By Allie Conti
By Keegan Hamilton and Francisco Alvarado
By Jake Rossen
By Allie Conti
By Kyle Swenson
By Chris Joseph
By Michael E. Miller
By Frank Owen
The potential for abuse -- and mounting evidence contradicting the industry rationale -- has spurred a number of legislative looks at the practice. While zone pricing has been upheld 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. During 14 years as head of Shell's marketing operations (he retired in 1996), he believed 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 one of a savvier breed that could operate several locations, would survive. "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."
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, 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 unleaded gas to consumers below the cost charged nearby Amoco lessee dealers. Under those circumstances, says Orlando-area dealer advocate Pat Moricca, "there's no way you're going to stay in business."
But if the idea was to pocket the dealers' 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 of $5000 for the year, 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 per month. A Texaco source says the company has determined it costs 32 cents per gallon to run its stores; depending upon rent and other costs, dealers require only in the range of 8 to 14 cents.
And in a West Palm Beach 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 upon 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 New Times 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 Steve Shelton, a Los Angeles gas-retailing expert.
Dealer consultant Tim Hamilton believes there's a reason for the strategy 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 to unprecedented levels.