WMT Walmart Inc

By Sarah Nassauer 

For most of the past 20 years, Wal-Mart Stores Inc. has let another company build and operate gas stations in the parking lots of its stores. Now, the retailer has decided it wants to pump its own gasoline.

Last week, Wal-Mart executives told Murphy USA Inc. that going forward it will build and operate its own gas stations. Murphy will continue to run the more than 1,000 locations it has already built near Wal-Mart stores.

Although oil prices have tumbled in the past year, forcing companies like BP PLC to slash thousands of jobs and Exxon Mobil Corp. to halt stock buybacks, falling prices at the pump haven't hurt gas-station owners. While revenue from fuel sales has fallen, so have fuel expenses. Plus, cheaper gasoline leaves more cash in drivers' pockets to buy cigarettes, snacks and other high-margin merchandise.

Wal-Mart has run gas stations in front of its warehouse chain Sam's Club since 1997 and already operates several hundred in front of its approximately 4,500 Wal-Mart stores, said company spokesman Randy Hargrove. But the largest seller of gasoline in front of U.S. Wal-Mart stores is Murphy. When building new stores, Wal-Mart plans to add its own gas stations to as many as possible, said Mr. Hargrove.

The shift is a sign that Wal-Mart CEO Doug McMillon is pushing to eke out profit from every corner as the retailer pours billions into boosting e-commerce sales to fend off Amazon.com Inc. and improve slow sales growth at stores, in part by raising minimum wages for hourly employees in an effort to improve customer service. The company has warned that profits could fall by as much as 12% in the fiscal year that began this month, and it recently closed more than 150 of its U.S. stores.

Like other retailers adding gas stations to parking lots, Wal-Mart primarily sees selling gasoline as a way to lure more shoppers to stores so they buy other, higher margin items in the main store. Executives from Costco Wholesale Corp. said last year that they hope to add pumps to as many of the warehouse retailer's locations as possible, though Costco is already one of the largest sellers of gasoline in the country.

Still, by running its own gas stations, Wal-Mart "can probably get a little more margin themselves," selling gasoline and cigarettes coupled with more profitable items like small bags of chips or fountain drinks, said Brian Yarbrough, an analyst at Edward Jones.

Wal-Mart has long embraced the philosophy of learning a business from an outside company, and then finding a way to do it more efficiently in-house. Since Mr. McMillon became CEO in 2014, Wal-Mart has become increasingly averse to outsourcing.

The decision is a blow for Murphy USA, which had presented a plan to Wal-Mart to build more gas stations in Wal-Mart parking lots last January. Murphy had sought to expand a decades-old partnership that helped propel Murphy into a company with $13 billion in annual sales. More than 1,000 of Murphy's roughly 1,300 gas stations are attached or near one of the retailer's stores.

Murphy held a call last week with investors to deliver the news, highlighting a plan to grow without buying land from Wal-Mart directly, while continuing to benefit from the stations they already own. The company said it would use funds on share repurchases and to potentially buy land for new gas stations within a one-mile radius of Wal-Mart Supercenters.

"Our business model as a low-cost fuel provider allows us to compete with anyone in the business, whether it is in a Wal-Mart parking lot or a busy intersection down the street," Andrew Clyde, CEO of Murphy, told investors.

The partnership between Murphy and Wal-Mart grew as major oil companies withdrew from retail operations to focus on production and refining operations.

But while the total number of U.S. filling stations has been in decline for the past two decades, convenience stores and big-box grocery stores that sell gasoline have been an area of growth, according to Energy Analysts International, a consulting firm.

Wal-Mart's move to build future gas stations without Murphy marks the unraveling of an unusual alliance first forged in 1996 between two large Arkansas companies. Murphy is based in El Dorado in the southern part of the state; Wal-Mart is in Bentonville, the northwest corner.

When Murphy executives first hoped to build stations in front of retail locations in the late '90s, "being an Arkansas company, the CEO at the time said we could work with Wal-Mart," said Mr. Clyde. The partnership has cooled and been reignited in the past as new Wal-Mart executives shift their opinion of how the retail behemoth should sell gasoline, said Mr. Clyde, who grew up in El Dorado.

Under their partnership, Murphy leased and then bought land in Wal-Mart parking lots and just adjacent to stores, selling cheap gasoline, cigarettes and, later, some typical convenience store items like fountain drinks. Supercenters with a gas station in front have more than 2% higher sales than those without, according to Murphy's Mr. Clyde. Murphy sells the gasoline at a discount for customers using Wal-Mart credit cards and gift cards.

Teaming up with Wal-Mart allowed Murphy to profit with Wal-Mart's rise. "We grew with the new growth of the Supercenters," said Mr. Clyde. Murphy will continue with plans to add about 60 gas stations that were already in the works. When the company was spun off from Murphy Oil Corp. in 2013, it cited its relationship with Wal-Mart as one of its risk factors.

Last January, Murphy executives met with Wal-Mart CEO Mr. McMillon and Wal-Mart U.S. CEO Greg Foran to pitch a plan to deepen their ties. Murphy executives highlighted that Supercenters with gas stations in front attract more shoppers and that Murphy had expertise running stations, which are often low-margin operations, said Mr. Clyde. The idea, Mr. Clyde recalled, was to take over "another distraction for management, given everything else that is on their plate."

Write to Sarah Nassauer at sarah.nassauer@wsj.com

(END) Dow Jones Newswires

February 03, 2016 19:08 ET (00:08 GMT)

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