A Reflection on the Future | Episode 27

  June 10, 2021

As vaccinations make their way through the U.S. population, we take a look back on the past year and its effect on the retail fuel market. In addition, we spend some time looking at current transportation patters, fuel demand, consumer behavior and what lies in the near future. Listen-in as we spend time with Joel Hirschboeck, Senior Vice President of Fuel Supply with Giant - GetGo and Chris Rapanick, Director of Business Development with NACS.

Transcript

John Eichberger:
Hey, everybody. Welcome to Carpool Chats. I'm John Eichberger with the Fuels Institute. Today, I am thrilled to have a couple good friends of mine on the program, Chris Rapanick in the NACS research division and Joel Hirschboeck with Giant Eagle-GetGo. We're going to be talking about something that's really important. We just came out of the pandemic that really disrupted the fuels market in 2020. Now at the end of May 2021, most of the country is starting to raise the restrictions, starting to get back to normal, trying to get the business up and running. We're going to talk about what we experienced last year and what we might expect in terms of transportation patterns and fuel demand and behavior of the consumers going forward 2021 and 2022. Chris, Joel, welcome to the program. Thanks for joining us.

Joel Hirschboeck:
Thank you.

Chris Rapanick:
Hey, thanks, John. Pleasure to be here.

John Eichberger:
Chris, let's start with you.

Chris Rapanick: 
Okay.

John Eichberger:
NACS is putting together the state of industry report for operating your 2020, which I have to imagine was somewhat of a challenge for you guys considering the past and trying to compare trends to past experiences. Can you give us a rundown of what you saw in the data that happened last year when the whole country shut down?

Chris Rapanick:
Sure. We are working on the SOI report now. We should be about ready to release on June the 1st, which is earlier than normal. The process was a little more difficult, obviously, because we know that comparing 2022 years past is going to be a difficult thing to accomplish and do it well. I'm definitely interested to see what 2021 brings, but with that being said, basically, the story for the industry both fuel and inside was a lot of the locations and the guys that were experiencing the first portion of the lockdowns ran into some situations where they needed gross profit dollars. It was just one of those things this year that fuel happened to deliver where the inside business didn't. So your next is a proponent of developing the inside business and relying less on margins for fuel to keep your business afloat.

Chris Rapanick:
In 2020, if it weren't for fuel margins, then there probably would have been a lot more businesses that did not float. So a lot of sad stories there with the amount of closings that we experienced and things like that, but at the end of the day, I think that the industry just let a satisfied sigh out that we were able to maximize margins this year to support some of that inside business that we lost.

John Eichberger:
Now, Joel, from the retail perspective, I remember seeing some reports that I knew miles traveled were down about 45% to 50% back in March. Gasoline demand also followed suit. What did you guys experience in terms of your operating markets? Was it that significant of a drop in demand or was there a resiliency in the market where you are operating?

Joel Hirschboeck:
What I would say for us specifically, because we do particularly operate within metro markets, we certainly were hit by the commuter demand on top of the overall lockdown measures that went into place. We typically do more volume than the average C-store. So when the changes took place, we saw a larger decline, but now we're starting to see a better return on some of that. Now the commuter traffic is still absent to some degree. We've been seeing that seasonal traffic as we're starting to approach summer. As you've said, John, some of the restrictions have been lifted. We saw that seasonal traffic's starting to come back earlier, probably about a month earlier than what we normally would have seen it. The real question will be, as we get through this summer and towards fall, will schools be in session and will people be going back to work or not?

John Eichberger:
Yeah, I think I saw some of the miles traveled stats towards the end of 2020 and they were only about 5% to 10% below 2019, but the day part are completely messed up. The convenience industry usually has pretty predictable volume and traffic based upon commuting patterns. Throw those out the window and hopefully, as people start going back to work, those are going to recover. Are you starting to see any return to normal at all? The transition period right now between fully open of what we've gone through this summertime, so kids out of school makes it really challenging, but are there any indications that travel patterns may return to normal?

Joel Hirschboeck:
I think we're starting to see that. We're starting to tighten up. This week is becoming a good week again for us for volume. Obviously, it's been a little goofy recently with the Colonial Pipeline issue and the reaction post that, but I think this pre-holiday week has been proving out to be a good week for us. I think triple layer reference that there's going to be an increase in travel, a fair amount this weekend, so we're looking forward to seeing that in the numbers. The commuter traffic though, to your point, day part, the mornings are still a little sparse. We're seeing more activity midday. Obviously, product mixes had to be changed to account for some of that and keep the inside sales strong. But we're targeting to be better than this past year for our next fiscal year and probably still a little bit below 2019 numbers based on where we operate. I think if you operate in the rural communities-

Chris Rapanick:
True.

Joel Hirschboeck:
... more predominantly, I think you've got a much more 2019-like volumes.

John Eichberger:
Then Chris, how does that pair up to what you guys have been seeing through CSX and through the data analysis that you guys have been doing?

Chris Rapanick:
Definitely same thing. Now I know that Joel, those guys operate up in the Northeast region or at least the next Northeast region anyway, and completely agree where he mentioned rural. We're seeing obviously our South central region for NACS here, that Texas, Oklahoma area and the Southeast are coming back a little faster than say, the Northeast or the West. But John, we're seeing... Just for kicks, I'm comparing April of this year versus March of this year and we're seeing double digit increases in all the categories,-

John Eichberger:
Wow.

Chris Rapanick:
... fuel transaction counts, everything. So it's very clear to see that as more folks are opening up in the States or releasing these mandates that people are in the stores, they're shopping, buying fuel as well. So it's pretty exciting to see the whole data thing if you're a data geek and you can watch the progression of how things change through '20, when second quarter when things started getting really bad and where we're at now. The data lays up perfectly against the story. It doesn't happen very frequently, especially on a nationwide level. If you're a data guy, it's exciting.

John Eichberger:
Your discussion with April being double digits higher than March. When we were in the heart of the pandemic, we used to speculate, "Okay, are we going to come flying out like cockroaches when we're released from our prisons or are we going to come out like a hermit squinting at the sun, 'I don't know. I don't know.'" I think there's still some people who are very nervous coming out, but man, I'm in Virginia and they are releasing the mass mandate and they're letting people if you're vaccinated and you wear a mask. I went into the grocery store last week and half the employees weren't wearing masks. I said, "This is weird. I haven't seen mouths and noses like this in months." It was interesting. It'll be interesting to see how people accommodate, how they transition into that.

Chris Rapanick:
It's crazy.

John Eichberger:
The pandemic was a huge, huge issue, of course. It's going to be the asterisk on 2020 forever, but there's so many other things that go into the fuel market. For 20 years plus, I've been monitoring the crude oil markets because crude oil uses 60% to 70% of the retail price of gasoline. Last year, crude oil was all over the place. This year, we had a pipeline problem attack. So we are running into all the other variables that go into it. What are you guys looking for when you think...? Now we got the Biden administration that's coming in and changing the approach to transportation energy, renewing the focus on carbon mitigation. Now, when you think about the future, we can start with you, Chris, what are the triggers? What are the market signals you're looking for to give you an idea of the health of the industry as a whole with all those variables swirling around and creating noise like the cicadas that are hidden this year.

Chris Rapanick:
I think that what it really comes down to and NACS' position on all this, especially since I've been here for the last 10 years, is the fuels business is so fragile and it's hard to believe even after being around it for so many years that the circumstances that led to 2020 with Saudi Arabia and Russia and all of those things that took place, how amazing it is that the industry always just seems to find that thing, whether it be a huge bump in food service sales, or in this particular case, super cheap gas and really high margins. It's amazing to me how something always just seems to save our bacon if you will. With that being said, continuing to understand that okay, so we have a cyber attack on Colonial and things like that, what can you do to prepare for those things?

Chris Rapanick:
The answer is nothing, unfortunately. So for us at NACS Research, we're still beating that drum to say, "Hey, develop your inside business. Develop the things that the consumer, especially post pandemic, are going to be interested in and use the fuel business to support that, not the other way around." So increased transaction counts both at the pump and inside are obviously good for us. Big baskets on the inside as well. We want people spending more on the inside than they did before, and all those things are coming to fruition. Again, it's just amazing to me how fragile that business actually is after all these years.

John Eichberger:
I remember when super storm Sandy came through and retailers ran out of fuel and we knew the storm was coming. People were saying, "I don't understand why they didn't prepare for this. Why didn't you store more fuel?" Our response was, "We have a 10,000 gallon tank. You can't put 11,000 gallon in it."

Chris Rapanick:
True.

John Eichberger:
EPA really doesn't like that. Joel, with the administration coming and saying, "We want to install 500,000 charging stations by 2030. We want to promote electric vehicles. We want to reduce the carbon intensity, canceling Keystone XL pipeline." All these signals are indicating that the current administration currently is really focused on, "We need to move away from fossil fuels." Clearly, petroleum, gasoline, diesel, fossil fuel business, from your guys' perspective, how are you looking at the future transportation energy and what you guys need to do to position GetGo to be successful as the market starts to evolve to a more carbon-sensitive type of structure?

Joel Hirschboeck:
Yeah, I think the first thing to remember is that liquid fuel is still going to be here for quite some time. It's going to take a long time to swap out all the vehicles throughout the US, the fleet, and so we're going to have that robust business case there for a period of time. But it doesn't mean you can't ignore the future. It's getting engaged with EV systems, partnering with the different companies that are out there, understanding what the administration is proposing and how you participate. I think it's protecting the capitalistic nature of retail's involvement in those spaces and making sure that we have an opportunity to service the customers and provide them what they want and that it's not over subsidized by utilities and different things to where we can't make it a good marketplace to participate.

Joel Hirschboeck:
So I think you have to monitor all of those things. Then I think you still have to pay attention to bio-blends and different things like that, a time of carbon capture. So you have to be involved in all of the spaces and understand where they are and move at that pace with them so that you can react if something changes. But I think it's going to change slowly. It's more about staying engaged and being knowledgeable.

John Eichberger:
Yeah. I think that's something wev'e been talking about at the Fuels Institute forever, is it takes a long time to turn the Titanic. The United States transportation sector is much bigger than the Titanic. The off-ramp for a combustion engine and the on-ramp for anything else is pretty long. We've got decades to make adjustment, but the time for changing and the pace of change is accelerating. But I want to go back and ask Chris about this, because you raised, Joel, the role of biofuels. One of the things we've been talking about is, if you think that electric vehicles are the white knights, going to save the world from climate issues, we've already lost because it can take so long for that technology to have a major impact on the market. What are we going to do to lower the carbon intensity in the interim? I've always looked at biofuels. So Chris, from the data you guys look at, had you seen any trends in terms of the industry sales of biofuel blend, whether it be biodiesel or ethanol blends or anything like that in the data?

Chris Rapanick:
It's still a very small piece. We don't get a lot into specifics as far as retailers go or whatever, but you see some patches and some folks that are moving into other fuels, bio included. But John, we're talking about a piece of a percentage of the regular volume. I don't know if Joel and those guys are playing in that part or not, but it's so small now that again, this on-ramp has got to be years and years and years long. Definitely not something that we talk about a lot.

John Eichberger:
So, Joel, what are you guys seeing in the biofuels market?

Joel Hirschboeck:
For us particularly, it's more about what's the future opportunity.

Chris Rapanick:
Right.

Joel Hirschboeck:
In my past life, I was pretty involved with it just because of our infrastructure and what made sense and where we operated. It's a different path and I think you see that throughout the country where it makes the most sense and how you can operate the different types of products and get them in front of the consumer. It's a moving target still on with everything and I think that's why it keeps it at a smaller percentage. It's just working through the different supply points and the relationships and finding that right path forward.

John Eichberger:
Yeah, I see the-

Chris Rapanick:
That's definitely... Oh, I'm sorry. Go ahead, John.

John Eichberger:
Go ahead, Chris.

Chris Rapanick:
It's definitely like the life that we live in NACS Research, is that we don't always hear about the plan, we just see the bump. So next year, we may be talking about something that was 2%, maybe 6% or whatever. So it's unfortunate that it's always historical, but still obviously interesting to follow.

John Eichberger:
I think my projection is you're going to find in the data in the next couple of years an increase in your alliance in biodiesel and renewable diesel, especially with the credits and low carbon fuel standard in California. Just saw a news article today, Neste, who also produces a lot of renewable diesel is also going to be testing a renewable gasoline over in Europe, which could have a 65% reduction in carbon intensity, which is significant.

John Eichberger:
Joel, you mentioned EVs are a long way off. I believe they are here, but the market potential is a long way off. In that interim, there's going to be new stuff popping up, and that's why I think it's so important that we pay attention to use case scenarios and what solutions can deliver reduced carbon emissions from different applications. Maybe it's not a one size fits all strategy. Maybe it's a multiple opportunity there. I know with your past life, you guys explored a whole bunch of different types of fuel products. Do you see a future where we have multiple liquid fuels, EV charters, maybe gaseous fuels, maybe hydrogen at the same location, or is that something that the industry can even accommodate?

Joel Hirschboeck:
Yeah. It's interesting. I think you have to have one winner because you have to build the efficiencies within the industry, and it will happen naturally if it makes sense. You look at the current liquid fuels industry, it is probably the most efficient industry in the world. To have a pipeline go down, to hurricane Sandy, to this pandemic, it reacted almost instantly if you think about it. Yeah, were there bumps in the road along the way as things shifted and changed? Yes. There were and you see that in the pricing and what happened, but the industry reacted and supply and demand was able to do that. You can try to put all of these things in one place, but I don't know how you economically manage that and get them, because you start losing scale when you spread it out too thin. So you still have to have something with scale to really drive it. Then it may add and flow and shift, and you got to be in front of that and hopefully, you have flexibility in your network that you can accommodate it.

John Eichberger:
Yeah. Even if you go and look at the footprint, how much space do you have to dedicate to multiple opportunities, especially when the newer one just such slow throughput. When you guys are looking at building or redoing these sites, are you thinking about, even if you're not ready to go into electric vehicle charging, are you thinking about future-proofing to upgrade your power panel, make sure you got the supply so if the moment is right, you can get into business pretty quickly?

Joel Hirschboeck:
We're having those discussions about that. We're still a little bit early stages. We're going to be partnering with Tesla, Greenlots, and talking to others about bringing some electrification to our sites. We're definitely planning the right sites out. The other piece of it is, is where does it make sense? Are you on an interstate? Are you in city center, or are you rural? Certain applications are going to work in different scenarios and different locations for the store. So I think, yes, there are those discussions happening and we're thinking about it and what's the right thing to do at each location. If they think you want to map that out and be thinking about that and doing what you can. You can put a lot of underground conduit and some other things to make runs easier if you want to install it later for pretty cheap. So if that makes sense, go that route.

John Eichberger:
Chris, one of the questions I get a lot is, do we have the opportunity to new build, to really make a splash and expanding the infrastructure for these alternative fuels? What is the pace of construction? One of the things that I'm concerned about going forward at the industry as a whole is we have just gone through EMV. We're still going through it, very expensive upgrades, work terminals. We are going through this electric vehicle enthusiasm momentum. We've got cafe standard, just going to get a ranch ratchet up again. It's going to reduce gasoline demand, you're looking at maybe 20% drop in gasoline demand in the next 20 years. You've got an aging infrastructure of underground storage tanks out there at or near their 30-year life expectancy triggering a six-figure investment upgrade. Are we seeing an anticipated growth or contraction industry? How does that compare with the build of new stores? Do we see anything like that in the data?

Chris Rapanick:
Yeah. We do what we call the demographic survey every year, John. What we do is we ask guys that participate in the SOI, how frequently they're remodeling, how many stores they raised and rebuilt. Typically, all those things happen about every seven years for the average chain. Just this year actually, we've included some other things like, do you have chargers on property so we're going to be able to track that a little bit better? But a lot of guys are saying that they are building new infrastructure in. Some of the guys, when they buy a new chain, a lot of times, they want to raise all the buildings to start again. So they're doing that work now. It's definitely on the horizon a lot more than it's ever been.

Chris Rapanick:
I think the main thing for this 500,000 charger piece is, this industry is known for only keeping people on property for three and a half minutes on average, whether you go inside or whether you're pumping gas. There's so many other locations, retail like grocery or QSRs that are more fitting to get that 15 or 20-minute trip versus convenience. That's what we have to be careful about. The Wendy's or a Sonic for example, where you're already folded into their little special lane already. They're just tailor-made for charging, I believe. I think that's what we need to be concerned about and where we go back to maybe our legislators and say, "Hey, we want our fair share of that hot 500,000 charger piece." Very important thing.

John Eichberger:
Your reference to Sonic makes you think, maybe we're going to have a resurgence in the car hop business where they're going to come out on the roller skates, plug in your car, grab your order, feed you, then unplug your car and off you go. That's going to be an interesting dynamics if that develops that wasy.

Chris Rapanick:
Absolutely.

Joel Hirschboeck:
Yeah, I think-

John Eichberger:
So my last question for... go ahead Joel.

Joel Hirschboeck:
I'm just going to say, I think the shift of convenience retailing to bringing food forward too is also making space for that. So we have our MTO cafe and markets. We have indoor seating. We've got, I think, 40 or 50 parking slots at a lot of our new build stores that are designed to be able to service those different customers. When you own the best corner, convenience, retailing, and fueling, it doesn't always have to be the primary focus-

Chris Rapanick:
True.

Joel Hirschboeck:
... so what else is there and what else do you bring to market? I think there's going to be some flexibility and there's going to be some leaning and shifting as we move forward and thinking about the comprehensive business plan long term.

Chris Rapanick:
Absolutely.

John Eichberger:
I think your comments are spot on. That's what the companies trying to install chargers are looking for. They're looking for space with enough parking to dedicate to some chargers. They're looking for a place where people can get food, looking for a place where people can hang out for 20 or 30 minutes. We don't need to think about hour-long dwell times for the on the go traveler. What I've been looking at in terms of working with NACS on their EV strategy is the commuters own the corners. They own that market. They are where customers have been going for 100 years to refuel their vehicles.

John Eichberger:
When they get into an EV, they can be charging at home. They can be charging at the park, charging at the grocery, they can be charging everywhere. But when they need the electricity, the first place we're going to think about is the gas station. It's going to be absolutely critical that you strike when the iron's hot because when you fail them early on, they're not coming back. So we need to make sure we have visibility that we are offering them the services they need. Even if we're not making money now, get it entrenched in their head that when you need us, when you need electricity, we're there for you. You don't have to go searching around for it. I think that's an opportunity we got to make sure that we capitalize on.

Chris Rapanick:
Very true.

John Eichberger:
Now, so last question. As we go into the summer months, we talked about the end of the pandemic. Summer is usually a great season for the industry. A lot of enthusiasm, people are out, sun's out longer. They're having fun. They're going to the pool, going to the beach. Any idea, any projections on what you think the summer is going to look like in terms of business opportunities? Is it going to be a blockbuster? Is this is going to be a fantastic summer? Or do you expect there's going to be some trepidation going into the next three months?

Joel Hirschboeck:
Yeah, I think it's going to be a really good summer. Like I said, we are seeing some of the seasonal lift starting probably a month earlier this year. I think we had some good weather to help with that, but I think people with the mass mandates being lifted, CDC's new guidance coming out, I think people are just excited to be back to normal. I think you're going to see a lot of traveling and exploring just around because you haven't been doing it for a year.

Joel Hirschboeck:
We're expecting a lot of big things. We've got a lot of great promos from an inside perspective, really trying to lean into that and get people back into the store. I see inside sales being strong this summer as people are out and about and just want to get back to that normalcy and that quick stop in the convenience store feels normal. It's what we used to always do. I think you're going to have that. I think with the product mix changes and bringing some new stuff to life, we've got spiked slushies, which is an outstanding product especially at a baseball game or something like that.

John Eichberger:
Did you say spiked slushies?

Joel Hirschboeck:
Spiked slushies, yeah. They're awesome.

John Eichberger:
Oh, man, that's so dangerous.

Joel Hirschboeck:
Yeah, they are.

Chris Rapanick: And you're killing it with them too, by the way. It's not even funny.

Joel Hirschboeck:
It's great. So yeah, there's a lot of good opportunities out there, I think, and I think we'll see it. We'll still be hindered by the commuter traffic, especially in the metro markets from a volume perspective, but I think the seasonal traffic will be higher than maybe it normally would've been.

John Eichberger:
Chris, any final thoughts on summer?

Chris Rapanick:
Yeah. I think that what we're looking at now is we really should be concerned with the June, July portion of it versus where we're at now because that's where it's probably going to get difficult when we start to see a little bit more traffic. But as far as comparison goes, we need to look at 2019 versus '21. I think that if we finished '21 at the same levels that we had in '19, it would be a huge win for us. But road trips, who's ever heard of having to make a reservation to get into Yellowstone National Park? This stuff is ridiculous. So you have to think that road trips are going to be out there. You have to think that people are going to be spending time outdoors because number one, either they hadn't been, or number two, it's considered safe.

Joel Hirschboeck:
So yeah, I had to think, John, that this is going to be a crazy summer and it's already looking that way. Some of the categories that did really well last year, like beer, for example, all alcohol, really. Some of those guys are probably sweating a little bit because they had such a great year last year. But I think that, especially at a gross profit level, if we're able to get some of this new business on the inside or from food service that we didn't have last year, if we're able just to come in flat at what we had for 2019, I think it would be pretty impressive.

John Eichberger:
Hopefully now we enter Summer 2021 mask-free, worry-free.

Chris Rapanick:
Absolutely.

John Eichberger:
The old song, Summertime where living is easy, I think that's the heart and soul of this industry. This industry is actually a fun industry. People like to swing by convenience stores when they go in places that's fun and summertime is the best time to do that. Chris, Joel, thank you very much for joining us today.

Chris Rapanick:
It's my pleasure.

John Eichberger:
It was a great conversation-

Joel Hirschboeck:
Thank you, John.

John Eichberger:
... and I hope you enjoyed the discussion as well.

Chris Rapanick:
Yeah, enjoyed it. Thanks again.

Joel Hirschboeck:
Yeah, thank you.

John Eichberger:
Hey, everybody. Thanks for tuning in Carpool Chats and we'll talk to you next time.