By Terrence McCoy
By Allie Conti
By Chuck Strouse
By Scott Fishman
By Terrence McCoy
By Ryan Yousefi
By Ciara LaVelle, Kat Bein, Carolina Del Busto, and Liz Tracy
By Pepe Billete
Read Part 2
When Ron Gregory first leased his Hollywood Shell station in 1994, he had high hopes. The station was rundown, and the price he paid the former dealer seemed steep at $155,000, but Gregory had a promise from his area manager in Miami that it would be rebuilt into a convenience store with a car wash. He had no reason to doubt Shell, which had an excellent reputation. Besides, he'd seen the blueprints, and Shell had pulled the permits for the job. The company had even sent Gregory to a special training school in Houston at its expense to learn to manage the modern facility. “The only reason I bought it was because they were gonna rebuild it,” he recalls.
But the months dragged on with no renovation. In 1995 Gregory lost $65,000. The next year he was informed that Shell, which had leased the property from a third party, did not plan to renew the lease. Gregory hired a lawyer and insisted Shell reimburse him for his investment, which had climbed to $310,000, or get him another station. The company chose the latter, and in 1997, he moved into a station in Perrine. In honor of his supplier, he named his new corporation BMO Petroleum, for Bend Me Over.
He made decent money for more than a year, but Gregory soon noticed that his wholesale gas price was higher than his competition's. The RaceTrac across the street, in fact, often priced below his cost, stealing his customers and cutting his sales in half. His rep promised a price break every time Gregory complained, but little was forthcoming. “Basically it was one friggin' lie after another,” he says.
Then, in August 1998, the letter arrived: Shell was canceling its long-standing rent-rebate program. Gregory's monthly bills doubled, and though he hung on for a while, his bottom line went red. This past February he closed his doors and walked away, bitter. “I'd run out of gas before I'd stop at a Shell,” he says.
Gregory isn't the only dealer who has lost his business in the last several years. Amoco, South Florida's most prominent gas retailer, has replaced some of its most venerable dealers with stations run by company employees. Richmond Heights Texaco dealer Russ Grande, Sr., who owns his own station, can walk across the street and buy gas for less than he pays wholesale. If that situation continues, Grande says, he'll have a hard time staying open. “The oil companies have deep pockets,” he says, “and they're trying to get us out.”
The neighborhood service station, once as bedrock a community institution as the local hardware store and corner grocery, is disappearing. Attendants who once greeted motorists, filled their tanks, and checked their oil have become obsolete in the age of self-service. As cars have become more complex, and a plethora of brake, muffler, and lube shops have evolved to meet demand, once-bustling gas-station repair bays have been leveled or have become musty with disuse. Convenience store chains added pumps in the Seventies and Eighties, capturing a huge share of the market. Recently megaretailers such as Wal-Mart and Albertson's have entered the gas business, selling cheap to draw customers and further strangle the old-timers.
But the small-business owners across the nation who have been the face of gas retailing for decades say something more than a changing marketplace is threatening their existence. They say they're perfectly capable of thriving in modern times, given the chance to compete. Most have invested in new technology, and many have borrowed heavily to upgrade their stations or convert older repair facilities to convenience stores and add car washes.
Instead, the dealers charge, the big oil companies that dominate the industry -- in particular ExxonMobil, Shell, Texaco, Chevron, and BP Amoco -- are forcing them out of business. “The objective is to get the dealer out of the network, period,” says Los Angeles-area dealer George Mayer. At the same location for 26 years, Mayer is taking a beating from a recent rent hike compounded by wholesale gas costs higher than his competition's. “My [repair] business stays busy,” he points out. “Otherwise I wouldn't still be here.”
The stakes are high. For the dealers, whose numbers still are measured in thousands, it's a matter of survival. For the oil companies, it's a matter of maximizing revenues -- dealer profits have long tantalized company executives. The easiest ways to extract the cash are by jacking up rents and fees or simply taking over the stations and running them with cheap labor.
But the implications of ridding the landscape of service-station dealers are much broader. Independent dealers who can set their own street prices obstruct the ability of the major industry players to manipulate prices freely. And though industry leaders reject the notion that the companies have the power to push up prices at will, the motivation is certainly there: In the United States, a one-cent increase in the retail price of gas would be worth about $1.2 billion annually to the industry. “The majors are going after their own to gain control of the pumps,” says Tim Hamilton, a consultant to several West Coast dealer organizations. “They want your wallet.”
Dealers, the bulk of whom traditionally leased their stations from the oil companies in franchise arrangements, have been complaining of predatory practices for years. The media occasionally have reported the charges, as well as the stock company denials. “All I ever hear [from the companies] is support for the dealer class of trade and how important the dealers are,” says American Petroleum Institute spokeswoman Denise McCourt. “The reality is that overall there is a strong commitment to the dealer network.”
But a five-month investigation by the Houston Presshas uncovered evidence to the contrary. (The Houston Press is a sister paper of Miami New Times.) A review of thousands of pages of internal company documents, court records, and legislative testimony, as well as interviews with more than a dozen current and former company employees lead to an inescapable conclusion: Major oil companies have in fact been deliberately and systematically driving dealers out of business. In several cases the Press has obtained documents that expressly target dealers for removal, with specific reduction goals. Although dealers are protected under the law, the companies have found ways to circumvent it, including:
•Raising station rents 300 percent or more, instantly forcing dozens of dealers to close and shoving hundreds more to the brink
•Withholding credit-card reimbursements, as much as $100,000, resulting in serious cash-flow problems
•Offering dealers take-it-or-leave-it lease renewals that include restrictions on reselling their businesses (thereby devaluing them) and blanket waivers of their legal rights
•Charging dealers different amounts for gas -- as much as a twelve-cent-per-gallon variation -- in the same metro area by separating them into “zones,” making it difficult or impossible for those in high-cost zones to compete
•Building spacious new company-run stations with convenience stores, car washes, and other amenities close to existing dealer-run stations and then undercutting the dealers' prices.
None of the major oil companies contacted by the Press would agree to an interview, though they all asked for a written list of questions. Only one responded to the list -- Equiva Services, the administrative arm of a joint marketing alliance between Texaco and Shell -- and that response was selective and vague. Nevertheless the views of the companies generally can be gleaned through press releases, news accounts, and documents filed in courts throughout the United States.
In lock step the companies say they're simply responding to changing market conditions, that new policies affecting dealers are designed to keep pace with the aggressive competition from the Wal-Marts and convenience store chains. Despite record profits the past two quarters, the majors say they make relatively little money selling gas. Yet documents show that while the companies regularly demand new concessions from their dealers, they don't make the same demands of their own company-run stations. Steve Shelton, a Los Angeles gas retailing expert, says there's no question the companies are propping up losing stores on the backs of the dealers. “They use subsidization selectively to go after competitors,” Shelton explains.
The complexity of the gas business makes the purpose of eradicating dealers hard to pin down, and the companies won't discuss their marketing strategies. But evidence shows that management would like to capture the profits once enjoyed by the dealer network to bolster the bottom line. “They always left a little on the table for us, but now they're taking everything,” says Jerry Gorczyca, a successful Shell dealer in Cleveland for 40 years. “And they want the table, too.”
Former St. Louis Shell dealer Warren Schuermann remembers how it used to be. He bought his station in 1952, when customers could buy gas on just about every corner in town. Until he gave up fighting Shell and closed down last October, Schuermann employed a simple philosophy that over the years earned him a loyal customer base and a host of performance awards. “There's nothing like courteous, honest service,” he offers.
As the number of vehicles in the United States exploded in the early and mid-1900s, so did the number of stations needed to serve them. Oil companies, wanting to establish a market share for their product, would buy property wherever they could find it, build stations, and lease them to dealers. By 1970 some 400,000 stations were pumping gas and repairing cars across the nation. Texaco alone had more than 40,000 stations; Exxon (then Esso) had almost 30,000.
The proliferation of stations meant each one sold relatively few gallons, averaging only about 30,000 per month. What distinguished such stations was service, Schuermann's stock-in-trade. “I tried to impress upon the customers that we were a step above everyone else,” he recalls proudly. “That was my theme: You can't get 'em all, but you sure as hell can get a lot of 'em.” Even in the Fifties, Schuermann pumped 100,000 gallons per month.
But the station network was inefficient and costly to maintain, and the 1973 Arab oil embargo hastened a huge shakeout in the industry. The oil companies began to shed their lower-volume outlets en masse; by 1982 the total number of stations nationwide had been cut in half. Most of the abandoned stations were torn down and the property sold. In addition to improving efficiency, the majors were looking for other ways to increase profits at the retail level, including the conversion of select high-profile locations from dealer-run to company operations. The advent of self-serve gas and the rise of the convenience store in the Seventies and Eighties prompted oil companies to replace bay stations with large food marts and multiple gas pumps.
Initially the dealers were pretty much at the mercy of their parent companies. They would sign lease agreements that protected them for the duration of the terms, usually three to five years, after which the companies could effectively choose not to renew. Even then, however, oil companies knew they had to tread carefully. A 1973 BP plan outlining how to convert desirable locations from dealers to company stores urged secrecy in implementing its mission. “The two items of highest priority are to secure possession of those units we desire to use in the program and to commence the divestment of other outlets,” the plan stated. “A continued effort in this field will help solve the possession problem without alerting the dealer organization to our ultimate plans.”
In 1978 Congress passed the Petroleum Marketing Practices Act, which guaranteed dealers certain franchise rights. But that didn't stop the oil companies from moving aggressively to shrink the number of dealers. In 1982 ARCO led the charge, when management decided to reinvent the company as a low-cost competitor. One component of the strategy was to get rid of dealers by tripling and quadrupling their rents and converting their stations to company operations. As an ARCO planning document stated, “What happens to the 700-800 stations that dealers would leave? Closing might be bearable but would clearly be less attractive than company operated.”
The same year ARCO conceived its scheme, Texaco produced a “Keepers and Losers List” that named 121 Nevada and California dealers the company wanted to disown. In a 1998 ruling, a Miami judge noted that “Exxon secretly divided its dealers into “keepers' and “non-keepers' and internally recognized that its pricing practices were driving the “non-keepers' out of business.”
Similarly Exxon documents show intent to halve its number of lessee dealers in the Houston area while doubling the number of company stores between 1997 and 2003. And according to news accounts, Shell planning documents unearthed in an Indianapolis lawsuit detail the company's plan to shift the balance in that city's retail market away from the dealers. “They wanted to make this a company-op town and drive the dealers out of business,” says plaintiffs' attorney Linda Pence.
The dealer attrition rate has varied over time by company and region, though the direction hasn't wavered. Exact numbers are hard to obtain because oil companies consider the information proprietary and stations can be lumped in broad categories that hinder comparisons. But the available data provide a vivid picture of a dying institution: Between 1988 and 1998, Chevron cut its lessee-dealer network from 9317 to 939. During the same period, BP's numbers plummeted from 1025 to 475; Exxon chopped its tally from 2909 to 1600.
In comparison Shell's collection of dealers dipped less dramatically during that span. But beginning in 1998, when it merged its marketing operations with Texaco, Shell decided to play catchup. Within months hundreds of dealers had shut their doors, and others have followed suit in droves. Including Warren Schuermann, who was informed in the spring of 1999 that his lease would not be renewed.
Two years earlier Schuermann had received an offer of $200,000 for his station, but he'd opted not to sell. “I wanted to save the business for my employees, which was very stupid,” he says. After 48 years he walked away with nothing.
After more than 21 years as a Shell employee, Bill Reed had planned the perfect retirement. He had been a Shell marketing rep in Los Angeles and knew everything there was to know about the gas station business. So in 1993 he took out a Small Business Administration (SBA) loan and plunked down $378,000 for a station in Victorville, northeast of Los Angeles. Although the traffic was seasonal, he more than doubled the gas sales to an average of 170,000 gallons per month. Two years later he invested another $150,000 for a station three miles away in Hesperia.
Under Shell's Variable Rent Program (VRP), Reed's rent went down the more gallons he pumped, so he was able to offset the leaner months with healthy profits when business was brisk. “For twenty-something years, I bled yellow,” Reed says. “Shell Oil Company could not do any wrong.”
In August 1998 the letter came: Shell was phasing out the VRP, even though Reed -- as well as almost every dealer in the nation -- had been told not to worry, that the inflated rent figures in their contracts were there only as a hedge against another oil crisis. But those guarantees had all been oral, and Shell's leases allowed the company to terminate the program at will. Reed was stuck with rent payments for his two stations that averaged $15,000 per month more than before.
Moreover Reed's wholesale fuel cost was consistently higher than that of his competition, which left him the choice of keeping his price low and losing his profit margin or keeping it high enough to pay the rent and losing sales. Either way he lost. “I was taking money out of my savings account,” Reed recalls. “It got to the point where I just couldn't do it anymore.”
Eventually his Hesperia account ran short, and Shell put him on COD, which constricted his cash flow. Reed gave up the keys in August of last year, hoping to salvage his Victorville station. But Shell began withholding his credit-card reimbursements, claiming he still owed the company money from the Hesperia location. The amount swelled to $50,000 before he threw in the towel. He still owes $100,000 on his SBA loan. “Right now I'm very bitter,” Reed says.
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.
That's the theory, anyway. In practice, dealers say, zone pricing is used to charge whatever customers are willing to pay in a given location as well as to keep uncooperative dealers in line. “The price is based on demographics,” says Dennis DeCota, executive director of a California dealer trade organization. “The companies charge what the market will bear.”
Proving DeCota's theory is an impossible task, especially because the companies collectively say the zone maps are proprietary. Where zones were once broadly defined using natural boundaries such as rivers or interstate highways, now they can change from block to block. But the huge spreads in relatively close areas seem difficult to justify. In August, for example, Mobil dealers in Scottsdale, a Phoenix suburb, were paying 14 cents per gallon more for regular gas than Mobil dealers in nearby Mesa. An ARCO marketing manager told the (Arizona) Tribune in April that its maximum zone spread was two cents, but dealer invoices from the same day showed a nine-cent difference.
As for the theory that the lower prices exist to help dealers, Phoenix Texaco dealer Dave Saifi is among many who would disagree. When an ARCO company-op opened less than a mile from Saifi three years ago and sold three cents below his cost, his Texaco rep told him that ARCO wasn't considered the competition. When the price at the Union 76 across the street from him took a dip, he says, he got no assistance despite repeated requests. But when the 76 price went up, his cost went up with it. “According to them, nobody's any competition,” Saifi says.
One former Shell marketing manager, who asked to remain anonymous, says the zone prices in his area were set by computer. Select stations in each zone would be surveyed daily, fed into the computer, and an average price calculated. The zone price would then be six to eight cents below the average retail price in order to control the dealer's profit margin.
Of course exceptions could be made. “If the district manager didn't like the guy or he wasn't pricing the way we wanted,” he says, “up went the price.”
With the specifics of zone pricing so nebulous, companies can pretty much charge whatever they want, wherever they want, as long as consumers are willing to pay. The potential for abuse, and mounting evidence contradicting the industry rationale, have spurred a number of legislative looks at the practice. And while zone pricing has been upheld as legitimate in the courts, elected officials such as Connecticut Attorney General Richard Blumenthal would like to change that. “Zone pricing is invisible and insidious,” Blumenthal testified before the U.S. House Judiciary Committee last April. “It benefits only the oil companies, to the detriment of consumers.”
Bill Schutzenhofer had a vision for Shell. The former head of Shell's marketing operations who retired in 1996, Schutzenhofer believed the company's interests were best served by a professional network of dealers who could build brand loyalty by providing community-based service the way only a small-business owner can. Though gasoline retailing changed radically during his fourteen years in charge, he says, the essentials -- good service, image, and price -- have been the same for half a century. “For us to succeed,” Schutzenhofer says, “we had to have futuristic thinking without ignoring tradition.”
For him the future meant a transition from the old-style service station to the modern convenience store model; from stations that pumped 30,000 gallons per month to stations that averaged at least five or six times that figure. And though the one-station dealer with a mechanical bent might not have a place, tradition still meant the dealer, albeit a savvier breed who could operate several locations. “I can assure you that the dealers who ran multiple leased service stations for Shell had a passion to succeed,” Schutzenhofer says. “And they would do anything Shell wanted them to do.”
But like the dealers themselves, Schutzenhofer's way of thinking is no longer in vogue. The Nineties ushered in the era of huge mergers in the industry, and with them came a new wave of management that saw the dealers more as a barrier to increased profit than as revenue generators. Successful dealers, like most successful small-business owners, could net six figures in a good year, make outside investments, live in nice houses, and drive fancy cars. If the companies could capture that profit, so much the better for the stock price and quarterly dividend. As Chevron marketing vice president Dave Reeves bluntly told the Wall Street Journal last November, “The cost of the business doesn't have to include any profit for the dealer.”
On paper the theory appeared sound. The companies could run the most profitable locations themselves, hiring managers at relatively low wages and getting all the revenue from the convenience stores as well as the gas. Another advantage of company operations is the ability to set price to maximize volume without worrying about dealers mucking up the plan by setting the prices as they see fit. Or, as has happened across the country, the companies can obtain properties or remove unwanted dealers by setting street prices near or even below dealer cost. On September 12 and 14, for example, two Amoco company-ops in Orlando were selling regular gas below the cost of nearby Amoco lessee dealers. Under those circumstances, says North Florida dealer advocate Pat Moricca, “There's no way you're going to stay in business.”
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.
Tim Hamilton laughs at the idea that the marketplace is more competitive now. He points to the just-announced merger of Chevron and Texaco as well as the BP Amoco-ARCO melding. The same refineries that supply the big retailers also supply most of the smaller stations and can choose where to offer the breaks. Add to that the removal of thousands of independent dealers and a higher percentage of retail outlets controlled by the refiners. “How can you say that this is not a reduction in competition?” he asks. “The arguments make no rational sense.”
“Look at their behavior,” seconds Shelton, “and you can be sure their behavior is part of a plan.”
In his spacious Redwood City office bedecked with signed posters of sports stars, Bob Oyster leans back in his wheelchair and frowns reflectively. One of the Bay Area's most successful dealers, Oyster owns 25 Shell stations as well as his own historic building and other real estate. He wears the tooth-and-nail look of a man who has made his own way in life. “You know what I got out of the service stations if nothing else?” he says. “The knowledge of service.”
Oyster is offended by the idea that he made too much money as a dealer, which he thinks is partly what drives the business-school suits now in charge of the Shell-Texaco alliance. “They want to talk about me cuttin' a fat hog on the service stations,” he scoffs. “I worked 80 hours a week.”
Like those of all Shell dealers, Oyster's rents abruptly increased with the cancellation of the Variable Rent Program and have continued to multiply since. “I've got about six stations I'm losing money at,” he notes.
But unlike many of his fellow dealers, he doesn't intend to let Shell get the upper hand. “I'll run 'em and lose money before I'll hand the keys over to Shell,” Oyster says. Eventually, though, pressure from the company will grind profits down to the nub, and he'll have to reduce his holdings in exchange for a more secure stake than the one he has now. His son has followed in his footsteps and intends to take over what's left when he retires. “If I didn't have him in the business, I'd tell Shell they could have it all,” he says. “But he deserves more, and that's why I'll fight and do whatever I have to do. I think that for his lifetime, this could still be a good business.”
The fatalistic edge to Oyster's tough talk is shared by even the most die-hard scrappers. They've seen the once-powerful dealer organizations lose their muscle as their ranks have dwindled and have seen others go defunct. Those who remain know the odds. “The handwriting's on the wall,” Oyster says.
The allegations of predatory practices, price gouging, and other abuses have spawned investigations at state and federal levels. Maryland has convened a task force to examine zone pricing. The California attorney general's office is studying that state's high prices, and the initial report raises some thorny questions. A Federal Trade Commission look at antitrust issues should be completed soon. An explosive Hawaii price-fixing case involving a whistleblower has the companies squirming. And a batch of lawsuits led by formidable lawyers coast to coast has raised dealers' hopes that the outright plunder of their assets may be halted, that they'll get fair compensation for their years of hard work.
That would suit former Shell marketing chief Bill Schutzenhofer, who keeps in touch with many of the dealers he helped set up and has heard one disaster report after another. “If you don't want them, tell them you don't want them,” he says. “Give them a fair price and buy them out, if that's what you want to do.”
In the late Nineties, Chevron notified its dealers that the company planned to move in a different marketing direction. The company set up a buyout fund for the stations it wanted for itself, and for a while was willing to pay something for the value of the businesses, even if a 1997 rent hike reduced their worth. Others were given an opportunity to buy their properties and rebrand with another supplier. Though dealers can share plenty of Chevron horror stories, they generally appreciate the company's honesty about its intentions.
The same cannot be said for the others, especially Shell, though that's partly because the wounds are so fresh. “Shell built their whole network on independent businessmen who put everything they had in it,” says Cleveland dealer Jeff Armbruster. He sums up his view of the company in a single word: “Dirtbag.”
For those who lost it all, one word and a few sentence fragments is about all they can muster. “Betrayal,” says Dan Self, a former Shell employee who locked the door to his St. Louis station after 23 years. “Anger. A lot of it is disbelief, that after all those buddy-buddy talks and all the effort I put into that place ...” he trails off.
On October 6 Dallas Texaco dealer Greg Kraft offered a little more via e-mail. “Just thought I'd let you know that they finally got me,” Kraft wrote. “After sixteen years I just closed the doors to my last station and walked away with nothing but the keys and a trip to my attorney's office to start bankruptcy proceedings.
“I really hope something can be done for those of us that gave our lives to this miserable business.”
This is the first installment of a two-part article. Next week: Taking big gas companies to court -- and getting taken to the cleaners.
In the Seventies Miami motorists had a host of choices when the gas tank ran dry. In addition to the major brands, dozens of independents offered lower-cost alternatives -- Thoni, Hudson, Highway Oil, Kayo. But over a twenty-year period the independents disappeared, and when Texaco bought out Florida's 128 Majik Markets in 1990, the transformation of Miami-Dade and Broward counties was complete. Today the five largest oil companies doing business in South Florida -- Amoco, Mobil, Shell, Chevron and Texaco -- control more than 70 percent of the market. Amoco, which owns the most stations, pumps more than a quarter of the gas.
In an unrelated Eighties antitrust case involving the oil industry, a federal judge wrote that a ten- to twenty-percent share of any market or submarket is “within the range that economists and the Department of Justice believe confer market power and lead companies to charge monopoly prices and engage in other uncompetitive behavior.” That would certainly qualify Amoco. And if the gas companies took advantage of their ability to share pricing and marketing data, which evidence from court documents suggests they do, all five of the majors might deserve scrutiny.
That's especially true of the way they're behaving lately. In addition to pressuring the handful of lessee dealers that have somehow survived, the big players are now hammering their wholesale distributors, or jobbers, and the owner-dealers they serve. For the past month, the jobbers have been paying five cents or more per gallon above what the company-ops have been selling it for retail. “It's bizarre,” says Richard Wheeler, general manager of Miami jobber Martin Petroleum. Asked if Martin's suppliers had explained the price difference, Wheeler laughed. “Explanations? No explanations.”
Once refiners produce gasoline and store it in strategically located terminals, it typically moves to the pump through two retailing channels. Jobbers buy gas at the terminal and pay a wholesale price, then deliver it to owner-operated stations, tacking on a few pennies per gallon for shipping and overhead. The dealers then add their margin, which has to cover loans, equipment, and other expenses.
Lessee dealers are served directly by the companies and, under most circumstances, pay a higher price that ranges from a few cents to more than fifteen cents. (The amount varies according to a complex set of marketing circumstances that are difficult to explain, according to the companies. Critics might describe the methodology as whatever they can get.) The dealers then add enough cents per gallon to offset expenses and put food on the table.
Given the relative costs, logic dictates that the wholesalers pay less for fuel than the retailers. But the company-ops throw a wrench in the equation: They pay nothing for gas, which instead is internally transferred on the books. And they pay no rent, meaning they can sell cheap and still show a paper profit.
Florida has a law that prohibits oil companies from selling gas below their costs. But given the vagaries of how cost can be calculated, proving that company-ops are engaging in predatory pricing is difficult if not impossible. That doesn't satisfy Wheeler, who takes a looks-like-a-fish, smells-like-a-fish view: “Every major oil company in Florida has been selling below cost in the last month,” he says.
With jobbers paying more for gas than direct-serve stations, those who rely on the wholesale channel are feeling the crunch. The owner-dealers can take a loss for a while but not indefinitely. “If this continues for an extended period of time, they won't be able to stay open,” notes Wheeler.
But why would the companies want to squeeze out their wholesalers and the stations they serve? The answer, according to Miami attorney Luis Konski, is that they probably don't. Konski, who represents dealers in industry lawsuits, believes the companies already have sufficient control and have no reason to trade additional market share from one hand to the other. The purpose, he says, is to use up all the gas from the refinery and make as much money as possible. Whatever way prices can be set to maximize revenues, that's the way they'll be set. “It's a win-win situation for the suppliers,” Konski says. “They just don't care.”