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TB0013
September 24, 2009

Graeme Rankine

Primo Benzina AG
In early 2010, Otto Schroder, Chief Executive Officer of Primo Benzina AG, completed a review of the companys financial situation with Annegret Heuermann, the companys chief financial officer. The two executives
had recently participated in discussions with Katerina Suvarinova, head of commercial lending at Dresdner Bank,
about Primo Benzinas financing requirements for the year. In spite of excellent sales performance, the company
had experienced a substantial decline in its cash flow, requiring Heuermann to request an increase in the credit
limit to 12 million, up from the previously established limit of 10 million. Primo Benzina had only managed
to stay within the loan limit by relying heavily on trade credit. While Suvarinova noted Primo Benzinas rapid
rise in sales revenue during the last few years, she was concerned about the companys weak profitability performance and increasing debt load. In spite of her reservations, Suvarinova affirmed the companys term loan for
the coming year, but she insisted on including additional restrictions in the loan covenants, and higher levels
of collateral to secure the loan. At their meeting, Schroder and Heuermann wondered whether the new credit
limit would permit the company to execute its expansion plans, including the construction of three new retail
petrol stations in Heilbronn, Germany.

Company Background
In 2006, Schroeder founded Primo Benzina AG in Stuttgart, Germany, to provide retail petrol customers with
outstanding products and service. Schroeder, an investment banker by training and occupation until his retirement in 1996, had been a customer at many rundown petrol stations where the snacks were stale and the stations
service personnel were rude and shabbily dressed. He had even been robbed late at night in one petrol station
in Hanover. After extensive market analysis, Schroeder found that most retail petrol stations in Europe catered
primarily to male customers between the ages of 18 and 25 by offering petrol and staple items such as chips, soft
drinks, beer, and cigarettes. This customer segment was primarily focused on fast, efficient service, caring little
about clean, well-lighted surroundings or fresh food.
But Schroeders analysis revealed that women and middle-aged people often felt unsafe visiting petrol outlets,
particularly late at night. These customers were concerned about safe, clean, sanitary stores and restrooms, as
well as ready-to-serve meals on their way home after work. In surveys commissioned by Schroeder, he found that
customers would be willing to pay extra to have service attendants fill their petrol tanks, put air in their tires, and
clean their windscreens. Some of those surveyed expressed an interest in service stations that provided in-store
restaurants serving meals while customers waited for an oil change or a car wash. Schroeder recalled that this was
more like the petrol stations he remembered visiting with his parents as a young boy. But with rising labor costs
and the advent of new automated petrol dispensers, service stations had become automated over time to reduce
labor costs. Now, service stations were operated with as few as one or two attendants sitting in a reinforced glass
booth for safety. Schroeder decided that there might be space in the crowded retail petrol station market for a
new business based on differentiated service levels.
Primo Benzina AG was established with a mission to be the best petrol, convenience, and fresh food retailer
in the eyes of our customers, our competitors, and our employees. Determined that female and middle-aged
customers in Stuttgart would never again be subjected to unsafe, dirty service stations, Schroeder established
the first Primo Benzina outlet on Stiffel Strasse. Annegret Heuermann, Otto Schroders daughter, a CPA and a
former partner with PricewaterhouseCoopers, became CFO in 2007 to introduce a rigorous financial approach
to decision-making at the entrepreneurial company.
Copyright 2009 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professor Graeme
Rankine for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.

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For the exclusive use of A. Harris, 2015.

Strategy
Primo Benzina operated retail service stations offering a variety of fuels, including super premium, premium,
regular petrol, and diesel, as well as an in-store deli market which sold snacks, drinks, grocery items, and
ready-to-eat meals and salads. Primo Benzina also operated full-service restaurants with a limited set selection
of breakfast, lunch, and dinner menu items. The company targeted women and middle-aged, upper middleincome professionals as its principal customers, who often purchased a meal while driving to or from work. The
company also focused on professional truckers employed by reputable trucking companies who signed up for the
companys Signature Service. This service was prepaid by the trucking company so that the long-distance trucker
was only required to show a Signature Service card issued by Primo Benzina to access the companys amenities.
The companys Signature Service enabled the trucker to use the companys full-service bathroom and showers
and have Primo Benzinas attendants launder the truckers clothes within one hour while they ate a meal at the
companys restaurant.
Primo Benzinas humble beginnings expanded from a single retail station in Stuttgart to 24 stores in Germany
and Switzerland by 2009. The company focused its expansion effort on medium-sized cities, which were often
underserved by the large retail petrol chains (see Exhibit 1 for information about the growth and location of the
companys retail outlets). The average retail outlet size was 750 square meters, including the deli and restaurant,
and each outlet stocked about 3,000 different storekeeping units (SKUs). Primo Benzina had increased the size
of the retail outlets it had constructed recently to nearly 3,000 square meters with the inclusion of a full-service
restaurant.
The companys strategy had several important elements. First, the company provided outstanding service
from its station attendants, who provided a range of services, including filling a customers petrol tank, checking
tire pressure and oil levels, and cleaning the customers windows. By offering outstanding service, many of the
companys customers were repeat customers, so the attendants knew them by name and what special services they
expected. All service station attendants wore the blue company uniform with its lion logo, which was provided
fresh to each attendant daily, because the company expected its attendants to be well groomed and maintain a
neat and tidy appearance at all times. Second, the companys service stations were spotlessly clean and well lit,
and because attendants came out to the customers car, customers felt safer. The company also had an armed
security service monitor all outlets via video cameras, with a response time of less than ten minutes to any of the
companys locations. Third, the companys delis and restaurants provided high-quality meals with outstanding
service. Fourth, the company maintained a loyalty program in which customers earned miles on Lufthansas
Miles and More mileage program for every euro customers spent at Primo Benzinas outlets. And, finally, the
company offered credit to customers who chose to use its Primo Benzina Visa credit card.
Because service was of paramount importance to its customers, the companys retail prices were often higher
than those of its competitors. Primo Benzina offered payment terms of 2% 10, net 30 to both its retail customers
and its professional trucking customers.1 The companys professional trucking customers, who accounted for
approximately 40 percent of 2009 sales revenues, generally took advantage of the discount offer, and virtually all
paid within ten days in order to receive it. To boost sales, Primo Benzina had become less stringent in granting
credit to its retail customers and in monitoring and collecting outstanding receivables.
As for its product offering, the company purchased only high-quality gasoline from reliable refiners such
as BP, Shell, and Esso. Its snack and drink products were brand name products provided by reliable distributors.
Primo Benzina guaranteed the quality of its snacks and soft drinks by offering a full refund if the customer was
not satisfied with its products. Suppliers typically offered Primo Benzina credit terms of 2% 10, net 30 on its
purchases.

Industry Background
In 2009, the retail gasoline industry was dominated by large integrated global exploration, production, and
refining and marketing companies that operated retailing businesses with thousands of outlets worldwide. The
The term 2% 10, net 30 means that a customer received a discount of two percent if payment was made within 10 days,
with the balance due within 30 days.
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primary strategy of the global chains was low-priced gasoline, which they were able to deliver by offering fast
and efficient petrol service at stations that were highly automated. Customers pumped their own petrol, checked
their automobiles fluid levels, and washed their own windscreens. Most outlets were staffed by as few as two
people who swiped credit and debit cards for petrol, snacks, and soft drinks. In Germany and Switzerland, OMV,
Total, and Aral provided more than 90 percent of all retail petrol sales. The rest of the market was served by
small operators, such as Primo Benzina.

OMV
OMVs refining and marketing business was number one in the Danube Basin, a growth market of 13 counties
with a total population of more than 100 million. With the Petrom acquisition, OMV was expected to hit its
target of a 20 percent market share in the region in 2009. More than 800,000 customers used the companys petrol
stations every day. OMVs retail petrol outlets had long since ceased selling only fuel, and become innovative
multifunctional service centers for its customers, offering convenient, customer-friendly VIVA forecourt stores
and quality catering. A close-knit network of petrol stations and dealers guaranteed the quality of service across
the region. OMVs refineries in Austria, Germany, and Romania, together with its stake in Germanys Bayernoil
refineries, added up to most of the capacity required for the entire Danube region.

Total
In 2009, Total was number one in western European refining and marketing and number one in African marketing, with a worldwide refining capacity of approximately 2.6 million barrels of oil per day and sales of approximately 3.9 million barrels of petroleum products per day. The companys integrated refining baseinterests in
25 refineries and 12 operated directlywas one of Europes most competitive, and was fully compliant with the
new European Union product specification standards. Total operated a network of almost 16,500 service stations worldwide, mostly in Europe and Africa. Total was one of the leading marketers, based on refining capacity
and refined product sales, across the combined six largest western European markets (France, Spain, Benelux,
United Kingdom, Germany, and Italy). Outside Europe, Total focused on fast-growing markets such as Africa,
where they were the largest marketer with a market share of 11 percent and approximately 3,500 retail stations
in more than 40 countries.

Aral
The blue Aral diamond was a familiar symbol on the German roadside, and one of the most trusted brands in
Germany. It had been associated with quality automotive fuels since the 1920s. Every day more than 2.5 million
customers visited an Aral station to fill up on petrol, use an on-site car wash, or purchase a beverage or snack.
Some 40 percent of Aral customers stopped by to shop in the companys retail spaces, which stocked a range of
convenience items, including Aral-branded motor oils, along with coffee and food. In addition to being Germanys leading fuel brand marketer, Aral was also the countrys third largest fast food retailer, after McDonalds
and Burger King. Alles Super was Arals slogan.
In the premium petrol retail segment, Primo Benzina competed with three private regional companies:
Zip AG, Schnell AG, and SparPetrol AG, each with about 10 retail service stations. These companies offered
attendant services like Primo Benzina, but did not provide restaurant or laundry service at its retail outlets.

The Financial Situation

Primo Benzina had relied heavily on short-term loans from Dresdner Bank, which had recently increased the
companys term loan to 12 million. Exhibit 2 provides balance sheet and income statement data for the years
2006-2009. The term loan was funded (or repaid) on June 30 of each year, and bore an interest rate of six percent per year, or about 200 basis points above the prime interest rate. If Primo Benzina utilized the maximum
amount of the term loan, which Heuermann believed would be necessary in 2010, the short-term interest
obligation would be around 739,000. The short-term loan was secured by a lien on all of Primo Benzinas accounts receivable and inventories, while the loans covenants specified minimum levels of working capital and
net worth that had to be maintained. Information about the companys product lines, petrol, and food, snacks,
TB0013

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For the exclusive use of A. Harris, 2015.

and drinks, is provide in Exhibit 3. Information about Primo Benzinas competitors in the premium segment is
provided in Exhibit 4.
The companys outstanding long-term debt of 6 million was financed by Gerhard Schroder, a billionaire
property developer and Otto Schroders son, and was due and payable on June 30, 2012. In 2009, Gerhard
Schroder had provided 4.4 million in additional loans, and indicated that he would be unwilling to increase
his commitment to the business, but that the interest rate of eight percent per year would remain in effect on
all long-term debt.
Another important source of financing Primo Benzinas working capital needs over the last few years prior
to 2010 had been the practice of stretching payables, i.e., delaying payments of accounts payable to the companys
suppliers. Most suppliers offered terms of 2% 10, net 30, but Primo Benzina had stretched its payables to the
point that several of its suppliers had called Otto Schroder to complain about the slowdown. Helmut Scharf, the
CEO of Petrol Jetzt AG, called to say he was also a small businessman who had bills to pay.
In 2009, Primo Benzina issued 6.211 million of new equity to Schroeder, the companys chief executive
officer and major shareholder, but he had indicated that he was unwilling to dilute his shareholdings or provide
additional equity during the next two years.
The companys short-term bonus scheme paid-incentive compensation was based on earnings before interest,
taxes, depreciation, and amortization (EBITDA). Under the plan, the bonus pool was ten percent of EBITDA
if EBITDA exceeded 1 million, and zero otherwise. To ensure that top management did not view cash outlays
on capital investment as a free good, Heuermann had recently recommended to the companys board of directors
that the bonus plan in the future should be based on free cash flow, which she defined as EBITDA less capital
expenditures (CapEx), or even cash flow from operations less capital expenditures.
In 2006, the company opened two retail outlets in Basel, Switzerland, and by 2009 the company had
increased its Swiss operations to five outlets. Swiss revenues were 40, 35, and 30 percent of the companys total
revenues in 2007, 2008, and 2009, respectively. Heuermann generally viewed the expansion into Switzerland as
having been successful, but she wondered about the impact of movements in the Swiss franc-euro exchange rate
on the companys revenues (see Exhibit 5 for information about currency exchange rates).

The Future
The company anticipated spending 3.402 million to build three new retail outlets in Heilbronn. Based on
extensive market research, Heuermann estimated that sales would increase 25 percent in 2010, and that the
companys cash on hand would need to grow at a rate consistent with sales growth to maintain adequate cash
for daily transactions. Outlays on property and equipment would continue to be depreciated over 15 years for
tax and reporting purposes.2 The companys tax rate was 25 percent of pre-tax profits. The company planned to
maintain its dividend payments at 800,000 per year for the foreseeable future.
As Schroder and Heuermann contemplated the companys growing need for additional cash, they wondered
whether the companys financial structure was the ideal arrangement. They foresaw increasing difficulties in
future negotiations with Dresdner Bank. To add to the companys difficulties, Deutsche Bank (January 9, 2010)
noted that, With petrol prices now at record levels, we expect that consumers will remain focused on low-price
operators, making the next two years very difficult for family-operated service stationsperhaps even the death
of small operators. Only the mega-unit operators will be able to reduce costs enough to remain competitive.

It was accepted practice to deduct a half years depreciation in the year equipment was acquired, and a full years depreciation
each year thereafter.
4
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Exhibit 1. Retail Petrol Stations during 2006-2009

For the Year Ending December 31
Retail Petrol Stations
Germany
Stuttgart
Karlsruhe
Heidelberg
Freiburg
Heilbronn
Switzerland
Basel
Total stationsat year end
Station growth rate

2006

2007

2008

2009

2
0
0
0
0

2
1
0
0
0

5
2
1
0
0

10
5
3
1
0

2
4
-

2
5
25.0%

3
11
120.0%

5
24
118.2%

Total retail square meters (in thousands)

Number of employees
Price per liter of petrol

3
4
1.40

5
7
1.50

15
23
1.55

60
88
1.60

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Exhibit 2. Financial Statement Information

Income Statement
(In thousands of euros)
For the Year Ending December 31
Sales
Cost of goods sold
Gross Profit
Depreciation expense
Other operating expenses
Operating Income
Interest expense
Income before income tax expense
Income tax expense
Net income

2006
2,430
(1,580)
850
100
340
410
150
260
65
195

2007
3,888
(2,527)
1,361
54
622
685
36
649
162
487

2008
10,887
(7,403)
3,484
138
1,742
1,604
163
1,441
360
1,081

2009
38,103
(27,815)
10,288
557
6,859
2,872
653
2,219
555
1,664

2006
0
195
(100)
95

2007
95
487
(250)
332

2008
332
1,081
(800)
613

2009
613
1,664
(800)
1,477

2006

2007

2008

2009

200
199
195
594

320
427
415
1,162

896
1,640
1,217
3,753

3,136
7,830
4,953
15,919

608
(100)
1,102

1,023
(154)
2,031

3,110
(292)
6,571

13,608
(849)
28,678

Current Liabilities
Accounts payable
Short-term loans payable
Total current liabilities

50
201
251

75
282
357

674
1,895
2,569

3,458
9,743
13,201

Long-term debt
Total liabilities

100
351

321
678

1,600
4,169

6,000
19,201

656
95
751
1,102

1,021
332
1,353
2,031

1,789
613
2,402
6,571

8,000
1,477
9,477
28,678

Statement of Retained Earnings

(In thousands of euros)
For the Year Ending December 31
Retained Earningsbeginning of the year
plus net income
less dividends
Retained Earningsend of the year
Balance Sheet
(In thousands of euros)
December 31,
Current Assets
Cash
Receivables
Inventory
Total current assets
Property and equipment (at cost)
Accumulated depreciation
Total assets

Stockholders Equity
Paid-in capital
Retained earnings
Total stockholders equity
Total liabilities and stockholders equity

TB0013

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Exhibit 3. Product Information

By Business Line
(In thousands of euros)
For the Year Ending December 31
Sales
Petrol
Food, snacks, and drinks
Cost of sales
Petrol
Food, snacks, and drinks
Inventory
Petrol
Food, snacks, and drinks

2006

2007

2008

2009

1,458
972
2,430

2,411
1,477
3,888

7,295
3,592
10,887

28,197
9,906
38,103

1,050
530
1,580

1,760
767
2,527

5,325
2,078
7,403

21,147
6,668
27,815

101
94
195

178
237
415

554
663
1,217

2,317
2,636
4,953

Exhibit 4. Benchmarking Competitors

For the Year Ending December 31, 2009
Days receivable
Days inventory
Days payable
Gross profit percentage
Return on sales
Return on invested capital
Return on assets
Return on equity

Zip AG
35
42
31
28.0%
8.0%
12.5%
9.0%
23.0%

Schnell AG
32
39
35
26.0%
10.0%
14.0%
12.0%
19.0%

SparPetrol AG
40
35
27
30.0%
6.0%
11.0%
10.0%
22.0%

Exhibit 5. Exchange Rates between Swiss Francs and Euros

Currency Analysis
Average exchange rate CHF/

TB0013

2006
2.50

2007
2.21

2008
2.00

2009
1.51

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