Thompson’s Pipeline Limited

"It was the best of times, it was the worst of times." These words from Charles Dickens' A Tale of Two Cities seemed especially apt to Paul Thompson as he was lying in his hospital bed. It was 7:00 p.m., March 8, 1987, and Paul had a lot on his mind. Just three months ago he had left a steady, secure job to take over a large, bankrupt gas bar and convenience store in Mount Pearl, Newfoundland, now known as Thompson's Pipeline Limited. While things seemed to be running smoothly, a number of issues that affected the profitability of the business needed to be addressed. Uppermost in Paul's mind was the utilization of non-selling space. In particular, Paul was considering installing a separate business in this space and was presently reviewing several options, including whether to operate as a franchise or an independent business.

Only two hours before, Paul had collapsed in his store while talking to the owner of another Ultramar Pipeline outlet. The doctors told him he was working too hard and had fainted from extreme exhaustion. Since taking over this operation, Paul had been working 17 to 18 hours a day, seven days a week, and had not been eating regularly He knew this was excessive, but there was a lot of responsibility in owning his business and there was so much to be done.


This case was prepared by Professor Greg Noah of Memorial University of Newfoundland for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.

Copyright © 1992, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.


The Owner

When he graduated with a Bachelor of Commerce degree from Memorial University of Newfoundland (MUN) in 1981, Paul didn't want just any job. He was a marketing major and wanted to put his newly acquired skills to work. After a few months of searching, he was offered a position in the marketing department of Ultramar Canada Inc in St John's, Newfoundland.

Over the next five years working as a marketing representative with Ultramar, both in St John's and in Grand Falls, Newfoundland, Paul became familiar with most of Ultramar's outlets in eastern and central Newfoundland. He was exposed to a full range of business practices from efficient and profitable operations to poorly managed, marginal operations. At one point, Paul managed an Ultramar gas bar and restaurant operation for six months while Ultramar searched for a suitable lessee. Paul was a dedicated employee and regularly worked 50 hour weeks. He did not mind having to work occasional 12 or 14 hour days if he felt it was necessary to get the job done.

When the Pipeline site in Mount Pearl, Newfoundland became available, Paul wasted no time in making up his mind; he jumped at the opportunity. He felt his education and experience would enable him to turn it into a successful operation. He was confident he could use his marketing abilities to increase the sales of gasoline and convenience items.

Paul felt it was necessary to become familiar with every aspect of the business so he could instruct employees as to how he wanted tasks performed. On a typical week day Paul would arrive at the site between 6:00 and 6:30 am and would not get home before midnight. On the weekends, he would generally arrive around 8:00 am and leave around 10:00 p.m. He worked the full service pumps from 7:00 to 9:00 am because he felt this was a valuable opportunity to meet his customers and to provide them with good service. He also felt customers would appreciate being served by the owner. During the day, he would occasionally work the counter if things got busy His other activities included making up daily sales reports, scheduling employees, paying bills, preparing the payroll, meeting with suppliers, picking up supplies, stocking shelves, ploughing the lot in the winter when needed, and even cleaning the floor. In general, he would do what he felt had to be done to make sure the operation ran successfully.

Company Background

Ultramar had made significant gains in market share in Newfoundland during the past two and a half years. Paul felt this was accomplished through capital investment in new sites, the acquisition of all the Gulf outlets in the province, high levels of staff morale, and very effective promotions.

Thompson's Pipeline Limited (Pipeline) was a modem, Ultramar gasbar and convenience store located at the intersection of Commonwealth Avenue and Ruth Avenue in Mount Pearl. It had fifteen employees, six full-time and nine part-time. It was open 24 hours a day, 365 days a year. The site had originally opened for operation in mid-1986 under the management of Captain Quick Limited, a local chain of convenience stores. When the original lessee went into receivership after just four months of operation, Ultramar offered a lease on the site to Paul.

The Pipeline's employees ranged in age from 18 to 22 years and were paid $4.25 to $4.75 an hour. Although all the employees had a minimum of high school education, none of them had any special skills or abilities beyond working the counter, pumping gas, and stocking shelves. Paul relied on his retired father-in-law to assist in scheduling employees, counting the cash, and making the daily bank deposits.

Accounting information and financial statements were provided by a local chartered accountant. However, by the time the statements were prepared the information was generally three months old.

The Pipeline site consisted of a paved asphalt lot, gas pumps, an overhead canopy, green space, and a building of approximately 3000 square feet (Exhibit 1). There was a total of eight gas pumps, four self-service, and four full-service. In addition, there was a kiosk with a cash register.

The building was quite attractive and had won a design award from the trade journal Convenience Store Merchandiser. The exterior consisted of medium-brown brick, large areas of glass and a cedar shake roof. The interior was laid out much like a small supermarket with five aisles, coolers along the back wall, a deli counter at one end, and a checkout counter with one cash register near the entrance. The northeast comer of the building consisted of a solarium which was a focal point for an eating area of approximately 500 square feet and which contained seven fixed tables and chairs (Exhibit 2). Although this area was quite attractive, from both the interior and the exterior, it was rarely used, since food sold at the deli counter was almost exclusively taken out.

There were seven parking spaces on the north side of the building for customers shopping in the convenience store. When all these parking spaces were taken, one or two customers would occasionally parallel park along the green space or occasionally in front of the building. However since customers received fast service, traffic tie-ups and potential resulting frustrations were usually avoided.

Competition

The city of Mount Pearl had experienced a 27 percent growth in population in the previous seven years. This was reflected in the increased traffic volumes on Commonwealth Avenue and Ruth Avenue. The section of Commonwealth Avenue between Ruth Avenue and Smallwood Drive had become very commercialised during this period. There were two other gas bars with large convenience stores operated by Petro-Canada, and Irving, two gas bars with service bays owned by Esso and Gulf, and two convenience stores all within a distance of less than one kilometre. In addition, there was a large Petro-Canada gas bar, convenience store under construction on the comer of Commonwealth Avenue and Brookfield Road approximately two kilometres south of Thompson's Pipeline.

This concentration of competition had lead to some very keen pricing on certain high-volume items such as tobacco products. In fact, as soon as Paul took over the site he dropped the price of tobacco, significantly underpricing all his competitors. Paul wanted to increase his market share in gasoline sales; since tobacco typically made up 35 to 40 percent of convenience store sales he wanted to use this to attract customers. The low price was prominently advertised on an illuminated, mobile sign in front of the store.

Although there was no price retaliation on tobacco, a week prior to his collapse, Paul had been visited by the general manager of Red Circle Convenience Stores, the operators of the Petro-Canada gas bar convenience store immediately adjacent to Thompson's Pipeline. He suggested Paul's actions might precipitate a price war and indicated that Red Circle Convenience Stores could weather a price war much longer than Thompson's Pipeline. However, Paul intuitively felt that Ultramar would not let his profitability suffer. This site, which was considered to be a flagship outlet, had been bankrupt once, and Paul felt that Ultramar would support him if he was involved in a price war.

Operations

Immediately upon taking over the operation, Paul realized that major changes were needed in the accounting system. There were only two accounting departments for the whole operation, one for gasoline, and the other for everything in the store. In addition, nothing was computerized. The result was an extreme lack of information and control. Paul had no idea of shrinkage, inventory control consisted of counting items on shelves, and there was no way to accurately estimate the profitability of various products. The situation was further complicated by the large stock of inventory that Paul was forced to purchase when he took over the site. The store carried deli and dairy products, groceries, snack foods, magazines, automotive supplies, beer, lottery tickets, health and beauty products, seasonal items, and tobacco. While both the gas bar and convenience store were profitable, some products in the store were moving much slower than others. Paul was particularly concerned with both the deli counter and the magazine rack.

The deli consisted of two large display coolers, a freezer, an oven and a microwave, sinks, cupboards, and counter space for working. It occupied approximately 200 square feet of floor space. Customers could purchase a wide variety of prepared meats, cheese, and salads to takeout or they could have a sandwich and/or salad served in the eating area of the store. However, most items in the deli were slow moving and customers rarely ate in the store. The deli products had to be changed frequently to maintain quality and to conform to health standards; this resulted in a large amount of wastage.

The magazine rack occupied one side of an eight foot aisle and was stocked with approximately 90 titles. While the retailer would receive a rebate on unsold magazines, the distributor charged for both delivery and pickup of unsold magazines. The magazines also required a significant amount of labour to keep the rack tidy and to count unsold copies for refund. While almost all the magazines were slow moving, Paul wondered if they were the reason some customers chose to shop at his store.

Storage space in the building consisted of only 50 square feet which restricted the amount of inventory Paul could keep on the site. Some suppliers had to deliver three times a week, requiring that someone be available to stock the shelves when certain merchandise was delivered. Being constrained on storage also affected the size of discounts Paul could receive from suppliers by purchasing large volumes.

The building did not contain an office. All of Paul's office work including counting the cash for deposit, writing payroll and suppliers' cheques, and other accounting functions had to be done on one of the restaurant tables or taken home. Since Paul wanted to spend as much of his working time as possible in the store, he knew he would have to locate an office somewhere in the building.

Paul wanted to take advantage of the under-utilized interior space by possibly expanding into another business. The eating area, almost 20 percent of the selling space in the store, was virtually unused. However, since parking was limited, Paul knew that to be viable, any alternative must not impede the existing business by tying up traffic at the gas pumps or elsewhere on the lot. Therefore, realistic options could only be those that required a short transaction time. Customers should be able to make their purchases in a minimum of time where little deliberation or choosing was necessary. In addition, the right alternative had to fit the space and lend itself to cross-merchandising with gasoline.

Alternatives

After considering a number of alternatives, Paul was favouring a film processing centre which would require approximately 200 square feet of floor space. He had the option of either purchasing a Japan Camera franchise or developing his own one-hour photo finishing centre with equipment from Kodak. At present, there was no competition in film processing in Mount Pearl. The nearest photo finishing outlet was in the Village Mall in St John's, five kilometres away.

While the financial terms were more attractive with Kodak, this system lacked the benefits of a franchised business (Exhibit 3). A franchise would provide Paul with a complete package of materials and services. In addition, Paul was provided with an estimated statement of income which seemed reassuring (Exhibit 4). He estimated his sales might reach $250,000 in the first year based on information from Statistics Canada and the 1986 Census of Canada (Exhibit 5). Without a franchise, Paul would have to develop all the ingredients included in a franchise package. As it was, Paid was already working too much, thus the amount of time he could devote to any new enterprise was limited.

Paul had also been offered an over-the-counter postal franchise from Canada Post. Although Paul had limited information on the postal franchise, it was very appealing to him (Exhibit 6). Because it required only 150 square feet of floor space, it could easily be accommodated along with a photo processing centre. Paul felt a postal service would attract customers who might not otherwise be drawn by the existing Pipeline or by the planned film processing centre. In addition, a postal franchise might increase business during the non-peak times of 9:30 to 11:30 am and 2:00 and 3:00 p.m.

The only potential drawback in choosing both franchises was the limited parking available to customers. Paul was worried that if the Pipeline lot became too congested customers could easily go to one of the nearby competitors. To successfully accommodate both franchises Paul felt more parking was necessary. Paul therefore made an application to the municipality to replace one-quarter of the Pipeline's lawn with eight parking spaces. However, the City of Mount Pearl refused the request for more parking.

The issue of his time would also have to be dealt with. Previously, Paul always assumed that as the owner of a business he would have the time to manage the operation and to plan for business growth. But, because of the constraints on his time and the fact that he was so caught up with the day-to-day operation he had almost no time left for planning, organizing, or controlling.

A nurse came back into Paul's hospital room and told him he was able to go home, but should rest for a couple of days before going back to work. Instead of immediately getting up, Paul continued to lie in bed for a few more minutes and wondered how he was going to prioritize all these decisions and what information was needed on each issue.


Exhibit 1

Exhibit 2

Exhibit 3

Comparison of Japan Camera Franchise Expenditures Versus
Expenditures from a Similar Operation Using Similar Equipment Purchased from Kodak

Japan Camera Franchise Kodak
Equipment cost* $75,000 $65,000
Leasehold improvements (estimated) 50,000 50,000
Franchise fee 40,000 not applicable
Franchise royalty 8% of gross sales not applicable
Advertising royalty 3.5% of gross sales not applicable
Start-up advertising (grand opening) 5,000 not applicable**
Inventory 40,000 40,000

 

* Both the Japan Camera and Kodak machines have a one-year warranty. While there is a Kodak service technician stationed in the Mount Pearl area, a Japan Camera technician would have to be flown in from Toronto at the franchisee's expense.
** Japan Camera required the franchisee to spend a minimum of $5,000 on start-up advertising. Kodak would provide the purchaser of their one hour film processing equipment with $1,500 to assist in start-up advertising. Kodak would also match dollar for dollar all advertising by the purchaser up to 3 percent of the value of the supplies purchased from Kodak.

Exhibit 4

Japan Camera Centre 1 Hour Photo
Franchise Estimated Statement of Income

The material set out herein is for informational purposes only. As certain information is of a conjectural nature only, no representation is made that if the Franchisee attains such sales that the same profit will result.

Source: Japan Camera Franchise Information Package

Exhibit 5

Consumer Spending Potential Summary; Photographic Goods and Services (1987) Estimated Expenditures in $000’s) Park and Mount Carson, Mount Pearl, NF

Source: Statistics Canada Survey

Population, Households and Income Projects, Park and Mount Carson, Mount Pearl, NF

Source: The Census of Canada

Exhibit 6

Projected Income Statements for Canada Post Franchisees

NOTES: ESTIMATED ONLY, NOT WARRANTED BY Canada Post Corporation
Sales, Gross Profits and Expenses do not include Fee Items.
Expenses do not include Depreciation or Interest Costs.
* Available from manufacturer to retail postal outlets at manufacturer’s price.

Source: Postal Franchise Information Package, Canada Post Corporation.