Paying the Price

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

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 and fed into the computer and an average price calculated. The zone price would then be 6 to 8 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."

With the specifics of zone pricing so nebulous, companies can pretty much charge whatever they want, wherever they want, as long as consumers are willing to pay. The potential for abuse -- and mounting evidence contradicting the industry rationale -- has spurred a number of legislative looks at the practice. And although zone pricing has been upheld as legitimate 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."

Bud Faron's Shell station
Jennifer Silverberg
Bud Faron's Shell station


Bill Schutzenhofer had a vision for Shell. The former head of Shell's marketing operations, who retired in 1996, Schutzenhofer believed that the company's interests were best served by a professional network of dealers who could build brand loyalty by providing community-based service the way only a small-business owner can. Though gasoline retailing changed radically during his 14 years in charge, he says, the essentials -- good service, image and price -- have been the same for half-a-century. "For us to succeed," Schutzenhofer says, "we had to have futuristic thinking without ignoring tradition."

For him, the future meant a transition from the old-style service station to the modern convenience-store model, from stations that pumped 30,000 gallons a 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 a savvier breed that could operate several locations. "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."

But like the dealers themselves, 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 themselves, 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 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.

Data available in key major markets show a clear shift from lessee-dealer stations to company stores. In Phoenix, the percentage of company operations increased from 9 in 1981 to almost 65 today. Chevron had only 93 company-ops in 1984; by 1995, the number had increased to 592, and the company has since continued the conversion unabated. In South Texas, Exxon dealers have been entirely eliminated in Corpus Christi, Austin and San Antonio, and Exxon plans to increase the number of company operations in Houston from 83 to 150 by 2003.

But if the idea was to pocket the dealer 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 for the year of $5,000, 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 to the tune of thousands of dollars a month. A Texaco source says the company has determined it costs 32 cents per gallon to run its stores; depending on rent and other costs, dealers only require in the range of 8-14 cents.

And in a Florida 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, he said, "I don't know that we can get to it with a great amount of accuracy on a per-station basis."

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