Friday, September 29, 2006

Collateral Brand Damage

I've been wondering how long it would take for the increasingly anti-American tone and actions of Venezuela's president to harm the interests of his country's wholly-owned US affiliate, Citgo Petroleum. Yesterday, that uncertainty became concrete, with the cancellation by 7-Eleven of its 20-year old supply and co-branding relationship with Citgo. 7-Eleven convenience stores with gas pumps will soon fly their own flag, rather than Citgo's. While I'm sure there's a lot of truth behind both parties' claims that this move resulted from diverging business strategies, rather than being prompted by the torrent of invective that Hugo Chavez issued during his recent visit to the US, the timing cannot be entirely coincidental. This could signal the beginning of serious problems for Citgo.

As a subsidiary of PdVSA, the Venezuelan state oil company, Citgo has had an impressive run in this country. They amassed a retail network of approximately 14,000 stations, putting them in the top tier of US gasoline marketers, with brands like Shell and Exxon. As is the case for most major oil companies, Citgo owns and operates few of these stations directly. Mostly, these are independent businesses with contracts for supply from Citgo that allow them to use the company's brand and capitalize on its advertising and network benefits. If those benefits become liabilities, because of a shift in public perceptions by US consumers--as the Washington Post article suggests may be occurring--Citgo could experience a dramatic reduction in the size of its network, as dealers flee to other brands with less baggage, including regional brands or their own brand. Citgo could find itself deprived of the higher margins that usually accompany integration to the retail level.

I have never participated in a gas station boycott, and I have gone out of my way to oppose some that I ran across. They harm local businesses more than the owners of the brands with which they are aligned. As a matter of personal choice, though, I have avoided filling up at Citgo since Mr. Chavez came to power. However small the profit margin that would find its way back to PdVSA, I can't in good conscience criticize Mr. Chavez's policies while supporting them financially. If more Americans come to share my views, today's Citgo retailers will face some tough decisions about their brand, and the corporation may need to sell more than just its interest in one refinery.

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