Paying the Price
Dimitris Karavokiris doesn't know how long he can hang on to the Shell station he leases on Sample Road in Coral Springs. When he bought the business from another dealer seven years ago, his monthly rent ranged from $3000 to $4000 after a sales-based rebate. When Shell eliminated the rebate program in 1998, his rent jumped to $6500. Last November Karavokiris was stunned to see his new rent figure: $20,000, rising to $25,000 per month in the third year of the deal. "I had to sign it," he says. "I had no choice. It was take it or leave it."
To make matters worse, Karavokiris has to deal with a competitor two miles away that consistently undercuts his price -- a company-run Shell gas station and convenience store with all the trimmings. "My biggest competition is Shell Oil," he says ruefully. "The day they built that station, I lost about 25 percent of my business."
Karavokiris, who also owns a smaller station in Fort Lauderdale, remembers better days. A Shell dealer for 20 years, he managed his businesses professionally and had excellent rapport with his company reps. His efforts earned him Shell's district Dealer of the Year award in 1987 as well as 30 other honors, and the company rewarded him with trips to Hawaii and Las Vegas. "Shell was the best in the industry," he says.
Though he's made offers to buy the property, sell his business to Shell or give it up in exchange for his smaller station, the company has not been in the mood to negotiate. Shell did offer him a pittance to abandon his Coral Springs location, but he turned it down. The future looks grim. "Eventually I'm gonna have to tell them to take the keys," he says.
At least Karavokiris is still in business. Former Shell dealer Juan Calvera gave up his station in Lake Worth in March after his rent more than tripled. His aging facility couldn't compete with nearby convenience stores, and though Shell had promised to rebuild it, paid for the plans, and pulled the permits, that never happened. He walked away from his $165,000 investment with nothing to show for his five years but heavy debts and a ruined marriage.
The neighborhood service station, once as much a part of the bedrock of a community 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 has 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 megaretailers such as Wal-Mart and Albertson's have entered the gas business, selling cheap to draw customers and to tighten the stranglehold on 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 capable of thriving in modern times, given the chance to compete. 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 Exxon, Mobil, 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 Angelesarea dealer George Mayer. "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. The easiest ways to extract the cash are by jacking rents and fees or simply taking over the stations.
But the implications are much broader. Independent dealers obstruct the ability of the major industry players to manipulate prices. And though industry leaders reject the notion that the companies have the power to push up prices, 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.
American Petroleum Institute spokeswoman Denise McCourt denies there is an effort to squeeze out the little guy. "All I ever hear [from the companies] is support for the dealer class of trade and how important the dealers are," she says. "The reality is that overall there is a strong commitment to the dealer network."
But a five-month New Times investigation 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 leads to an inescapable conclusion: Major oil companies have in fact been deliberately and systematically driving dealers out of business. New Times 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 -- 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
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.
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."
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.
Industry groups argue that, with the entry of megaretailers 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 Bay Area prices average at least 20 cents 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. "How can you say that this is not a reduction in competition?" he asks.
"Look at their behavior," seconds Shelton, "and you can be sure their behavior is part of a plan."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 Schutzenhofer, who keeps in touch with many of the dealers he helped set up. "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 and for a while was willing to pay at least something for the value of the businesses. 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, a state senator from North Ridgeville, Ohio, who owns seven Shell stations in the Cleveland area. He sums up his view of the company in two words: dirt bag.
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