Pumped Out

Major gas companies are driving away independent station operators, all in the name of greed

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 not to be identified, 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 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."

Texaco is making it impossible for independent dealers such as Greg Kraft to stay alive. Kraft shut down his service station at Forest Lane and Webb Chapel Road earlier this month.
Michael Hogue
Texaco is making it impossible for independent dealers such as Greg Kraft to stay alive. Kraft shut down his service station at Forest Lane and Webb Chapel Road earlier this month.
The neighborhood service station is disappearing -- and the big oil companies are glad to see them go.
Paolo Vescia
The neighborhood service station is disappearing -- and the big oil companies are glad to see them go.

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--has 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 in 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 that 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 14 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 a 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 that 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 1990s 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 prices to maximize volume without worrying about dealers mucking up the plan by setting the prices 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 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 shows a clear shift from lessee-dealer stations to company stores. In Phoenix, the percentage of company operations increased from nine 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.

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