Paying the Price

Bud Faron and other independent dealers devoted their lives to the big oil companies. That just wasn't enough.

In 1978, Congress passed the Petroleum Marketing Practices Act, 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 the 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 provide 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 New Times, 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, Calif., 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."

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