 2018.

According to public filings of SEI’s parent company, there were 4,392 gasoline stores in the United States as of March 31, 2019, constituting just under 46 percent of the total. An escalating number of store closures were also reported, rising from 149 stores in its fiscal year ended February 28, 2017, to 251 stores in FY 2018, and 349 in FY 2019, and another 175 are slated for closure in the current fiscal year. If that projection holds true, SEI will have closed 924 stores in the United States over a four-year period. At the same time, there has been increasing turnover of stores in the United States. The number of transfers involving franchisees selling their units, and in many cases leaving the system, has risen steadily, rising from 105 in 2014 to 365 in 2018. On top of that, the blended gross margin of company stores and franchise stores has been on a largely downward trend. The blended gross margin was 36 percent of revenue in 2007 and had fallen to 34.2 percent in 2018. That blended gross margin has fallen over just the past three years from 34.8 percent in 2016, a loss of 6/10ths of 1 percent.

The picture on SEI’s side of the ledger, particularly as it relates to gasoline sales, is much rosier. SEI’s 2011 gasoline revenue was just under $9 billion, but by 2018 it grew to more than double that amount or $18.2 billion. SEI’s gross margin on gasoline rose from $535 million in 2011 to $1.56 billion in 2018, an increase of just about an even $1 billion. Moreover, SEI’s gross margin as a percentage of revenue on gas sales has also increased by impressive amounts over those last seven years. In 2011 its reported gross margin on gasoline was 5.8 percent. In 2018 it was 8.29 percent.

Among the questions every franchisee should be asking are these:

• Why was Sunoco willing to divest itself of such a large portion of its retail gasoline portfolio in the United States, notwithstanding the fact that those gasoline stations typically pump about 1,500 more gallons per day than SEI franchised stores in the United States?

• Did Sunoco think that it was more important to have a guaranteed customer for its wholesale gasoline than it was to be in the retail fuel business?

• Does Sunoco have concerns about the long-term prospects for retail gasoline stations in the United States?

• Does Sunoco know something that SEI doesn’t know but that the franchisees should know before they consider becoming a franchisee of a gasoline store?

There are indications within the industry that the number of gasoline stations in the United States has been in steady decline for years. According to an article on published in 2016, the number of gasoline stations declined by 25 percent between 1994 and 2013. This article suggested that the rising use of natural gas and electricity to power automobiles will further reduce demand for gasoline and thus the viability of the gasoline station.

An article published on on April 4, 2018 suggested that back in 2015, the number of electric vehicle charging stations in Japan surpassed the number of gas stations. The same article suggested that the largest oil companies, such as Shell, believe that gasoline demand will continue to grow in developing countries for some time, even as it shrinks in the so-called wealthy world, meaning the United States and similar economies. He reported that Shell is expanding its global network of gasoline stations in such places as China, India, Indonesia, Russia and Mexico.

Other authors have suggested that the transition to electric vehicles is inevitable and around the corner. National Public Radio, in a broadcast on February 16, 2019, quoted one analyst stating that about a year from now, it will become comparable or cheaper to buy and operate an electric vehicle than an internal combustion vehicle. Another analyst suggested that electric vehicles will also surpass conventional vehicles by 2030.

Self-driving cars are also part of the equation, although a New York Times article published on July 17, 2019 suggested that a pedestrian fatality in Tempe, Arizona has slowed the industry down a bit. Elon Musk of Tesla was quoted as saying that he expects to have as many as 1 million autonomous robo taxis in use by the end of 2020. Some experts are skeptical that the development of self-driving cars will occur that rapidly, but if the future is not here, it’s certainly on our doorstep.

In an article published on Inverse .com on October 15, 2018, entitled, “The End of the Gas Station: How Electric Cars Will Transform the Rest Stop,” the author states that “gas stations are already under enormous pressure to stay relevant,” and cites a Reuters article suggesting that the number of electric vehicles could hit 125 million by the year 2030. States the author, “In short, the gas station’s days are numbered.” Moreover, the author quotes the account manager of an outdoor architecture firm to the effect that gasoline stations will not have an easy time converting to electric charging stations, because those charging stations can be and are being installed in many other locations, including workplaces, parking garages and supermarkets. This means among other things, that any 7-Eleven store in the United States could offer electric charging, not just those that are currently functioning as gasoline stations.

And according to an article published on on November 21, 2018:

“As more electric and autonomous vehicles take to the streets, consumers may soon be able to skip the mundane task of stopping for gas. The disruption of other types of retail, like big department stores, suggests this transition could push the multibillion-dollar market of gas stations and convenience stores towards collapse.”

Moreover, even if all of the 7-Eleven gas stations would eventually face market pressure to convert to providing electrical charging stations or other fuels such as natural gas, and with the assumption that SEI is aware of these trends and that it just might possibly be conducting private internal discussions about the conversion, the economics of any arrangement between the franchisor and the franchisees have not surfaced.

We raise these questions because most certainly they have long-term implications for not only SEI’s sustained and massive investment in gasoline retailing, but also for how the economic model of convenience stores coupled with gasoline stations may face equally massive disruption in the nottoo-distant future. While we have consistently, but without success, attempted to engage SEI in open, transparent and constructive dialogue on a wide range of issues, the future of gasoline retailing cries out for a very high level of communication and partnership with franchisees.