Paying the Price

Major oil companies are gobbling up independent gas station operators, all in the name of greed

Rents aren't the only expenses that have been thinning dealer bottom lines. In recent years, new contracts have forced lessee dealers to pay expenses once borne by the companies, including maintenance and property taxes. Withholding of credit card reimbursements, a major cash flow issue for many dealers, has become increasingly common -- Shell dealer Bob Oyster, who owns 25 stations in the Bay Area, saw his withholding climb to more than $100,000 last year before the company finally settled his account.

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 a good business could count on the opportunity to sell their stations and reap the reward 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 Angeles-area dealer Carl Eastridge $5.1 million in 1983 because Shell rejected a dozen qualified buyers for his station. Houston Exxon dealer David Vawter, who settled a fraud case against the company for $250,000 in 1993, subsequently had 10 buyers rejected before Exxon informed him this year that his station was no longer in the master plan and would be "surplussed." Eight other dealers interviewed for this article told similar stories.

Former Shell dealer Bill Reed "bled yellow" -- until the company drove him out.
Wild Don Lewis
Former Shell dealer Bill Reed "bled yellow" -- until the company drove him out.
Former Shell dealer Bill Reed "bled yellow" -- until the company drove him out.
Wild Don Lewis
Former Shell dealer Bill Reed "bled yellow" -- until the company drove him out.

The new Shell and Texaco leases ask the dealers to sign away any legal claims they may currently have or might have in the future, even though the right to seek relief in the courts is guaranteed them by the '78 Petroleum Marketing Practices Act.

The companies don't always ask dealers to abandon their rights first 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 typically 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.

Former ARCO dealer rep Ron Raville testified in a 1996 deposition that while the company couldn't force dealers to cooperate on prices, it could make their lives miserable by withholding gas and not returning phone calls. And a former Shell rep says that during his tenure, dealers were allowed to make eight cents a gallon, and no more. If a dealer tried to do better, "They'd raise his price."

Of all the squeeze tactics most galling to the dealers, however, one stands out as universal: zone pricing, the practice of breaking metro areas into zones and charging different wholesale prices depending on the zone. The idea behind zone pricing, at least according to the companies that employ it, 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 depending on market conditions. "At Chevron, we price our wholesale gasoline to our dealers at prices that will allow them to be competitive," wrote a company spokesman in a 1999 letter to Arizona state Rep. Barbara Leff.

That's the theory, anyway. In practice, dealers say, zone pricing is used to charge whatever customers are willing to pay in a given location 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. Where zones were once broadly defined using natural boundaries such as rivers or interstate highways, now they can change block to block. 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 gas than Mobil dealers in nearby Mesa. An ARCO marketing manager told the (Arizona) Tribune in April that its maximum zone spread was two cents, but dealer invoices from the same day showed a nine-cent difference.

As for the theory that the lower prices exist to help dealers, Phoenix Texaco dealer Dave Saifi is among many who would disagree. When an ARCO company-op opened less than a mile from Saifi three years ago and sold three cents below his cost, his Texaco rep told him that ARCO wasn't considered the competition. When the price at the Union 76 across the street from him took a dip, he says, he got no assistance despite repeated requests. But when the 76 price went up, his cost went up with it. "According to them, nobody's any competition," Saifi says.

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