The hardest job in retail

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The hardest job in retail

By Mike Troy - 10/06/2017
To stay connected to retail operations, Shell Retail EVP Istvan Kapitany and his executive team work full shifts in the field every quarter.

Future proofing any retail business is a tall order these days given the pace of technology driven change and rapidly evolving consumer preferences. It is especially complicated for global energy company Royal Dutch Shell and its expansive Shell Retail Operation led by Executive Vice President István Kapitány. The 30 year Shell veteran leads a team that oversees a global network of 43,000 locations in 80 countries with 500,000 employees. To add an extra layer of complexity, Shell’s operating model includes a mix of company owned, dealer owned, wholesale and licensed stores that varies by geography. Shell’s iconic logo is already found on more locations globally than Starbucks or McDonalds and the company has ambitious expansion plans to execute at a time when the internal combustion engine is under assault.

That combination of scale and complexity against a backdrop of societal concerns would make Kapitány’s job hard enough, now throw in a lofty profit improvement goal. Kapitány has until 2025 to increase the profit contribution of Shell Retail’s non-fuel business to 50% from a figure well below that currently. The company doesn't disclose the actual number but Kapitany concedes the profit goal is aspirational. He also notes the company is almost at the 50% goal in some countries, so he knows it is doable, even if it has a long way to go in a market like the U.S.

“We are always adapting our retailing capabilities to the changing world and believe it is a great opportunity for us because of the scale and size of the business,” Kapitány said. “Some markets are close to the 50% goal and some are far away, but one of the benefits of Shell’s global scale is that we can learn from each other. Whatever works in one country we can transfer that knowledge to another country.”

For example, the company operates a service oriented concept called Shell Select in The Netherlands that is comparable to the highly regarded Wawa convenience stores in the U.S. Shell’s operating model in the U.S. is different than The Netherlands but the company is looking to make changes that would facilitate expansion of the Select concept in the U.S.

“I would say that Shell Select in The Netherlands is kind of like the top end food and coffee convenience place to go in the market, similar to a Wawa. We’re looking at how we bring that Shell Select concept to the United States,” Kapitány said.

That’s an advantage Shell Retail has over some U.S. only retailers, many of whom have a broader product offer than Shell, and its speak to the attitude required of C-level executive looking to future proof their business. Doing so requires peering into the future further than others and imagining possibilities. Most U.S. retailers did a poor job of this 15 years ago when it came to e-commerce and recognizing the huge digital shifts changing how shoppers interact with retailers and brands. They have been trying to catch up with shoppers ever since. Royal Dutch Shell and the Shell Retail division don’t want to make the same mistake. That’s why the company openly talks about the need to transform its retail business, is aggressively expanding new product and service offerings, experimenting with technology and preparing to offer a broad range of fuel types that will power vehicles in the future.

WHERE THE GROWTH IS

The Shell brand has a dominant presence in market like the U.S. with 14,000 locations, Brazil (6,000), Japan (3,300) and Germany (2,000), but in some of the largest markets in the world the brand is just getting started.

“The United States, Brazil, Japan, Germany, are already very, very strong, and we would like to be building our Chinese, India, and Indonesian, Russian and Mexican footprint to similar levels. We are working to grow them fairly quickly,” Kapitány said.

It has a long way to go. In China, there are only 1,200 Shell locations and there are only 100 sites in India. Russia has several hundred locations and the first Shell branded location recently opened in Mexico. As Shell grows its global footprint the company is being fuel agnostic and embracing the role progressive societal forces are placing on the company regarding its environmental impact.

“We’re very keen now on electric charging,” Kapitány said. “We believe that as the number of electric cars increase high powered electric charging will grow and the time required for electric recharging will come down significantly to around nine or ten minutes.”

Kapitány sees that as a fantastic opportunity for Shell because the user experience will be comparable to filling up with gasoline today.

“We see an amazing opportunity for us to participate in the change in mobility industry and the world, as we’re going forward. It is very clear to all of us that an energy transition is underway for mobility. It will not change from Friday to Monday, but it will change. It needs to change, and it must change, and we would like to be playing our part in the change.”

The big drivers of change are governments around the world lining up against internal combustion engines and rapidly growing consumer acceptance of electric vehicles. Various edicts from the United Kingdom, France and China are designed to curtail the use of internal combustion engines and some automakers are embracing the shift. Hybrids and electric vehicles have improved dramatically and are getting better all the time with high end models offering amazing performance. Tesla offers a version of its acclaimed Model S that costs upwards of $100,000 and is scary fast, capable of 0-60 miles per hour in 2.5 seconds. Tesla’s mass market move came this summer with the introduction of its lower cost Model 3. By year end, the company expects to be manufacturing 5,000 Model 3s per week in the U.S. and said it will double that capacity in 2018.

While Tesla and its high profile founder Elon Musk command a lot of attention, other manufacturers have made electrification moves of their own. Nissan earlier this year sold its 250,000th electric vehicle, the Leaf, earning it the distinction of America’s best-selling electric vehicle. A new version of the vehicle is due this fall. Meanwhile, an automotive press long enamored with all things internal combustion, has embraced electric vehicles. When the Chevy Bolt EV was named Motor Trend’s 2017 Car of the Year the publication gushed that, “the groundbreaking Chevrolet Bolt EV is the car of tomorrow. Today.” The Bolt’s combination of range (238 miles) and priced (less than $30,000 when adjusted for a $7,500 federal tax credit) has made just about every other electric vehicle on sale obsolete, according to Motor Trend.

One of the most significant electrification moves will come in 2019, when Volvo Cars CEO Håkan Samuelsson has drawn a line in the sand stating that every car the company makes will have an electric motor.

“This announcement marks the end of the solely combustion engine-powered car,” Samuelsson said. “Volvo Cars has stated that it plans to have sold a total of one million electrified cars by 2025. When we said it we meant it.”

Registrations of electric cars worldwide hit a new record in 2016, with more than 750,000 unit sold as sales advanced 40%, according to an organization known as the Clean Energy Ministerial. The group consists of government members from 10 countries (Canada, China, France, Germany, Japan, the Netherlands, Norway, Sweden, the United Kingdom and the United States) and recently set an ambitious goal to promote an electric vehicle penetration rate of 30% penetration by 2030.

If that figure is to be achieved it will require changes to the refueling infrastructure, creating new opportunities for Shell Retail and others. The electrical infrastructure in the U.S. is will get a huge boost in the coming decade thanks to a bizarre turn events. After Volkswagen Group was caught cheating on emissions one component of a lawsuit settlement involved creation of a subsidiary called Electrify America (EA). The Reston, Va.-based entity plans to spend $2 billion over 10 years to build out and strengthen the zero emissions vehicle (ZEV) infrastructure across the United States. EA recently selected JLL, one of the nation’s largest commercial real estate firms, to identify and provide site feasibility studies for the installation of fast charging sites along high-traffic highway corridors and community-based charging locations in 11 metropolitan areas in the Northeast from Boston to Seattle, across California, and in Texas and Oklahoma.

“Electrify America’s investment in zero emission vehicle infrastructure is the largest of its kind ever made and will revolutionize charging infrastructure in the U.S.,” said Walter Wahlfeldt, an executive vice president with JLL. “We’re currently looking for accessible and regularly trafficked real estate locations that support drivers for the long-term and will keep the network of charging stations sustainable. The stations are brand neutral and are designed to service fast-charge capable EVs now and into the future.”

The creation of a more accessible charging grid could be a boon for all types of retail uses since Electrify America will install, operate and maintain chargers at its expense. JLL is initially seeking 450 sites for 2,500 universal chargers at locations such as malls, restaurants, retailers, gas stations, mixed-use developments and hotels. EA plans to make its investment over four 30 month cycles with $800,000 million spent in California and $1.2 million spent elsewhere in the U.S. It is the largest investment of its kind and designed to promote zero emission vehicle adoption by reducing charging anxiety and increasing convenience.

LOWER FOREVER

If Kapitány has the hardest job in retail (Retail Leader’s assertion, not his) he certainly doesn’t act like it and isn’t an obvious choice for that distinction given his relative anonymity in U.S. retailing circles. Someone like Sears Holdings CEO Eddie Lampert has what many consider an impossible job. He’s been trying to turn Sears and Kmart around since he engineered a merger of the floundering retailers in 2004. Another option could be Toys “R” Us CEO Dave Brandon. He joined the company a little over two years execute a turnaround, but instead filed for bankruptcy in September and heads into a holiday season facing intense competition from Walmart, Amazon and Target. Jeff Genette became CEO of Macy’s in early 2017 and is executing a wide range of strategies designed to prove a place remains in the retail landscape for a mall-based, mid-tier department store operator. Then there is Kroger CEO Rodney McMullen. As head of the nation’s largest supermarket chain, he’s dealing with intense price competition, expense challenges of a highly unionized work force and a massive share price decline caused by the uncertainty of Amazon’s acquisition of Whole Foods.

Each of these executives face considerable challenges, but their core offerings of food, consumables and clothing are necessities of life. So is fuel, but demand for fuel and the types of fuel are expected to change dramatically in the coming years. People will continue to eat and wear clothes in the future, but regularly filling up a car with gasoline is a behavior that is expected to diminish greatly and who knows what happens to the price of oil. Shell doesn’t. That’s why the company is running its overall business with a “lower forever” attitude toward oil prices.

“We do not want to have the mindset that higher oil prices are around the corner to help us out. In terms of practical planning, we take a very conservative outlook,” Shell CEO Ben van Beurden told Bloomberg after the company released its second quarter results.

The reality is no one really knows what the price of oil will be in 10 or 20 years. The annual U.S. Energy Information Administration offers a wide range of estimates in its annual report released in September that assesse long-term world energy markets. EIA modeled projections of what may happen given certain assumptions under different scenarios if the price of North Sea Brent crude in 2016 dollars reaches $43 a barrel by 2040, compared with $109 a barrel in the reference case and $226 a barrel in the high oil price case. The use of refined petroleum and other liquid fuels in the transportation sector is forecast to increase through 2040, but their share decreases from 95% to approximately 88% as the use of alternative fuels slowly increases, according to EIA. Motor gasoline, including biofuel additives, remains the primary fuel for transportation, accounting for 36% of the world’s transportation-related energy use in 2040, according to the group.

Relying on the government to forecast the future, especially something with the historic volatility of oil prices, is not a good strategy on which to stake the future of a multi-billion business. Lower forever may not come to pass and the pace of vehicle electrification could happen much sooner. Shell CEO van Beurden has said his next vehicle purchase will be electric.

Either way, Shell and its global retail chief Kapitány and U.S. retail head Sydney Kimball are doing the hardest thing there is to do in retail: reposition the business to capitalize on future growth opportunities while maximizing sales and profit performance in the current landscape.

For example, Kimball’s single biggest priority in the U.S. is promoting increased loyalty to the Shell brand through the company’s recently enriched Fuel Rewards program. Launched on June 5th, Shell expanded the existing program to give Fuel Rewards members instant gold status for six months which allows them the perk of a five cent per gallon price reduction.

The program and Shell’s high end fuel branded as
V-Power are near and dear to Kimball’s heart. She served as the company’s premium fuels marketing manager several years ago and oversaw the global rebrand to V-Power and chafes at the notion that gas is gas.

“I absolutely believe that Shell fuels are different and better than any other fuels. In my role as premium fuels manager, I oversaw research and development. Our claims about having the best cleaning power, it really helps in terms of engine wear,” Kimball said.

And when it is time to fill up, Shell Retail is experimenting with technology and partnering with car makers to transform the experience.

“We’re testing a mobile app that allows you to buy your fuel from the car and not have to pull out cards,” Kimball said. “We’re on that journey and there is optimism that we’ll be first in some areas and fast followers in others.”

Kapitány doesn’t worry much about filling up these days. He walks to work at Shell’s London headquarters, a city with stringent pollution regulations designed to curtail vehicle use in the urban core. It is the type of commute that allows Kapitány to think differently about the future of mobility, energy and convenience retailing. RL