Paying the Price

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

• 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 -- varying by 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

Phoenix Mobil dealer Tom Van Boven: Comply with the "target price" or else
Paolo Vescia
Phoenix Mobil dealer Tom Van Boven: Comply with the "target price" or else

• building spacious new company-run stations with convenience stores, car washes, and other amenities close to existing dealer-run stations -- then undercutting the dealers' prices.

None of the major oil companies contacted by New Times would agree to an interview. Only one responded to a list of questions -- 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 that they're simply responding to changing market conditions, that new policies affecting dealers are designed to keep pace with competition. 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 dealers, they don't make the same demands of company-run stations. 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 properties wherever they could find them, 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 former St. Louis Shell dealer Warren 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."

But the station network was inefficient and costly to maintain, and the 1973 Arab oil embargo hastened a major industry shakeout. The oil companies began to shed their lower-volume outlets -- 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 properties sold. The advent of self-serve gas and the rise of the convenience store in the '70s 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. "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 in Miami, a federal 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.

The dealer attrition rate has varied. 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.

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 followed suit in droves. For decades Shell assisted dealers with something executives called the Variable Rent Program. Under the VRP, dealers' rent declined the more gallons they pumped, so they were able to offset the leaner months with healthy profits when business was brisk. But in August 1998 the company began phasing out the VRP. Many of the dealers were angry. They say they 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 all those guarantees had been oral, and Shell's leases allowed the company to terminate the program at will.

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