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Pumping Up At Texaco


The Corporation

PUMPING UP AT TEXACO

These are hardly the best of times for gasoline retailers. Sales have been stagnant for the past five years. And the slow-growth recovery isn't helping matters. Last year, the nation's service stations sold 115 billion gallons of gas, about as much as in 1989. To top it off, there's all that talk of some kind of energy tax.

Still, such somber realities haven't stopped Texaco Inc. from trying to grab a bigger piece of the U.S. gasoline market. The White Plains (N.Y.) company is spending heavily to modernize its refineries and offer cleaner-burning fuels. And to increase the retail traffic at its gas stations, Texaco is devising new consumer attractions. It's enlarging many of the 6,000 convenience stores at its stations. And it's adding fast-food franchises, such as McDonald's and Dunkin' Donuts, to many locations. "All we want to do is to get you into our stations," says Donald H. Schmude, president of Texaco Refining & Marketing.

The strategy is showing promise. In the hotly competitive gas business, where a penny-a-gallon price difference can cause a customer to switch brands, Texaco has been steadily building loyalty. Dead last among the six largest gas marketers five years ago, Texaco has upped its share of the U.S. gasoline market by almost 6% since 1990, moving it to fourth place. Only Chevron and Mobil did better. Exxon and Shell lost market share, as did Amoco, the nation's No.1 gasoline retailer (chart).

BAD OLD DAYS. The emphasis on gas retailing is already having an impact on the bottom line. Operating earnings from U.S. gasoline refining and marketing could increase 11% this year, to $330 million, say analysts. This should help push overall earnings for Texaco up 15%, to $1.2 billion, as sales rise by 6% to $40 billion, estimates William L. Randol of Salomon Brothers Inc. Says Randol: "The irony is they used to be one of the less desirable companies in the industry in the refining and marketing area."

The retail push is the latest step in a broad strategy to improve Texaco's performance. Long considered a bureaucracy-bound laggard among the Big Oil set, Texaco hit big-time trouble in 1985 when it was ordered to post an $11 billion bond while it appealed a damage award to Pennzoil Co. for meddling in its attempts to acquire Getty Oil Co. Texaco later filed for Chapter 11 bankruptcy protection. Then came raider Carl C. Icahn's unsuccessful takeover attempt. During those dark days, former Texaco Chief Executive James W. Kinnear, who retired in April, began a major overhaul. He sold off businesses and slashed costs, cutting the payroll by almost a third. He also boosted Texaco's oil exploration. Now, under new CEO Alfred C. DeCrane Jr., 61, Texaco is stepping up its attack on the so-called downstream, or retail end of the oil business.

Devising cleaner fuels has been key to that strategy. Texaco introduced System 3, a high-performance gasoline that produces fewer pollutants, in 1989. It's been a hit because of tougher emissions laws and because some drivers believe it makes their finicky new engines perform better. And the company continues to upgrade its refining system to produce cleaner fuels. Texaco and the Saudi Arabian Oil Co., which purchased 50% of Texaco's downstream operations in 1988 to secure an outlet for its crude, have invested $2.5 billion in refinery technology since 1988.

Many of the improvements are now paying off. For example, the company has taken the industry lead in producing a diesel fuel with low sulfur content, an advantage in markets such as California, which are setting tough environmental rules. Texaco and the Saudis are also spending $240 million to make their upstream operations nearly self-sufficient in the production of oxygenates, which help limit pollution from gasoline.

At the other end of the pipeline, Texaco is sprucing up its network of 14,000 gas stations. Texaco Star Marts, which sell snack foods and beverages, were introduced in 1991. And the company reckons that the average independent station owner now pumps about 30% more gasoline, thanks in large part to the stores. So Texaco is enlarging the minimarts in hopes that a wider array of snacks and such merchandise as videocassettes will lure even more passing drivers.

To persuade owners to go along with the improvements, Texaco is offering them rebates on gasoline sales. Station owners can also obtain low-interest loans through a $115 million line of credit that Texaco has arranged. "It's much more a partnership-type feeling now," says Frank Macaluso, who owns 20 stations in the Southwest.

Texaco is also leasing space at its gas stations to fast-food franchises. There are only a dozen such outlets now, but Schmude foresees many more. Another possible draw: express oil-change outlets. By yearend, Texaco will have 30 drive-through mini-lubes that promise a complete oil change and lube in less than 30 minutes. More are planned, but the company won't provide details.

SHOP 'N' SWAP. Finally, Texaco is also taking a hard look at consumers' top priority: the price at the pump. Although prices are mostly the product of the crude-oil market, Texaco has been buying, selling, or just plain swapping gas stations with other major retailers. The goal is to build retail networks near one of the company's seven U.S. refineries. Limiting delivery costs to wholesalers can shave a penny or so off the price per gallon. Texaco recently announced plans to swap 14 outlets in St. Louis for 15 Amoco stations in the Rocky Mountain region.

Texaco is gradually exporting its retail strategy overseas, too. In Europe, where demand for cleaner gasolines has lagged behind the U.S., Texaco is slowly rolling out its System 3 products. It opened Europe's largest gas station in Britain last November. And in Thailand, it will supply the fast-growing Asian market as a partner in a $1.8 billion refinery.

Back at home, Schmude admits the market will stay tough. Forecasters predict only a 1% increase in U.S. gasoline sales volume this year. And the volume could actually fall if Washington goes ahead with an energy tax. But Schmude says such harsh prospects aren't likely to deter Texaco. The key to success in any stagnant industry is better market share, he argues. And by that measure, the Texaco star is clearly on the rise.Tim Smart in White Plains, N.Y.


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