By Ryan Yousefi
By Chuck Strouse
By Terrence McCoy
By Terrence McCoy
By Terrence McCoy
By Michael E. Miller
By Kyle Munzenrieder
By Michael E. Miller
Predatory pricing also can be done on a bigger scale, as a 1995 University of Washington study observed. According to economists Timothy Dittmer and Keith Leffler: “We find that ARCO has retail prices for months at a time that are below the economic cost of supplying the gasoline.”
Data available in key major markets show a clear shift from lessee-dealer stations to company stores. In Phoenix the percentage of company operations increased from 9 in 1981 to almost 65 today. Chevron had only 93 company-ops in 1984; by 1995 the number had increased to 592, and the company has since continued the conversion unabated. In South Texas Exxon dealers have been entirely eliminated in Corpus Christi, Austin, and San Antonio, and Exxon plans to increase the number of company operations in Houston from 83 to 150 by 2003.
But if the idea was to pocket the dealer profits, it's not working very well. In fact, though some locations are quite profitable, others are losing money. A 1998 Chevron financial statement for a company-run station in California calculated a net loss for the year of $5000, and that included no payment for rent. Evidence presented during legislative hearings in Nevada showed that ARCO was subsidizing its company-ops in Las Vegas as much as $15,000 per month. A Texaco source says the company has determined it costs 32 cents per gallon to run its stores; depending on rent and other costs, dealers only require in the range of 8 to 14 cents.
And in a West Palm Beach federal case, Chevron marketing manager Ramon Cantu testified in 1995 that although he thought the company stores were making money, he wasn't sure. “We just make certain assumptions along the way, you know, that if it's meeting certain criteria, therefore, it must be profitable,” Cantu said. Still, “I don't know that we can get to it with a great amount of accuracy on a per station basis.”
Indeed the companies seem to be muddling around with different strategies, trying to find something that works. In the Eighties Texaco turned over hundreds of stations to commission dealers, who (depending on the arrangement) make a few pennies per gallon or a percentage of store revenues in exchange for managing the station. Texaco eventually abandoned the concept, though Shell has now embraced it and has been finding commission operators to replace dealers who have been economically evicted. Chevron is selling off some properties and converting others to company stores, while others are turning entire markets over to wholesale distributors.
Ironically the rationale for hiking rents and increasing fees to dealers consistently has been a stated need to get an acceptable return on the companies' investment, placed variously at between ten and fifteen percent. “In order for the new [Texaco-Shell] joint venture to succeed under current market conditions, rents have to be brought closer to market value,” someone in Equiva Service's legal department wrote in response to a Press inquiry.
The fact that companies are propping up their own stations has not been lost on industry observers. “Internal [financial statements] on refiner salary operations typically show higher costs of doing business than do dealer stations,” says Los Angeles marketing expert Steve Shelton. “When refiner-operated stations underprice lessees, it is not because they are more efficient but because they often get lower wholesale prices on their products, are charged no rent, or sell below the true cost of retailing.”
This is no news to dealers such as Jeff Armbruster, a state senator from Cleveland who owns seven Shell stations. He runs a low-overhead outfit with no high-priced squads of lawyers to pay and no floors of accountants to manage. He trains and pays his employees well, so he doesn't suffer from the high turnover or theft that plagues the company-ops. Those workers in turn provide reliable, professional service that keeps customers coming back.
Given a level playing field, Armbruster says, “Independent businessmen will categorically, day in and day out, outsell any [company-operated] station.” He ticks off a list of contributions to community groups his stations have given, of sports teams sponsored, of good deeds done. “We're the heart of the community.”
Schutzenhofer agrees. “The cost [to the corporations] to manage the system is gonna go up,” he says. “A dealer can do it cheaper.”
If that's the case, the companies haven't admitted it. And the number of dealers continues to diminish by the day, leading dealer consultant Tim Hamilton to believe there's a reason beyond bureaucratic incompetence and internal philosophical struggles stemming from the mergers. That reason, he says, can be found in the spiraling price of gas. The dominant retailers in the United States also are the major refiners; in California, which has the highest gas prices in the nation, six refiners produce 92 percent of the gas consumed in the state. With enough control of gas at the wholesale and retail levels, companies theoretically could push prices higher, to unprecedented levels.
While that level may not have been reached in California, the refiners have tightened the supply of gas during the past decade, and many independent retail companies that relied on surplus product have gone under, consolidating the market in fewer hands.
Industry groups argue that with the entry of the megaretailers, as well as the expansion of convenience store chains, competition in gas retailing is stronger than ever. Much has been written about the reasons for high gas prices: OPEC production cuts, refinery fires and other supply disruptions, clean air mandates, higher costs of doing business. And while those factors contribute to higher prices, they don't explain curiosities such as why Shell led each of seven retail price increases during a four-week period in the spring of 1999, when it was the only brand without a refinery or pipeline problem. Or why San Francisco Bay Area prices average twenty cents or more higher than in Los Angeles and San Diego, when documents produced in a Hawaii lawsuit show that the cost of doing business in all three cities is almost identical.