Paying the Price

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

In court filings Shell has denied anyone ever told dealers that VRP 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 New Times, each statement 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 had been 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. "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 undercutting dealers' bottom lines. In recent years new contracts have forced lessee dealers to pay expenses once borne by the companies, including maintenance and property taxes.

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 good businesses could count on the opportunity to sell their stations and reap the rewards 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 Angeles­area dealer Carl Eastridge $5.1 million in 1983 because Shell rejected a dozen qualified buyers for his station. Nine other dealers interviewed by New Times told similar stories.

The companies don't always ask dealers to abandon their rights 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 prices and reduce their margins, 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.

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, at least according to the companies that employ the practice, 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.

That's the theory. In practice, dealers say, zone pricing is used to charge whatever customers are willing to pay 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. 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 unleaded gas than Mobil dealers in nearby Mesa.

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 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."

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