The Circle K Company Business Information, Profile, and History
Phoenix, Arizona 85012
History of The Circle K Company
The Circle K Company, which became a division of Tosco Corporation in 1996, is the third-largest convenience store chain in the United States and the largest operator of company-owned convenience stores. It is also a major marketer of gasoline, through the 85 percent of Circle K stores that offer gasoline and the more than 1,000 Tosco gasoline stations merged into Circle K following its purchase by Tosco. Overall, Circle K operates a retail system of more than 4,000 outlets in 34 states. There are also about 900 Circle K stores--operated via joint ventures or licensing agreements--in more than 50 other countries, notably Canada, Taiwan, Korea, Hong Kong, New Zealand, Mexico, and Argentina. Through a 1993 agreement, Uny Company of Japan operates 1,750 Circle K stores in Japan, from which The Circle K Company derives no royalties or other income.
Founded as Three-Store Chain in 1951
In 1951, Fred Hervey, a self-made businessman, bought three Kay's Food Stores in El Paso, Texas, and began operating them under the name of Kay's Drive-In Food Service. Hervey, who was born in 1909, began his business career in childhood by selling magazine subscriptions and by setting up a soda pop stand outside his father's outdoor theater. During the 1930s, Hervey and his brother started a profitable root beer stand. Hervey then went on to other business enterprises and even served two terms as mayor of El Paso before he founded Circle K.
By 1957 Hervey had a 10-store chain in the El Paso area, and he decided to expand his operation to Arizona. The company adopted a new logo and corporate trademark: an encircled K to create a western image. By 1959 the Circle K Food Store chain had 15 units in Arizona in addition to the 10 in Texas. In those days, convenience stores were still a new idea--there were only 500 such stores in the country (in 1988, there were 80,000). In 1965 Circle K developed its contract store concept, individual owner-operated stores to serve remote areas.
In the early 1960s, the company doubled in size and moved its corporate headquarters to Phoenix, Arizona. In 1963 Circle K went public, issuing 96,000 shares of common stock. From this original stock offering to the late 1980s, Circle K's stock split eight times.
Began Selling Gasoline in the Mid-1960s
In 1964 Circle K celebrated the opening of its 100th store. That same year, the board of directors began to think about expanding into nonfood activities, and so changed the name of the corporation, eliminating the words "Food Stores." The Circle K Corporation soon began selling gasoline as well as food products--the first convenience store to do so. In 1964 the company also test-marketed manufactured ice under the brand name Crystal Clear Circle K.
By the late 1960s, the company was able to devote more of its resources to technology: in 1967, business operations were computerized, and in 1968, a chemist was hired to develop food products, which eventually led to the Hi Spark'l line and Circle K Freezes. These products, along with others in the Polar Beverage division, such as Del Sol fruit punches and Just Orange juice, developed in the 1970s, continued to be sold until the mid-1980s. At that time, the trend in convenience stores was to enter into joint ventures with brand name companies to sell fast foods such as ice cream, juices, or doughnuts. For example, a Dunkin' Donuts brand program was successful in many Circle K stores.
In 1971, with the establishment of the foodservice division, the company began to sell sandwiches. In 1972, the company was operating in eight western states: Arizona, California, Colorado, Idaho, Montana, Oregon, New Mexico, and Texas. By the mid-1970s Circle K had acquired 26 Quick-Shop stores, thus expanding its base of operation into Oklahoma and Kansas.
Under the leadership of president John Gillet, Circle K began to expand overseas in the early 1970s. In 1972, businessmen from Japan came to the United States to study the convenience store concept; their visit to Circle K in Phoenix led to Circle K's first foreign licensing agreement, in 1979, with the Uny Company of Japan to establish Circle K stores there. Further overseas expansion in Asia, Europe, and Australia occurred in the 1980s. By 1989, Circle K convenience stores existed in 13 foreign countries.
Aggressive Growth in the Early 1980s
The early 1980s were a period of aggressive growth. Karl Eller, CEO and chairman of the board--with the help of his long-time associate, Carl H. Linder, a director--was given credit for Circle K's ambitious posture during this time. Eller, who previously founded Combined Communications Corporation and served as president of Columbia Pictures, had a reputation as an acute dealmaker and business opportunist. (An anecdote reported by Business Week claims Eller was once able to strike a good deal buying several television stations by reading about their owner's death in the obituaries.) And, indeed, under Eller's leadership sales soared and the number of Circle K stores nearly tripled, mostly through acquisitions from other chains. During the early 1980s, due to changing consumer needs and the growth of the industry, competition in the convenience food industry was fierce, and Eller's strategy was to buy up units from rivals hurt by this vigorous competition. In 1983 Circle K nearly doubled its size with its acquisition of 960 UtoteM units. Other acquisitions included 435 Little General stores and 21 Day-N-Nite stores in 1984, 449 Shop & Go stores in 1985, and 473 7-Eleven stores and 538 stores from Charter Oil in 1988. Circle K expanded from its base in the Southwest aggressively into the South and Northwest and to a lesser extent into the East and Midwest, as well as internationally.
In addition to expansion, the early 1980s also brought a number of innovations to Circle K stores. In 1983, stores in the Phoenix area installed automatic teller machines, while commissary operations developed the Deli-Fresh sandwich concept to serve company stores as well as some supermarket and military accounts. A third innovation that year was a redesigning project to establish a unique corporate identity for Circle K. Stores were remodeled in orange, red, and purple.
In fiscal 1984, Circle K passed the $1 billion sales mark, and the next year it constructed a new corporate headquarters in Phoenix--an elegant four-story building housing a Circle K store in its front section. But the fast growth and creative innovation of the 1980s were not without difficulty and controversy. Circle K's 1980 acquisition of 13.2 percent of Nucorp Energy, Inc., a petroleum corporation, brought with it a lawsuit by a group of shareholders and officers of companies acquired by Nucorp in 1981. The lawsuit, filed in 1983, questioned the integrity of Nucorp's accounting practices, and threatened the financial stability and ratings of Circle K for five years. It was settled in 1988, when a jury ruled in Circle K's favor. Meanwhile, Nucorp filed for bankruptcy in 1982, then Circle K sold its interest at a loss the following year.
Controversies and Financial Problems in the Late 1980s
In 1988, however, there were other problems. Early in that year, Circle K triggered a gasoline price war in Alabama by cutting prices as much as seven cents a gallon. The state's attorney and a group of retailers claimed that Circle K's action violated the state's Motor Fuel Marketing Act and threatened to file a suit. The impetus for legal action was stifled when Circle K raised its gas prices once again. A spokesperson for Circle K told National Petroleum News, "As a convenience store chain, we give our customers the best possible convenience and value in pricing, but we don't sell below cost."
Circle K generated further controversy in 1988 when it instituted a new health insurance plan for its employees which sought to exclude "lifestyle-related" health care problems such as drug or alcohol abuse. This policy would also have excluded AIDS victims, except ones who contracted the disease through blood transfusions. It would not have excluded drug and alcohol rehabilitation, however. The plan created a furor among civil libertarians and gay-rights groups, who feared that other self-insured companies would rush to institute similar policies. Brent Nance, insurance case manager for AIDS Project Los Angeles, told Business Insurance, "It's almost as if Circle K says there are innocent victims and guilty victims, and they will cover only innocent victims." Criticism also came from less expected quarters such as the insurance industry and the convenience store industry. Circle K eventually withdrew the lifestyle exclusions from its policy.
Circle K's fast growth brought with it a number of personnel problems that the company had to address. Numerous acquisitions meant that uniformity of procedures and training simply did not exist. It also led to rapid turnover and a lack of company loyalty on the part of employees who often felt an allegiance to their original employer. Circle K instituted a number of communication and training improvements. Newsletters and a toll-free telephone number were designed to allay fears among employees whose stores were in the process of being acquired by Circle K. The No. 1 Club rewarded sales effort with cash and recognition; the Management Development Candidate program and the Professional Retail Operator program provided comprehensive training for managers.
All of these difficulties paled, however, in comparison to Circle K's mounting financial problems, which stemmed from the company's rapid expansion throughout the 1980s. In 1989, the company began to have serious financial problems, coincidentally or not the year after founder Hervey left the board of directors. From 1983 to 1989, Circle K had nearly quadrupled its number of outlets, going from 1,200 in 12 states to 4,500 in 32 states. To finance the expansion, long-term debt increased from $40.5 million to $1.1 billion over the same period. By 1989, Circle K was paying nearly $100 million annually simply to service its debt. Although sales reached a record $3.5 billion in 1989, net income was only $15 million, a minuscule 0.4 percent of sales. During the year, Circle K put itself on the block, but there were no takers.
In early 1990 Circle K brought in Robert Dearth from Chiquita Brands to be president, with Eller soon resigning. Dearth moved to cut costs, but it was too little, too late. Circle K declared bankruptcy in May 1990, in the midst of a year in which the company would post a $773 million loss.
Fortunes Turned Around in Early 1990s
Dearth resigned in June 1991. Bart Brown, an attorney from Ohio, was chosen as CEO and chairman and John Antioco became president and COO, leaving rival Southland Corp. to do so. Brown and Antioco began to slowly revive Circle K under bankruptcy protection, closing or selling stores to cut costs and renovating those that remained in the chain. No less than 45 percent of the stores would be jettisoned by mid-1993, when there were 2,800 stores chainwide. The renovation program ultimately led to Circle K's Shoppers Express format, which organized each store into six distinct departments: Sales and Service, Beverage Depot, Grocery Express, Food Court, Snack World, and Car Care. The company also began to add such enhancements to its stores as pay-at-the-pump credit card readers, safety lighting, and improved canopies.
By July 1993 Circle K's finances had improved to the point where Investcorp S.A., a Bahrain-based investment company, offered to buy the chain out of bankruptcy for $399.5 million. Following the purchase, Antioco took over the CEO position, with Brown remaining chairman. That same year, Circle K reached the first of several agreements with federal courts and state governments regarding the cleanup of sites contaminated by leaking underground gasoline storage tanks. In 1995, the company estimated that it would have to spend approximately $100 million through the year 2000 to clean up all the sites.
In 1994 Circle K returned to profitability, posting a modest profit of $18.4 million on sales of $3.32 billion. Early in 1995 Circle K became a public company again, when Investcorp sold 30 percent of Circle K to the public. The resulting capital was earmarked for a cautious program of growth. The company spent $24.6 million to purchase 16 Kwik-Stop stores in the Phoenix metro area. More significantly, Circle K entered the franchising arena for the first time through a deal with Gibbs Oil Co., based in Massachusetts, which soon thereafter ran 82 Circle K units in New England. A second franchising deal followed through a joint venture with Southgard Corporation which created 164 Circle K franchises in Texas and Oklahoma. These deals involved secondary markets, which was where Circle K intended to look for future franchising opportunities.
Circle K seemed to throw some of its caution to the wind later in 1995, however, when it made an unsolicited bid for National Convenience Stores Inc. and its 661 stores. But Diamond Shamrock Inc. outbid Circle K, purchasing National Convenience for $190 million. Also in 1995, Antioco succeeded Brown as chairman.
Began New Era with Purchase by Tosco Corporation
The following year, Tosco Corporation, a Stamford, Connecticut-based petroleum refiner and marketer, purchased Circle K for $750 million. Tosco merged its marketing arm, Tosco Marketing Company, with The Circle K Corporation to create The Circle K Company, a division of Tosco with more than 4,000 retail locations in 34 states. Brought together were one of the country's largest independent oil companies and one of the largest convenience store chains. Antioco soon resigned his position (quickly landing at Taco Bell as president and CEO), and Robert Lavinia, who had headed up Tosco Marketing, became the new Circle K's president and CEO.
Also in 1996, a jury awarded four former Circle K managers of Vietnamese heritage more than $20 million in damages in a discrimination case. The company planned to appeal the verdict. Later in 1996, Coca-Cola Co. and Circle K settled another suit, this one stemming from Circle K's decision to terminate an exclusive agreement to sell only Coke fountain products. Although terms were not announced, the two firms stated that they had signed a new agreement involving the sale of Coke products in Circle K stores.
In late 1996, Tosco signed a letter of intent to acquire the assets of 76 Products Company, the West Coast refining and marketing division of Unocal. Although it was not immediately clear how the acquisition would be integrated into Tosco, the deal brought 1,350 76-branded gasoline stations to the Tosco fold. Along with Tosco's existing deals to sell the British Petroleum "BP" brand in 20 states and the Exxon brand in Arizona, the Unocal deal added to the potential ways that Circle K could sell branded gasoline at its units. The power of the combination of the well-known Circle K convenience store brand with well-known gasoline brands was a main attraction for Tosco when it was considering the Circle K purchase.
Circle K approached the turn of the century seemingly at the beginning of another period of rapid growth. In addition to its move into franchising and the addition of Tosco outlets, Circle K had begun to experiment with a home-meal replacement store called Emily's Market, whose take-home meals might eventually be offered at Circle Ks as well. It had also been testing in-store Blimpie and Taco Bell franchises. Such experiments and the deep pockets of its parent boded well for Circle K's future.
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