By Michael E. Miller
By Allie Conti
By David Villano
By Jose D. Duran
By Michael E. Miller
By Allie Conti
By Kyle Swenson
By Luther Campbell
In court filings Shell has denied that anyone ever told dealers that the Variable Rent Program would remain in place indefinitely. But financial statements prepared by prospective Shell dealers based estimated profits on a variable rent; in five cases reviewed by the Press, the statements each would have shown a net loss had the higher contract rent figure been applied. One of those, submitted by dealer Martin Swofford for a station in San Ramon, California, and approved by the company, induced Swofford to buy the station. One month later the VRP was canceled. Dealer rep Ken Giffin stated in a related court filing that he and other employees were instructed to tell dealers the VRP was to continue indefinitely. “As a practical matter,” Griffin reported, “dealers were dependent upon the VRP program economically, and the company knew that.”
Though Shell is the most recent oil company to spike rents, it didn't invent the concept. In the Eighties Texaco figured out that raising rents to the breaking point was a good way to obtain locations the company wanted for itself. “The basic philosophy was, they just kept raising the rents till [the stations] wouldn't be profitable,” says former Texaco employee John Gryder. A dealer rep until he retired in 1988, Gryder would make rent recommendations in pencil and forward them to his boss. When they came back, the figures had been inked -- at twenty percent higher than what Gryder thought fair. “They discriminated as a policy,” he says.
Rents aren't the only expenses that have been thinning dealer bottom lines. In recent years new contracts have forced lessee dealers to pay expenses once borne by the companies, including maintenance and property taxes. Withholding of credit-card reimbursements, a serious cash-flow issue for many dealers, has become increasingly common. San Francisco Bay Area Shell dealer Bob Oyster saw his withholding climb to more than $100,000 last year before the company finally settled his account.
The latest contracts, offered on a take-it-or-leave-it basis, include other provisions that profoundly affect a dealer's future prospects. Before 1990 dealers who had built a good business could count on the opportunity to sell their stations and reap the reward of their sweat equity. Shell, Texaco, and Chevron now require huge “transfer fees” -- up to 35 percent of the difference between what the dealer paid for the station and the sale price -- if a dealer sells his business to someone other than the company. The Shell and Texaco leases also state that prospective buyers who aren't already dealers for those companies are subject to a one-year “trial franchise” that doesn't have to be renewed by the companies.
Finding a buyer willing to lose an investment of $250,000 or more after a year is no mean feat. But even if dealers do, the companies, especially if they covet the location, won't necessarily approve the sale. A jury awarded Los Angeles-area dealer Carl Eastridge $5.1 million in 1983 because Shell rejected a dozen qualified buyers for his station. Houston Exxon dealer David Vawter, who settled a fraud case against the company for $250,000 in 1993, subsequently had ten buyers rejected before Exxon informed him this year that his station no longer was in the master plan and would be “surplussed.” Eight other dealers interviewed by the Press told similar stories.
The new Shell and Texaco leases even ask the dealers to sign away any legal claims they may have currently or might have in the future, even though the right to seek relief in the courts is guaranteed them by the 1978 Petroleum Marketing Practices Act.
The companies don't always ask dealers to abandon their rights first before shredding them. According to federal law, the dealers have the right to set whatever price at the pump they want without interference from the supplier. Companies do have the right to make recommendations, but that's it. As a Shell retail manager typically put it, such “price counseling” is merely “creating an awareness with some of our lessee dealers about the competition in the marketplace.”
But dealers say the companies constantly pressure them to lower their price and reduce their margin, then punish them if they don't obey. Phoenix Mobil dealer Tom Van Boven says he regularly gets a “target price” from the company. “If I don't comply with their target price, the next day I get a two-cent increase [in cost].”
Former ARCO dealer rep Ron Raville testified in a 1996 deposition that while the company couldn't force dealers to cooperate on prices, it could make their lives miserable by withholding gas and not returning phone calls. And a former Shell rep says that during his tenure, dealers were allowed to make eight cents per gallon, and no more. If a dealer tried to do better, “they'd raise his price.”
Of all the squeeze tactics most galling to the dealers, however, one stands out as universal: zone pricing, the practice of breaking up metro areas and charging different wholesale prices depending on the zone. The idea behind zone pricing, at least according to the companies that employ it, is to help dealers in highly competitive sectors without having to drop prices in an entire region. Wholesale-price discrimination is illegal; zone pricing allows companies the flexibility to support individual dealers depending on market conditions. “At Chevron we price our wholesale gasoline to our dealers at prices that will allow them to be competitive,” wrote a company spokesman in a 1999 letter to Arizona state Rep. Barbara Neff.