Exxon Mobil gases up with coffee
Oil giant eyes brews to boost profits
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By SUDEEP REDDY The Dallas Morning News - Published: March 20, 2005
DALLAS - Already atop the world oil industry, Exxon Mobil Corp. wants to earn global prominence for an entirely different product: gourmet coffee.
Facing intense competition at gas pumps, the world's largest publicly traded energy company is betting on new brews of coffee to keep customers returning to its convenience stores.
Exxon Mobil's recent investment in its trademark Bengal Traders coffee brand marks the oil industry's latest salvo in a ferocious battle at U.S. gas stations.
With the rapid rise of unbranded retailers and giant discounters such as Wal-Mart Stores Inc., oil companies have found themselves re-evaluating their retail gasoline strategies or getting out altogether.
"We recognize it's a changing marketplace," said Mark Shores, U.S. retail sales director for Exxon Mobil's Fuels Marketing unit. "We have been assessing, how do we survive in this marketplace and continue to enhance shareholder value?"
Unlike the more profitable businesses of drilling for crude oil and refining it into gasoline, selling fuel at the pump typically draws a net profit of a few pennies per gallon.
Gasoline retailers are increasingly squeezed by rising credit card processing fees and - due to rising prices - lower sales of the more profitable premium gasoline.
With gas prices near their all-time highs - now $2 a gallon nationwide, the government said March 7 - analysts say that consumers once again are becoming more sensitive to price and less loyal to their favorite gasoline brands.
Wal-Mart's latest plans to build its own branded gasoline spells even more trouble for traditional gasoline retailers, said Tom Kloza, director of the Oil Price Information Service.
The retail giant, along with other discount clubs and grocery stores, has shaken up the industry over the last decade by capturing an increasing share of the gasoline business using lower-cost gas to drive traffic to its stores.
Oil companies and independent retailers can't simply count on gasoline anymore for their profits, Kloza said.
"You better have a model that gets the customer inside the convenience store," he said.
Discounters such as Wal-Mart and Costco accounted for 9.4 percent of U.S. gasoline sales last year, according to the NPD Group, a market-research firm.
The onslaught has led to a polarization in the retail gasoline market, said David Portalatin, an industry analyst for NPD in Houston.
At one end, major oil companies are concentrating on building brand recognition to protect their position. The other end - selling discount gasoline to drive traffic to stores - shows no sign of losing strength.
"Where you don't want to be is somewhere in the middle," Portalatin said. "Some of those folks that are just left in the middle and haven't figured out who they are yet, are the ones that are suffering the most."
While exiting the retail business, many major oil companies are promoting their brands through independent dealers and other arrangements in which they don't own the retail location.
ChevronTexaco Corp. and Royal Dutch Shell Group are among those with retail stores changing hands in the Dallas area over the last two years.
ConocoPhillips has been exiting the retail business to focus on wholesale marketing. The third-largest U.S. oil company sold many of its corporate-owned gas stations to Lukoil Oil Corp., the Russian giant that's trying to expand globally.
Other foreign-owned players also plan to step up their convenience store efforts.
Alon USA, a unit of Alon Israel Group, plans to expand beyond its west Texas foundation by going from 170 stores to as many as 500 in the coming years.
Alon owns the marketing rights to Fina-branded gasoline in the Southwest and operates as a licensee of 7-Eleven Incbil isn't the first convenience store chain to focus on coffee to draw customers.
Four decades ago, 7-Eleven became the first retailer to sell coffee to go. It has since rolled out its own coffee bars with a variety of flavors.
But through its On the Run and Tiger Market convenience stores, Exxon Mobil has drawn attention in the industry as one of the few big oil companies expanding its retail front.
The company is installing car washes and in-store computer banking terminals to attract new customers.
The investment in new, larger coffee bars - along with new equipment and training programs for store employees - is part of Exxon Mobil's larger effort to expand the convenience store brand with greater profitability.
Exxon Mobil studied coffee drinkers' wishes before rolling out its program last fall, said Shores, the company's retail sales director.
The larger coffee bars, with cups starting at less than $1, feature coffee brewed from top-quality Arabica beans and several flavors that rotate by season.
Coffee sales can have profit margins of 50 percent to 60 percent, better than the 30 percent average for most products in a store, Shores said.
Gross gasoline margins are less than 10 percent, even though gas accounts for two-thirds of store sales, according to industry estimates.
Exxon Mobil says customers are more likely to buy their gasoline from a place where they shop regularly.
In the same way that Wal-Mart attracts in-store shoppers with its gasoline, Exxon Mobil wants its coffee to attract shoppers for gasoline and other convenience store items.
"Coffee customers are loyal customers," Shores said. "If we can win the morning, we can win the day."
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