Paying the Price

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

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 on 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; 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.

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 marketing expert Shelton. "When refiner-operated stations underprice lessees, it is not because they are more efficient but because they often get lower wholesale prices on their products, are charged no rent or sell below the true cost of retailing."

This is no news to dealers such as Jeff Armbruster, a state senator from Cleveland who owns seven Shell stations. He runs a low-overhead outfit with no high-priced squads of lawyers to pay and no floors of accountants to manage. He trains and pays his employees well, so he doesn't suffer from the high turnover and theft that plague the company-ops. Those workers in turn provide reliable, professional service that keeps customers coming back.

Given a level playing field, Armbruster says, "Independent businessmen will categorically, day in and day out, outsell any [company-operated] station." He ticks off a list of contributions to community groups his stations have given, of sports teams sponsored, of good deeds done. "We're the heart of the community."

Schutzenhofer agrees. "The cost [to the corporations] to manage the system is gonna go up," he says. "A dealer can do it cheaper."

If that's the case, the companies haven't admitted it. And the number of dealers continues to diminish by the day, leading dealer consultant Tim Hamilton to believe there's a reason 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 higher, to unprecedented levels.

Although that level may not have been reached in California, the refiners have tightened the supply of gas in the past decade, and many independent retail companies that relied on surplus product have gone under, consolidating the market in fewer hands.

Industry groups argue that with the entry of the 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 although those factors contribute to higher prices, they don't explain such curiosities as why Shell led each of seven retail price increases during a four-week period in the spring of 1999, when it was the only brand without a refinery or pipeline problem. Or why San Francisco area prices average 20 cents or more 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. The same refineries that supply the big retailers also supply most of the smaller stations and can choose where to offer the breaks. Add to that the removal of thousands of independent dealers and a higher percentage of retail outlets controlled by the refiners. "How can you say that this is not a reduction in competition?" he asks. "The arguments make no rational sense."

"Look at their behavior," seconds Shelton, "and you can be sure their behavior is part of a plan."


In his spacious Redwood City, Calif., office bedecked with signed posters of sports stars, Bob Oyster leans back in his wheelchair and frowns reflectively. One of the Bay Area's most successful dealers, Oyster owns 25 Shell stations, as well as a historic building and other real estate. He wears the tooth-and-nail look of a man who has made his own way in life. "You know what I got out of the service stations, if nothing else?" he asks. "The knowledge of service."

Oyster is offended by the idea that he made too much money as a dealer, which he thinks is partly what drives the business-school suits now in charge of the Shell-Texaco alliance. "They want to talk about me cuttin' a fat hog on the service stations," he scoffs. "I worked 80 hours a week."

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