Pay at the Pump

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 the prices 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 gas below the cost of nearby Amoco lessee dealers. Under those circumstances, says Florida dealer advocate Pat Moricca, "There's no way you're going to stay in business."

Predatory pricing also can be done on a bigger scale, as a 1995 University of Washington study observed. According to economists Timothy Dittmer and Keith Leffler, "We find that Arco has retail prices for months at a time that are below the economic cost of supplying the gasoline."

Data available in key 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 of $5,000 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 a month. A Texaco source says the company has determined that it costs 32 cents per gallon to run its stores; depending on rent and other costs, dealers require in the range of only 8 to 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, "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 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, 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 Houston Press 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 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."