CEO Julian Segal reinvents Caltex business model

CEO Julian Segal is embracing change as the new normal.

Caltex CEO Julian Segal. Picture: Nic Walker.

Caltex chief executive Julian Segal wants to give you back 10 minutes of your day. Make that 15. Faced with a slow-growth industry – thanks to more fuel-efficient and electric cars – the chief executive of Australia’s largest service station group believes the answer lies in catering to a time-poor population.

His plan is to expand its service stations into upmarket convenience stores, where you will pick up your barista coffee, drop off your drycleaning, collect a parcel, buy your fresh food for dinner, or pull up a chair and use the free wifi.

It’s all part of a plan that will also see Caltex dramatically upend its business model from one dominated by franchised outlets to one where all service stations and convenience stores will be directly operated by the company.

Caltex rolled out its first Foodary stores around the country last year, including some stand-alone stores not connected to petrol stations. The first stand-alone store opened in Newcastle last year and another appeared in Sydney’s Bondi Junction this year.

“We believe we can build a real convenience store business,” Segal tells The Deal at Caltex’s headquarters in Sydney. “There is an opportunity to redefine convenience in Australia.

“Not in terms of fizzy drinks … but in terms of ‘how do we make your life easier?’ When you come to our site, how many problems can I solve for you without you having to go somewhere else? So I can give you back 10 minutes of your day, 15 minutes of your day.”

The Foodery store at the Newcastle Transport Interchange.

The Romania-born Segal has been reinventing Caltex Australia since 2009, after previously running fertiliser company Incitec Pivot. By Australian standards, he is already beyond the average lifespan of a chief executive. But nine years in he is only part of the way through his plans for transforming a company that turns over more than $21.4 billion a year from a network of around 1900 outlets, including about 810 retail outlets.

“The biggest change in Caltex is the ability to go through constant change,” Segal says. “We don’t see it as ‘disruption’, we see it as the normal.”

The California Texas Oil Company was founded in 1936 as a joint venture between Standard Oil of California (later renamed Chevron) and the company later known as Texaco. It was renamed Caltex Petroleum in 1968 and later expanded into Australia, taking over Golden Fleece in 1981 and Ampol in 1995.

Chevron retained a 50 per cent interest in Caltex Australia until 2015, when it sold its stake in a deal worth $4.6 billion. That meant Caltex Australia was on its own, no longer part of a global giant like its competitors BP, Shell and Mobil, and free to make its own decisions as an independent company.

Today Caltex is unique in corporate Australia, where it ranks in the top 100 ASX companies by market capitalisation.

“Caltex is the only company of its type on the ASX,” says Segal. “BP, Shell and Mobil are international companies not listed on the ASX.”

Well before the Chevron exit three years ago, Segal had been working to get the company into better shape, making the painful decision to close the Caltex refinery at Sydney’s Kurnell and turn it, from 2014, into a fuel-importing terminal. Caltex is now one of the largest importers of fuel in Australia.

The company retained its smaller refinery in Lytton, in Brisbane. With a combination of more investment and production efficiencies, the refinery was able to ensure its future as a viable operation and is now a strong contributor to the company’s earnings.

Segal followed up with a major review of operations, dubbed Tabula Rasa (clean slate), which saw 350 of its 3000 staff lose their jobs. The changes put the company on a sounder financial footing, but it was not enough to guarantee its future in a world relentlessly determined to become more efficient in its use of fuel. Falling demand has resulted in Caltex’s sales of petrol dropping at about 2 to 3 per cent a year by volume.

Says Segal: “We knew that in the long term the industry would be under pressure as new technologies are emerging – not just electric vehicles but the improvement in efficiency of internal combustion engines, which is putting pressure on volumes.

“For the next 15 to 20 years there is still a lot of value to be derived from our core fuel business, but we needed to start thinking about a new platform for a new business.”

As Segal says, it is not as if the company can move into selling Gucci handbags. For him, the task was to identify Caltex’s strengths.

‘Segal brought in consultants Bain & Company and began hiring new staff to build a bespoke operation’

“Our biggest asset was our retail sites,” Segal says. “We have three million customer visits to our sites every week. Why do they come? We are not particularly good at advertising, we don’t have a loyalty program of our own, and we are not the cheapest in the market.

“So why do people come? Because our sites are extremely conveniently located – on the way to work, to home or holiday.”

The challenge was to take the Caltex convenience business that had always been a sideline and turn it into a core profit generator. Segal says experience in the UK and Japan showed that convenience stores attached to fuel stations had the potential to be much bigger businesses with much richer offerings.

While Caltex had operated stores for years, Segal knew it didn’t have the capacity to run an upmarket business. He brought in consultants Bain & Company and began hiring new staff to build a bespoke retailing operation.

In 2016, the company announced its plans to launch a “Freedom of Convenience” program that would see it expand its convenience store business under the name Foodary. The first Foodary store opened in the inner western Sydney suburb of Concord in February last year, followed by another 26. Caltex plans to open another 50 or 60 this year.

The strategy involves partnerships with fresh food companies, including Boost Juice and Guzman Y Gomez, other operators such as ParcelPoint, and a trial of a same-day laundry service.

Caltex is also expanding its pure retail footprint. In 2016, it took over the Victoria-based coffee and sandwich bar chain Nashi, which had nine outlets, and it plans to open as many as 10 more – stand-alone high street shops not linked to any petrol stations – this year.

The expansion of the Foodary and Nashi outlets will cost Caltex around $100 million this year and the company has plans to step up the rollout in the future.

Caltex can’t advertise its new Foodary outlets as they are not available to all customers, so Segal is relying on word of mouth to tell locals the new-look stores are open for business.

Reflecting its emphasis on retailing, this year Caltex restructured itself into two distinct business units: convenience retailing, and fuel and infrastructure. The first is run by Richard Pearson, who has had a long career in retailing, including as director of Coles Express and stints at UK supermarket ASDA, as well as with Proctor & Gamble and United Biscuits.

Others in the retail team include former Woolworths executives Karen Bozic and Helen Moore.

“We have built a brand new team,” Segal says. “We needed different skills. Half the team has been in the job for less than a year, the other half just over a year.”

The push for convenience has also seen the company rolling out trials for numberplate recognition. This allows customers to register their numberplate with the company, drive in, fill up and drive off, knowing the bill will be charged to their account.

“It’s all about convenience,” Segal says. “People say ‘If you do that, you are going to miss the person coming into the shop and spending more money’. But I don’t mind that. If you are in a rush you can do this, but maybe the next day the customer who has to be in a meeting in half an hour can come in, sit at the table and have a coffee, and work using the free wifi.”

‘The push for convenience has seen the company roll out trials for numberplate recognition’

Segal found himself under even more pressure to look for new sources of revenue when Caltex missed out in the bidding to buy the 530 service station sites currently operated under a dual-brand strategy with Woolworths, an arrangement in place since 2003. Woolworths announced in December 2016 that it would be selling its fuel and convenience store outlets to BP in a deal worth $1.8 billion.

If the sale to BP goes ahead it would cost Caltex an estimated $150 million a year in earnings – about 16 per cent of 2017 group earnings before tax of $935 million .

In December last year the Australian Competition and Consumer Commission (ACCC) announced it was opposed to the deal on the grounds that it would substantially lessen competition in the fuel business. The parties are still in discussion.

If the deal is blocked it could be a boost to Caltex, allowing it to retain its supply contracts with the service stations. But Segal says he has to run his business on the basis that the deal will go ahead and Caltex will lose a business supplying 3.5 billion litres of fuel a year.

Segal’s other problem has been the controversy over the franchising model in Australia, on which Caltex has traditionally been very dependent. He says the revelations in 2015 that some 7-Eleven franchise operators had underpaid staff prompted Caltex to conduct its own review of its franchisees. It was a “black swan moment”, according to the CEO.

The company asked itself the big question: could the problems at 7-Eleven happen at Caltex? Segal wrote to franchisees asking them to confirm that they were complying with the law. When a small group failed that test, Caltex ran its own audit.

In December 2016, the company operated only about 150 of its 810 retail consumer outlets, with the rest operated by franchisees. The result of the audit saw it take over more franchises, doubling the number of company-owned sites to 314 by December 2017.

The debate over the franchise model also prompted an audit by the Fair Work Ombudsman of 25 Caltex service stations, a review the FWO said was “in response to concerns about underpayments and other non-compliance issues within the Caltex network of franchisee-operated outlets”. In February this year, Caltex announced it would take over the operation of all its retail sites by mid-2020, at a cost of $100 million to $120 million over the next three years, as part of its convenience store strategy. The decision came ahead of a statement last month from the FWO that 75 per cent of Caltex sites had breached workplace laws.

In defence, Segal points out that the FWO finding of 75 per cent was based on the 25 sites it audited, not on all 810 retail outlets. He strongly rejects suggestions that the announcement that Caltex would take over the running of all its service station outlets was in response to the FWO investigation. Rather, he says, the company’s decision was always going to be part of its new retailing strategy, first announced in 2016.

‘Caltex’s move away from franchises and the expansion to convenience stores is costly’

“When you are building a totally new business, you have to have significant innovation,” Segal says. “When you know you are going to do trial and error, you have to be in control of the business; you can’t let other people do it for you.”

He argues that Caltex would never make such a major decision – to move away from the franchise model – so quickly. For example, the decision to close Kurnell as a refinery was made after an 18-month investigation of all the possibilities.

The move away from franchises and the expansion to convenience stores is costly. “The retail operating model is changing from franchise to corporate with near-term costs that weigh on earnings,” broker Ord Minnett wrote in a recent review of Caltex. “But we note the long-term Foodary earnings opportunity. Foodary is an attractive long-term opportunity provided execution risk is managed.”

The prospect of losing a significant share of its retail outlets as a result of the BP-Woolworths deal has seen Caltex expand its footprint in Australia and New Zealand. Last year it bought Milemaker service stations in Victoria for $95 million and Gull New Zealand for $329 million. It was able to supply the New Zealand operations from the fuel bought by the trading office in Singapore that it set up in 2014 to source fuel for Kurnell.

It is also buying 20 per cent of SeaOil Philippines. Segal says he expects there will be additional opportunities for Caltex outside of Australia.

The Singapore office was established by Louise Warner, a chemical engineer who joined Caltex in 1999. Now 55 people are employed in the office sourcing fuel. All up, Caltex’s staff has grown to 4700, with its expanding retail operations and more direct ownership of petrol stations. Warner now heads up the fuel business and is one of the company’s most senior executives.

Segal says the New Zealand deal was very important for Caltex. “It’s a terrific acquisition,” he says. “It has a terrific team of people who are very entrepreneurial. It leverages our capabilities in Singapore.”

Over time, Segal says, the company’s revenue from retailing will rise while revenue from fuel will fall back. But for the man driving Caltex there is no final destination, just constant change in a world where disruption is the new normal.