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Lukoil is a company that
supplies gasoline to consumers in the New York, New Jersey and
Pennsylvania region. And those
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gas stations are run like most,
with a franchisee model. But ongoing sanctions by the US
against Russia over the Ukraine
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war is having an impact on those
stations, many of which end up being family run. So it's an
interesting story of how small
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business is being impacted by
something half a world away, and still needs to try and survive.
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Pleasure to be joined to discuss how they go about this by
Serguei Netessine, who is a
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Professor of Operations,
Information and Decisions here at the Wharton School. Serguei, great to catch up
with you. How are you, sir?
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Very good. Thank you for
having me, Dan. Thank you, sir. Well,
like, as I said at the top, a
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lot of these stations are family
run, so it has to be quite the challenge being caught in the
middle of all of this.
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Yes, absolutely. This is a very
unfortunate situation where, you know, Lukoil's US footprint
was built largely through
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acquisitions of existing station
networks. First it was Getty stations, and then there was
some Mobile, Exxon Mobile
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portfolio, followed by gradual
rebranding. So today you have local operators running
community businesses under a
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brand whose ownership is a
geopolitical flashpoint. So that's what's going on.
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What is the relationship, then,
that these local stations have with the larger company? How
does that work out?
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Well, many of those stations are
family run, locally operated businesses caught in the middle,
really. They're kind of like a
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collateral damage, because they
are franchised locations, and sanctions imposed on Lukoil,
they really target ownership and
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control. But the shock travels
straight to family run franchisees who have, really,
nothing to do with with the
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ownership of the franchise. Right. And it's
important to note that while these stations are from a
Russian company, the gasoline
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from, what I read, from these
stores, is gas that's refined here in the US, not in Russia.
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So those people that may have a concern of thinking that they
are supporting Russia, that may
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not necessarily be the case. That is correct, yes. So the
molecule— molecules in the tank
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may be American, but the
reputational risk is about the logo, not the refinery. And
this is what a lot of customers
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see. They see the logo, and the
logo is from the Russian company, and that's why they
often stop buying gasoline, even—
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even before any sanctions. Even,
you know, above and beyond the effect of the direct sanctions
imposed on Lukoil.
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And so the financial side of
this for the companies is a challenge because they have
certain relationships set up in
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terms of how they can bank the
level of credit, where they can get credit from, and it's a
challenge for them right now.
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Exactly, Dan. And the problem is
that stations depend on credit card payments or debit card
payments. And typical franchisee
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in this business gets something
like 85 to 90% of their sales from cards. And cards are
controlled by the bank, of
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course. And when the bank sees a
risk— like in this case, a risk of sanctions— they just stop
accepting payments. And so
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customers come to the station,
payments are not accepted. On the other hand, the franchisee
agreement corners the owner as
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well. Because when you are in a
franchising agreement, you have to use certain equipment, you
have to use certain bank. You
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have to use certain branding.
And so these owners cannot even go to a different bank and say,
"Hey, you know, my bank is not
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accepting payments. Let me go
with a different bank." They are squeezed from both sides. There
is a compliance risk on one side
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and then the contract default
risk on the other side. So that's— that's a very, very
unfortunate situation.
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And so if they wanted to go to
another bank just to be able to solve their problems
temporarily, what are some of
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the potential repercussions of
doing that? Well, they would violate, potentially,
rules of the franchising agreement.
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And that typically means they
can get sued by the— by Lukoil, by the parent company
itself. I mean, I'm not giving
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legal advice here. You know, I
would definitely want to read their agreement and probably
consult with a— with a lawyer and
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understand how the agreement
works. But typically, that's what happens. You— you
would violate the rules of the
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agreement, and potentially just lose entire franchising
unit that you have. So then for the
company, Lukoil, I guess, one
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of the potential solutions might
be if they were to sell their assets to another owner, then.
Correct?
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Yes, that would be probably the best
solution for everyone. Divestment is kind of a cleanest
structural solution I can think
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of. But the problem is, with
timelines and approvals, that could be slow because of the
sanctions. Because OFAC
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explicitly addressed this, and
they said that, look, the general license that they give,
it authorizes negotiations and
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all kinds of contingent
contracts, plus due diligence, but it doesn't authorize the
actual sale. So when it comes to
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sale, it still has to be approved. So
that probably means extra months and months that are going—
that are going to take place
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between the agreement is reached
and then the approval is gained. So policy-wise, the sale is a
nice off ramp, but it's a
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regulated off ramp. So—
- Right. It would be a slow off ramp. But if you did have something
like that occur, I would assume
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most likely that— well, I can't
assume it, but would there need to be a rebrand of the stores?
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Practically, yes. Yeah. I think
in most cases, either immediately or part of the sale.
And there are multiple reasons.
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There is a commercial reason. You
want to avoid kind of a customer seeing this sign, and the
reputational drag is there. But
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then there is also compliance,
operational reason. So banking and payment partners will be
more comfortable. And then there
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is a contract reason. Usually
rebranding is required as a part of termination of the agreement
and sale of assets. So even
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if the fuel supply would stay
the same, most likely, rebranding can be the difference between
this political headline and a
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local corner store.
A corner store. What, potentially, then, is the
path that these local store
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owners need to consider right
now? I mean, as you said before, they're kind of stuck in the
middle here, and it doesn't
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feel like they have a lot of
options at this moment. No, unfortunately not. And, you
know, they kind of should have
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seen this coming. I'm frankly
surprised that Lukoil wasn't sanctioned earlier. You know, it
took so long. You know, the war
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has been going on for such a
long time, and Lukoil is clearly supporting the Russian
government in the war. There
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are a few things you can do. You
can try to find redundant payment options. You know, try
to encourage multiple processors
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to accept payments, for example,
and hopefully there are some banks that are not as worried
about sanctions. So that's kind
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of in the mediate, in the mediate
term, to investigate. Then you really want transparent
customer messaging. I would
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have— I would have, everywhere,
"Locally-owned, employs local staff, fuel supply through US
distribution," and so on, to just
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help customers understand that,
you know, this is really— has nothing to do— it doesn't have
much to do with a Russian
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company business. This won't
solve sanctions, but it can soften this brand avoidance
disturbance. And then you
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probably want to engage in some
trade associations, start talking with each other, and
push for practical guidance from
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OFAC and so on. So then you can
get engaged into some medium term, you know, seek compliance
pathways and negotiate some kind
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of franchising relief. That would
involve some kind of a consultations with a lawyer,
probably.
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How much is this really a story
of kind of the nature of how small businesses have to deal
with, you know, some very unique
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situations that may come out of
the blue, that they may not have expected when they, you know,
wanted to be an owner of a
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business like this? Yeah, it's— it's an— it's
unfortunate in this case, that
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the policy goal is to cut off
sanctioned cash flows, right? So you want to cut off cash flows
to Russia, not to wipe out
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American family businesses,
right? So, of course, I think OFAC realized this a little bit late,
and kind of created this
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solution where they allowed
stations still to operate, but then there is still a backlash,
because customers see the brand
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and, you know, they kind of
perceive it as not a good brand. So there are,
unfortunately, no great solutions
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right now. Really, this
acquisition would be the best. So it should be encouraged. It
should be made relatively fast,
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because this really would be a
good outcome for everyone. Serguei, great to talk to you
again.
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Thanks very much. All the
best. Yeah, thank you. Thank you, Dan.
- You got it. Good to see you, as usual.
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Absolutely. Serguei Netessine,
who is Professor of Operations, Information and Decisions here
at the Wharton School.