A Month before he closed his Texaco service station at Forest Lane and Webb Chapel Road, Greg Kraft surveyed the array of honors lining his office wall--Texaco Excellence Winner, Award of Achievement, Top Performer Award--and laughed grimly. "We never felt that our future was in question," Kraft said. "I don't see myself here in 30 days."
The large crack in the glass covering his desk is evidence enough of how times have changed. "That came after a conversation with Texaco," Kraft said.
Until a couple of years ago, Kraft had earned a good living at the two stations he leased from Texaco, pumping a steady volume of gas and repairing cars. He managed an efficient operation and brought home enough to keep himself comfortable, and his company reps worked closely with him when he needed assistance.
But in 1998 Kraft began to notice that he was paying more for gas, and his competition was pricing on the street as much as 20 cents per gallon below his cost. Sales dropped by more than 50 percent. His rents also increased, and his profit margin eventually deteriorated to zero. To keep his business afloat, Kraft borrowed. And borrowed some more. He showed his rep the numbers and asked for a break, but the response was always the same: "Greg, that's just the way it is, and it's not going to change." He turned in his keys October 6.
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Kraft isn't the only Texaco dealer to lock his doors recently. Nor is Texaco the only company that is making it impossible for dealers to stay alive. Ghanam Akshar, who built a network of six Shell stations in Dallas and six others in Houston and New Orleans, is more than $1 million in debt and teetering at the edge of bankruptcy. Since Shell eliminated its rent rebate program in 1998 and boosted his gas cost above competitive rates, Akshar has seen his expenses double and his income dip by half. He's trying to hang on. "We have to maintain the daily operation," he says. "If I shut them down today, I lose everything."
Tommy Vo already has lost his investment. After 16 years with Shell, Vo walked away from the last of his three Dallas-area stations and ate $100,000. "I knew it was time to get out," he says. "I had no choice."
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 1970s and '80s and captured a huge share of the market. Recently, mega-retailers 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 country 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 to 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 says. "Otherwise, I wouldn't still be here."
The stakes are high. For the dealers, whose numbers are still 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 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 have occasionally 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 Press, the Dallas Observer's sister paper, has uncovered evidence to the contrary. 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 Houston Press has obtained documents that expressly target dealers for removal, with specific reduction goals. Although dealers have protection under the law, the companies have found ways to circumvent it, including:
··· Raising station rents 300 percent and 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 in the same metro area--as much as 12 cents a gallon--by putting them in different "zones," making it difficult or impossible for those in high-cost zones to compete; and
··· Building spacious new company-run stations with convenience store, car wash, and other amenities close to existing dealer-run stations--then undercutting the dealers' prices.
None of the major oil companies contacted by the Houston 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 lockstep, 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 last 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 says.
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 says.
As the number of vehicles in America exploded in the early and mid-1900s, so did the number of stations needed to serve them. Oil companies, wanting to establish market share for their product, would buy property wherever they could find it, build stations, and lease them to dealers. By 1970, 400,000 stations pumped gas and repaired 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 a month. What distinguished them was 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 1950s Schuermann pumped 100,000 gallons a month.
But the station network was inefficient and costly to maintain, and the 1973 Arab oil embargo hastened a major shakeout in the industry. The oil companies began to shed their lower-volume outlets en masse--by 1982 the total number of stations in the country 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 1970s and '80s 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 discussing 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 (PMPA), 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 Florida 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 provides a vivid picture of a dying institution: Between 1988 and 1998, Chevron cut its lessee-dealer network from 9,317 to 939. During the same period, BP's numbers plummeted from 1,025 to 475; Exxon chopped its tally from 2,909 to 1,600.
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 catch-up. 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 to buy his station for $200,000, 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 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 loan and plunked down $378,000 for a station in Victorville northeast of the city. Though the traffic was seasonal, he more than doubled the gas sales to an average of 170,000 gallons a 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 20-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 country--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 payments for his two stations that averaged $15,000 a month more than before.
Moreover, Reed's wholesale 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 says. "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 dealers with the company based estimated profits on a variable rent; in five cases reviewed by the Houston 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, 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 1980s 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 20 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 major cash flow issue for many dealers, has become increasingly common--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. Even if dealers do, the companies won't always approve them, especially if they covet the location. 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 10 buyers rejected before Exxon informed him this year that his station was no longer in the master plan and would be "surplussed." Eight other dealers interviewed by the Houston Press told similar stories.
The new Shell and Texaco leases even ask the dealers to sign away any legal claims they may currently have or might have in the future, even though the right to seek relief in the courts is guaranteed them by the '78 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 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]," Van Boven says.
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 a 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 into zones 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. Since discrimination on wholesale prices is illegal, zone pricing gives 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 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 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."
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.
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 $5,000, 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 by thousands of dollars a 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 eight to 14 cents.
And in a Florida case, Chevron marketing manager Ramon Cantu testified in 1998 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 1980s Texaco turned over hundreds of stations to commission dealers, who (depending on the arrangement) make a few pennies a 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 has consistently been a stated need to get an acceptable return on the companies' investment, stated variously as between 10 and 15 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's legal department wrote in response to a Houston 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 marketing expert 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 North Ridgeville who owns seven Shell stations in the Cleveland area. 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 major retailers in the United States are also 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 mega-retailers 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 such curiosities 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 Bay Area prices average 20 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.
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 says.
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 the 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 whistle-blower 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 1990s 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 at least 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 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..."
On October 6 Greg Kraft offered a little more via e-mail. "Just thought I'd let you know that they finally got me," Kraft wrote. "After 16 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."
Name-Calling at the Pump
Getting into the gas business used to be a simple proposition. A prospective dealer would hook up with a brand, go to training school, buy out another dealer or maybe even be given a vacant station by the company, and start pumping. Most were lessee dealers, who rented stations from their gas supplier but operated them independently and kept the profits. Lessee dealers, the focus of this feature article, are a dying breed. Their precise numbers aren't known, because the major oil companies stopped reporting the information in the mid- and late 1990s, but the trend is still clear.
So what's replacing them? Thousands of older, outmoded facilities have been razed, and many of the dealers have retired or gotten out of the business. But lessee dealers aren't the only kind of station operators, and now the majority of the nation's gas stations are being run by a different type of animal.
Lessee dealers who have lost their stations often see them reopened as company-ops. Major oil companies or convenience store chains often build and run their own stations and hire salaried employees to manage them. Years ago the companies tried to operate their own repair shops but proved incompetent and lost money. Today the only company operations are convenience stores.
A more recent innovation in gas retailing is the commission operator or contractor, who manages a station in exchange for a penny or two per gallon, all or part of the convenience store revenue or a monthly stipend, out of which the operator must pay all expenses. Most significant, the company provides and pays for all the gas--and gets to set the retail price. Lately Shell has been furiously converting stations abandoned by dealers into commission-ops. Companies like to call the commission operators "dealers," though dealer organizations have another name: "serfs."
Given their vulnerability, most lessee dealers would prefer to become open dealers, who own the property (or lease it directly from a third party) as well as the business. Open dealers can "brand" with any company they choose, subject to contractual terms, which gives them more leverage when their brander starts acting up. Under the federal Petroleum Marketing Practices Act, companies wishing to sell or shutter their lessee-dealer stations first must offer them to the dealers, who buy if they can afford the facility. Chevron in particular has sold hundreds of stations to dealers since announcing it wanted out of the lessee-dealer business.
While most lessee dealers and open dealers are supplied directly by their brands, some are supplied by jobbers, wholesale distributors who often own their own stations as well. Jobbers tend to serve outlying markets that the majors find inefficient to supply, though recently several refiners have turned over entire metro areas to big jobbers, who absorb a few cents a gallon and the management headaches.
"They Got Hosed in Dallas"
First thing every morning, Houston attorney Rob Steinberg arrives at his office and flips the switch on the toy known as Death Row Marv. Sitting in an electric chair with his limbs bound and electrodes fastened to his body, Marv gets the shock of his life. Across the victim's plastic chest, Steinberg has taped a new name: Shell. "I want to get back our pound of flesh for these dealers," he says. "It charges me up."
Steinberg, whose "The Bulldog" T-shirt and leather motorcycle pants speak for themselves, is one of an expanding army of lawyers filing state and federal lawsuits against Shell on behalf of dealers across the country. His firm is also going after Exxon in a federal antitrust and fraud suit in Corpus Christi that was in trial at press time. Among his Shell clients are a group of Dallas dealers that includes Ghanam Akshar and Tommy Vo. "They got hosed in Dallas," Steinberg says.
It's not easy to sue a major oil company, no matter how obvious the transgression. With a seemingly unlimited legal budget, a Shell or an Exxon can throw banks of lawyers and other resources at a case that the cash-strapped dealers can't possibly afford to match. Even when the dealers' attorney works on contingency, as Steinberg does, the company can delay and obfuscate for years with relative impunity. In two Exxon cases reviewed by the Houston Press, the list of motions alone ran more than 100 pages. "Their attitude is, 'We're Exxon, you're nothing, fuck you,'" Steinberg says.
Invariably, the companies request that documents and testimony produced in a dealer case be sealed, claiming that the release of proprietary information could damage their business. In the event that the cases settle before trial, the seal becomes permanent. But because of clerical errors, key documents in the Corpus case and another in Florida were left temporarily unprotected. Together they paint a picture of a company hell-bent on removing dealers and replacing them with company-ops and wholesale distributors. In South Texas, for example, Exxon planned to cut its lessee-dealer population in half by 2003 while doubling the number of company-ops.
Such smoking guns are rare, but more are emerging, including a damaging deposition by a former Shell marketing executive in a Florida case. The testimony indicates that while the dealers thought they were getting a break on rent if they sold more gallons under the Variable Rent Program, the company was making it back by charging them more for gas. The hidden rent component in its wholesale gas price has been the basis for one of many fraud charges against Shell.
That deposition has made its way to Texas. A judge in an Indiana case became so incensed at Shell's consistent refusal to obey the rules and produce documents as ordered that he allowed Steinberg's team to travel to Indianapolis and copy whatever it wanted from the case file (though the material is still officially sealed).
Lawyers for the dealers have generally taken the shotgun approach, tossing as many charges as possible into every suit and seeing if anything sticks. Results to date have been decidedly mixed. Some of the Shell suits seem to be gaining momentum, and the dealers have won a few scattered victories. However, a recent verdict in a California Chevron case may have a chilling effect on future litigation. A group of 22 dealers won $3.4 million from Chevron in 1995--13 years after they filed the case--following a jury verdict that the company illegally manipulated prices to pressure the dealers. But a three-panel court overturned the verdict, and a judge recently awarded Chevron its attorneys' fees, which total $6.8 million. Most of the dealers, who spent much of their money during the 18-year battle, will have to declare bankruptcy.
Another remedy for dealers can be found in Congress. The federal Petroleum Marketing Practices Act has proved to be weak enough for the companies to dodge, but recent gas price spikes have the Federal Trade Commission as well as several U.S. senators and state governors conducting investigations. As the oil companies like to point out, however, those investigations usually die on the vine. Millions in campaign contributions and hordes of lobbyists flooding legislative hallways probably help, as Chevron spokesman Jack Coffey hinted recently. The money is spent, Coffey said, "to be sure our business opportunities can continue in the way we want them to continue."
Six states and Washington, D.C., have tough laws protecting dealers, and six others have gas laws that shield them from predatory pricing. Not surprisingly, Texas hasn't considered such a law for years.
Dealers recognize the odds, and most say that all they really want is to be bought out at a fair price that will enable them to move forward with their lives. But unless companies are brought to their knees in court, they aren't likely to give that up voluntarily. As a Shell motion in the Steinberg case reads, under Texas law, "Shell does not owe a duty of good faith and fair dealing to plaintiffs."
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