THE MARKETING SECTOR The marketing sector of the petroleum industry in contrast to the earlier levels is characterized by strenuous competition between hundreds of thousands of independent marketers. Each of these marketers provide a level of services and price as they strive to attract a segment of the market to purchase gasoline and related products from their individual outlets. It is this last link in the petroleum industry that is now threatened by the programs and plans of refiners to integrate forward into direct marketing. It is our contention that the public interest would not be preserved by permitting this to happen. Once the conversion to major dominated marketing is completed the petroleum companies could then dictate the level of price and service at which they would sell their gasoline to the motoring public. The major petroleum companies are not more efficient in terms of providing services than the independent marketers who sell their products. The gains of the large refiners at the marketing level are to a large extent the result of the shortage condition and the monopoly like position created for the refiner. They are able to take advantage of the power they have to unfairly compete at the marketing level of the industry. It is our firm belief that there is no evidence showing that the public will be provided better service and lower prices as a consequence of permitting the large refiners to extend their dominance over the marketing sector of the petroleum industry. We believe, furthermore, that if Congress and the public understand that independent competition in the marketing of gasoline faces the real prospect of being destroyed by the large suppliers that this takeover of marketing will not be permitted to happen. It is estimated that approximately 85 percent of all gasoline marketed in this country displays a brand name of the supplying refiner. Brand names of refiners have been developed through extensive advertising campaigns and prominent signing at retail outlets. The purpose of branding is to provide customers with assurances that standards of product quality will be maintained and be available at stations displaying a given brand name. Refiners also hope to develop steady customers that are loyal to a particular brand regardless of the station from which it is purchased. The remaining 15 percent of the gasoline sold at retail are private brands that are owned by the retailer and not by the supplying refiner. It is estimated that in the early 1970s there were approximately 200,000 retail outlets selling gasoline that derived more than half of their sales from petroleum products. In addition, there may have been up to another 100,000 retail outlets that sold gasoline, but that did not derive a majority of their sales from petroleum products. These 300,000 stations were operated by five categories of marketers: branded leasee dealers, branded open dealers, private brand marketers, refiner direct units, and jobber direct units. The five categories of gasoline marketers are shown at the lower level in Figure 2. The largest category of gasoline marketers is branded leasee dealers who rent their stations from refiners and resellers who are also their suppliers of gasoline. It is estimated that in 1972 leasee dealers sold 55 percent of the gasoline at retail. The second largest category of gasoline marketers are open to buy branded dealers. While these dealers sell gasoline under their supplier's brand, they own their own station properties rather than renting them from their suppliers. These independent gasoline marketers are referred to as open to buy branded dealers since they do have some discretion, during normal supply period, to change from one brand of gasoline to another. In 1972 it is estimated that open to purchase dealers sold 16 percent of the gasoline at retail. The third category of independent marketer is the private brander. The private brander purchases unbranded gasoline from refiners and sells the gasoline under the marketer's own brand. In most instances these are lesser known brands such as Hudson, Martin, Star, Hood and a variety of other names chosen by the private brand marketer. It is estimated that there were around 10,000 private brand marketing outlets in 1972 marketing 15 percent of the gasoline at retail. Private branders have historically sold the gasoline on a high volume, limited service, low price basis. Typically they have sold gasoline for 2 to 5 cents per gallon below the prevailing price of the branded retail outlets. The somewhat higher prices at the branded outlets resulted from the supplier's cost of branding and brand development, more extensive car service, and large numbers of conveniently located outlets. However, while generally major brand gasoline has sold for a few cents more than private branders' gasoline, there are many instances where branded dealers who own their own outlets compete on a high volume, low price, basis with the private brand marketers. There have been two principal ways of supplying gasoline to the branded dealers as noted in Figure 2. In the major metropolitan markets the refiners have normally done most of the supplying of dealers on a direct basis. But in the smaller communities and in the rural areas they have relied upon jobbers acting as their agents to supply the branded dealers. Historically these two suppliers of branded petroleum products have relied upon independent dealers to sell their gasoline and they have not been heavily involved in direct retail marketing of gasoline. However, since the beginning of the gasoline shortages in 1973 refiners and resellers have rapidly integrated forward to market product directly that had previously been sold by branded dealers. Government statistics indicate that refiners share of market at retail has doubled from 1972 to 1979 and the growth may even have been more spectacular as noted in the footnote to Table 1. In some states jobber supplied branded product represents 50 percent of the total and nationwide probably amounts to about a third of all branded gasoline. While the government has not compiled the statistics to show the growth in direct marketing by branded jobbers, reports tend to indicate that it has been very rapid and has at least kept pace with the increase in direct marketing by refiners. The forward integration by refiners into direct marketing represents a major shift in how petroleum products are being sold. Historically, the integrated companies realized most of their profits from their lucrative production operations. Marketing was long looked upon by the refiners as merely a means for cashing in on their highly profitable crude oil. These large companies invested great sums to insure that they could directly distribute much of the gasoline produced from their crude oil and processed by their refineries. It is widely recognized that the large refiners actually constructed too many service stations in their attempt to directly distribute their own gasoline with the consequence that service station investment to the refiners was only marginally profitable, or even unprofitable. However, since large profits had been earned in the earlier levels of the petroleum industry the inefficiency of the retail system was not considered to be terribly important. It has been largely since the beginning of petroleum product shortages that the refiners have accelerated their move into direct marketing. As demand has exceeded supply for the first time many refiners have grown to recognize that marketing can now become quite profitable and several refiners are endeavoring to integrate forward into marketing and to dominate this final sector of the petroleum industry. With supply and demand now being closely balanced and the profit prospects have at long last improved for marketing, refiners and their jobbers are eliminating branded dealers and integrating forward into direct marketing. As will be shown in the next several sections the suppliers of branded products have used a variety of techniques that have greatly impaired the ability of their dealers to compete and they have unfairly driven many dealers out of business. CHAPTER II UNFAIR MARKETING PRACTICES AND PARTIAL LEGISLATIVE RELIEF This section of the report reviews a variety of techniques employed by the large integrated refiners to closely and unfairly "control" the actions of independent marketers and at times they are used to "destroy" dealers. Since the beginning of the petroleum products shortages in the early 1970s refiners have taken advantage of this unequal bargaining power to integrate forward into direct marketing. Unless refiners are stopped from using the power they derive from integration to destroy retailers, they will dominate all levels of the petroleum industry from the production of crude oil through the final marketing of the product. A distinguishing characteristic of the branded leasee dealer is that he purchases the branded gasoline and leases the station which he operates from the same party his landlord supplier. This dual supplier-landlord relationship results in refiners having considerable control over the actions of their dealers. Giving the refiners real power to control the actions of their dealers has been the prevailing practice of granting one year leases, with thirty day cancellation clauses for infraction of certain contract provisions. With the short-term lease, dealers either give in to the requirements of their refiners, or find their leases cancelled. Refiners use their superior bargaining power to include in their leases conditions and requirements making it difficult for dealers to make independent decisions and to pursue courses of action beneficial to independent operators. The lease and the company representive calling on the dealers closely prescribe how the dealer will operate his station. Some of the obnoxious provisions of this one way relationship include hours of operation, purchases of refiners' TBA, acceptance of company promotions, adoption of refiners' pricing policies, exclusive marketing of refiners' brand of gasoline and the purchase of stated quantities of gasoline and oil from the supplier. Lengthy testimony has been given over the years regarding how dealers were forced to comply with unreasonable demands of their landlordsuppliers. For example, hours of operation were frequently prescribed that were uneconomical for the dealers; nonetheless, they were required to stay open during nonproductive hours or run the risk of having their leases. cancelled. Refiners' TBA was forced upon dealers when often the same product could be purchased for less from independent suppliers of these items. To obtain price reductions and to obtain other concessions such as repair and upkeep of facility, dealers were forced to go along with the company's prescribed pricing policy. Gasoline volume requirement, and prohibition against selling other brands of gasoline through the same tanks and pumps, made it impossible for dealers to seek more economical sources of supply and to sell more than a single brand of gasoline. In addition, dealers were frequently discouraged from buying brands of oil and lubricants other than those sold by their refiner. With the fear of reprisal, dealers largely complied with the one-sided demands of their suppliers. This caused dealers to make decisions about prices, services, and products and to pay unnecessarily high prices which in |