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On an aggressively sunny day in mid-October, a local radio station team is setting up for a live broadcast from the reopening of a Calgary gas station. As news events go, this might rank pretty low on the buzz scale, but it’s a big deal for Jeff French. Parkland Fuel’s vice-president of network development and retail programs paces the store, making chit-chat with the employees operating a spin-the-wheel game for gasoline discounts. This is one of a handful of stations the company has in its hometown, he notes—a surprising fact, given that Parkland runs the largest fuelling network in the country.

The station used to be a Fas Gas Plus—Parkland’s original brand and still its largest in Alberta—but the site was dated, with just four gas pumps, no at-pump payment, no canopy and a shabby convenience store. You still find these old-school service stations in small towns and along secondary highways, with sun-faded posters covering the windows and coffee congealing into bitter mud inside Bunn carafes. But a wave of transformation is sweeping the business, turning bedraggled mom-and-pop operations into sophisticated retail outlets run by national chains.

Parkland decided to transform this location into a higher-end station, so “we took it down to the dirt,” says French. The rebuild includes an On the Run store, the convenience banner the company has been rolling out across Canada (it’s called Marché Express in Quebec). One-fifth bigger than the previous outlet and housing an A&W restaurant, the store has floor-to-ceiling windows that let customers at the pumps peek at what French calls “the experience inside.” A big-screen TV above the front counter greets customers with promotions. A Van Houtte coffee bar takes up most of one wall, next to elaborate milkshake and slushie stations; another wall is lined with 10 drink fridges, one filled entirely with myriad varieties of bottled water.

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It’s a big transformation, but in a few more years, this gas station may be downright unrecognizable, offering prepared meals, serving as a courier package drop-off depot, sending trucks to fill your car in your driveway, running vehicle diagnostics while you fuel up. “We know the customer is time-starved,” says French, “so if we can allow them to do two or three things in one spot, that’s our goal.”

Over the past decade, Parkland Fuel Corp. has quietly become a gas supply giant in North America. It is also Canada’s second-largest operator of convenience stores and gaining fast on the leader, Quebec-based Alimentation Couche-Tard. It has a market cap above $6 billion and employs 4,500 people across 25 countries (23 of which are in the Caribbean). Some 85% of Canadians live within 15 minutes of a Parkland gas station—but most would draw a blank at hearing the company’s name. “Our strategy has been to build up the brands and put Parkland DNA behind them,” says CEO Bob Espey.

The brands are certainly familiar. In Eastern Canada, there is Pioneer, Ultramar and Esso. In the west, more Esso, plus Chevron and Fas Gas Plus. The company now operates more than 1,860 gas stations coast to coast and is expanding rapidly in the U.S., where it currently has 285 sites. But its key advantage—that “Parkland DNA” Espey refers to—is a scrupulously fine-tuned supply infrastructure that has helped the company achieve 15 consecutive quarters of same-store sale increases in the notoriously low-margin gasoline retail business.

Still, is that enough to withstand a looming industry-wide decline? Amid the rise of electric cars, car sharing and autonomous vehicles likely to be refuelled in special parking areas, as many as four out of five gas stations may be unprofitable within 15 years, according to a 2019 Boston Consulting Group report, ominously titled, “Is There a Future for Service Stations?” For companies like Parkland, convenience store revenues will be essential to offset declining sales at the pumps. “Retail is critical to their long-term success,” says Steve Hansen, an equity analyst with Raymond James in Vancouver. “It will become a bigger piece of the story.”

Downtown Calgary is not a happy place these days. The unrelenting oil industry slump makes the city feel ghostly—on a weekday afternoon, the streets are almost devoid of cars or people—and Encana’s Bow tower only serves as a reminder of that company’s pending move stateside.

Amid the gloom, Parkland is a ray of corporate sunshine. The firm recently occupied a five-storey downtown space (designed by the same firm that created Google Canada’s Toronto headquarters) filled with bright colours, gadgetry and funky furniture. Lest a visitor think they have stumbled into a well-heeled tech startup, the employee cafeteria mimics an On the Run store and serves as an informal test lab for new products and retail concepts. As PR specialist Leroy McKinnon leads a tour, he points out the airy layout and dearth of offices. “Bob is really big on open-concept,” he says.

That would be Bob Espey (always Bob, never Robert). With a self-deprecating manner and quiet voice, he has a studiously low-key presence; purple-framed glasses are the only soupçon of flash. His spiky grey hair looks like a slightly overgrown buzz cut (he’s a former naval officer). To the analysts who track the company, Espey is a star. Since he took over as CEO in May 2011, Parkland has delivered 496% in shareholder returns, and its stock price has risen by 286%. “Bob is a visionary,” says David Newman of Desjardins Capital Markets. “No one else is doing what they’re doing in terms of distribution.”

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The CEO, however, has no pretensions of being a seer. Asked if he came in with a grand plan to build the nation’s leading gasoline supplier, Espey chuckles softly: “No way.” In fact, he was largely a novice to Parkland’s industry. He had spent a decade as a management consultant, bouncing around between the U.K., the U.S. and Canada. He had worked for everyone from a nanotech startup to a die-casting company. When the latter was sold, one of Parkland’s board members approached him to run the firm’s retail operations.

Founded in Red Deer, Alta. in the 1960s as a cattle feedlot, the business was acquired in 1975 by a pair of former gas station owners who pivoted the publicly listed company to gasoline retail. When Espey came aboard, Parkland had $78 million in annual EBITDA, with a sizable retail network in Alberta and Saskatchewan, and footholds in Manitoba and Ontario. He saw a wide-open window of opportunity.

The vast integrated oil companies that extracted, processed and sold gas directly to consumers were increasingly getting out of the fiddly retail part of the business. “Integrateds are good at global processes, not at figuring out what the local consumer wants,” says Espey. (In the 1980s, Parkland briefly had its own oil development and refining arm, which proved to be a lesson about lack of scale. “For a short period, we were the smallest integrated oil company probably on the planet,” says Espey with a laugh.) Meanwhile, many independent gas station operators were facing succession issues, as children showed little interest in their parents’ stodgy businesses. Parkland, one of those independents, already had a strong retail base and stable cash flow, and was rapidly improving its logistics and supply network. It was in a great position to serve as a consolidator of smaller chains.

So Espey formed a team of former investment bankers and private-equity pros to hunt down potential targets. The first major deal was with Pioneer Energy, which Parkland bought from the Hogarth family in Burlington, Ont., in 2015—a complex transaction involving almost 400 service stations, largely in Ontario. The following year, the company spent nearly $1 billion on a portfolio of gas stations, mainly in Quebec and Atlantic Canada, being sold by an offshoot of refiner Valero Energy. The deal included the Ultramar chain of 490 retail locations and 72 so-called “cardlocks,” where trucks and other large vehicles are fueled up. A few months earlier, Parkland had taken the On the Run convenience store network from Imperial Oil, along with 17 Esso gas stops. Within six years of assuming the CEO role, Espey would triple Parkland’s service station business to more than 1,500 sites.

The the company’s biggest deal to date came in 2017: the $1.5-billion acquisition of Chevron’s Canadian assets. Parkland had been courting the purchase for years; aside from gas stations in B.C., the oil giant had few other retail operations in Canada. “Every time we met with senior management in California, we said, ‘Any time you want to sell the business, give us a call,’” says Espey. That call came in 2014, with a plunge in the price of crude. It took until October 2017 to close a series of deals, which included a refinery in Burnaby that largely serves the B.C. station network. By mid-2018, Parkland had completed almost 30 acquisitions valued at about $4 billion over the previous decade, according to estimates by Tyler Reardon, an analyst with Peters & Co.

While gas stations might be the most visible of Parkland’s operations, retail is just one of three divisions. The commercial arm, which supplies diesel and propane to marinas, airports and other industrial clients, is another. But it’s the wholesale supply division, and its elaborate logistics system, that Espey is most proud of, calling it Parkland’s “core competency.”

The CEO points out that much of Canada’s petroleum distribution infrastructure—namely, pipelines and terminals—was installed in the 1950s. In southern Ontario, for example, a fuel truck must weave through downtown Toronto to reach the terminals where it can load up with gasoline. “That’s so inefficient!” he says. So Parkland put facilities in the exurban cities of Hamilton and Milton, where fuel brought in by train could simply be loaded directly into the truck.

Espey admits he initially underestimated how big this supply advantage would be. When Parkland bought Pioneer, it purchased a company with $55 million in EBITDA but that quickly reached $75 million—largely due to synergies. “We tend to buy better and have better logistics than others,” says Espey, striking an unusually boastful note. “We call it the ‘no-brainer synergy.’” The supply system is underpinned by a logistics group Espey terms “the engine room of the business.” Using sophisticated algorithms and optimization software, the team buys fuel from every refiner in Canada and most in the U.S., and then moves it around by rail, truck and ship. This ability to buy at the best price is a key reason for Parkland’s steady organic growth of 3% to 5%, says Newman. “They have the scale, and pennies here and there add up to millions of dollars.”

As consolidation opportunities in Canada began to thin, in 2016 the company took this approach stateside. The U.S. market is much more fragmented: According to NACS, a convenience and fuel retailer association, about 60% of American convenience outlets that also offered fuel in 2018 were single-store operators, and these stores sold about 80% of all fuel purchased in the country. Parkland has completed six major acquisitions there in the past two years, mainly in the Midwest, and Espey sees “a good pipeline” of future targets—the company’s current market share in the Americas is just 1%.

This regional approach is also evident in the firm’s early-2019 acquisition of Sol Investment Ltd., the largest independent petroleum supplier in the Caribbean. The purchase brought Parkland into 23 markets. It quickly reduced supply costs by sending ships carrying fuel on milk runs around the islands rather than having them go back and forth to Texas refineries on the Gulf of Mexico. Shortly after, Parkland bought Miami-based Tropic Oil to serve as a new regional centre. As Espey points out, “In Florida, there are no pipelines, and we have synergies with supply in the Caribbean via shipping.” Ergo, another no-brainer market ripe for Parkland’s efficiency machine.

While devising logistics that send petroleum across vast distances at the lowest cost may set Espey’s eyes a-twinkle, getting consumers to buy it is a different challenge. Retail now represents a significant portion of Parkland’s global revenue and roughly 30% of its cash flow—and it isn’t Espey’s forte.

When he joined the company, the CEO asked a longtime Parkland executive to show him how the service station business had evolved. Over the course of a day driving around Red Deer, Espey learned, for example, that before the introduction of at-pump payment, fuelling stations (known as the forecourt) were usually installed parallel to the store (the backcourt) to make driving in and out easier; people had to go into the store to pay anyway. Now, pumps are positioned so customers face the store when fuelling, giving retailers a chance to lure them inside.

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The stores’ importance to gas retailers has been growing dramatically in recent years. Parkland’s fore- and backcourts used to deliver roughly equal gross profit. At upgraded or new sites, it’s closer to 70% for non-fuel purchases, says Espey, “and that’s where we want to be long term.” Backcourt margins are also significantly higher. According to a recent analysis by Matthew DiLallo for U.S. investing website Motley Fool, the average net profit per gallon of gas is just five cents (U.S). “Fuel sales, which typically account for 60% of a gas station’s revenue, only contribute roughly 38% of its profit,” DiLallo estimates. Meanwhile, in-store products carry gross margins above 30%; on prepared foods and fountain drinks, these can be north of 60%.

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The convenience game rests disproportionately on a few key factors: price, cleanliness, safety and, most important, location. “Gas, washroom, hungry—it’s totally impulse,” says Espey. Hence, picking the right site is paramount. “You get the wrong corner, you’ll get 30% less volume,” he says. Before deciding on a location, Parkland’s network-planning group prepares 30 to 50 pages of analysis, covering traffic counts and patterns, community development plans, demographic trends and planned road changes, among many other factors. The suburban Toronto area north of Highway 407, for example, is a hot zone for new gas stations, targeting commuters moving into the housing developments that are sprouting up. The key is to move in soon enough to snag the best locations and grow with the community but not so early as to precede significant traffic. “There is a real art to it,” says Espey. “We get it right 80% of the time.”

To handle the consumer end, in 2014 Parkland hired Ian White, an 18-year veteran of Canadian Tire who at one point had led that company’s gas station network. His first task was integrating and upgrading the then newly acquired Pioneer stations. By changing store layouts and the product selection, he raised same-store sales by double digits—and showed Espey and his colleagues how good merchandising could deliver a giant boost. The company has been converting about 70 sites to the On the Run brand (and building 30 new ones) per year, with the aim of reaching 475 locations by 2025.

Getting people to buy more than a pack of gum requires creating the right experience, explains White, who serves as senior vice-president of strategic marketing and innovation. “Historically, a gas station was a grungy, badly lit place. Now customers can see from the canopy right into the store and know it’s bright, full and safe. Our aim is to take them that additional 20 feet into the store.” To tempt them, On the Run features a broader product mix, including a rapidly expanding lineup of roughly 40 products under its own 59th Street brand (named after the company’s first station location). Today, the average customer spends $10 to $15 in the store.

For all of Parkland’s recent growth, Canada’s $39-billion gas station industry isn’t exactly an engine of the new economy. Michael Ervin, the senior vice-president of consulting firm Kent Group who has long tracked the industry, notes that, despite a recent three-year upswing, the sector has experienced a quarter-century-long decline, with the number of service stations down 40% in that time. According to a 2019 IBISworld report, low crude prices have whittled their revenues by almost 2% since 2014. Revenues may rise with oil prices, but gas stations’ margins tend to shrink as operators typically absorb a larger portion of the costs than they are able to pass on to consumers.

Long-term trends aren’t encouraging. Even if gas-fuelled vehicles continue to dominate, rising fuel efficiency will dampen demand for gasoline, according to the 2019 Boston Consulting Group report. That could push up to 30% of fuel retailers into the red by 2035.

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But there’s also the rise of substitute fuels, such as electricity and natural gas, to worry about. So far, electric vehicle (EV) adoption has been slow, with zero emission vehicles making up just 2.2% of passenger car sales in Canada in 2018. But if trends elsewhere move into North America—in Norway, roughly half of new vehicles are zero emission—the dynamics may change. “In Canada, electrification is lower than elsewhere because the country is very wide and skinny, plus cold temperatures are not ideal for electric cars,” says Hansen of Raymond James. He noted the biggest markets for electric vehicles in North America are in cities on the coasts. “When you think of where Parkland has been growing, it’s been through central U.S. and the Caribbean, in areas that are less urbanized.”

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An increase in electric cars will affect not only gas sales but also convenience store revenue, since consumers won’t stop at gas stations as often. To survive, gas retailers will have to broaden their offerings. “In an era of disruptive change, fuel retailers must move from vehicle centricity to consumer centricity,” write the BCG consultants.

That’s very much in line with Parkland executives’ thinking. The company is exploring a number of ideas that would make customers come back more often, such as adding lockers that would act as package pickup locations. Parkland is also running a pilot with M&M Food Market to sell frozen prepared meals. And it’s experimenting with options like letting customers pre-buy fuel or having fuelling trucks deliver it to their cars, White says. “And if we deliver fuel to you, could we deliver something else?”

Ultimately, gas station convenience stores could outlast many other retail formats. “Studies have shown that only discount stores and convenience sectors are growing in retail, while many retail stores are closing,” notes Brenda Johnstone, publisher of the trade magazine Convenience & Carwash Canada. As Parkland invests in more store retrofits and improves its merchandising game, it’s pushing ever deeper into terrain long dominated by Couche-Tard, which has about 2,200 stores in Canada (both with and without gas stations), and 7-Eleven, which provides retail services to oil companies wishing to stay focused on gas. Espey’s team is now even thinking about opening urban convenience stores without pumps (No need for the expensive real estate full stations require). Some analysts and investment managers call Parkland a “mini Couche-Tard,” but Newman insists the two companies have very different strategies. “Parkland is a more focused fuel distributor, and everything it does feeds into that—not only gas but diesel, propane, lubricants,” he says. He points out that the company’s profits come largely from the supply side.

The mention of the Quebecois rival brings a cagey smile to Espey’s face. “I like Couche-Tard. They’re incredible…” He hesitates before finishing the thought. “They’re very good.” But later he clarifies what he really means. “Couche-Tard is a retail company that also does fuel. We’re a fuel company that also does retail.”

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