TABLE 3 Who Accounts for the Volume Increase in Refiner-Operated Retail Outlets Among the Leading 28 Refiners (gallons of Gasoline) Reprinted from "Trends in Company Stores" by Robert N. Fenili and James B. Delaney, Office of Competition, D.O.E., December, 1979, page 4. CHAPTER IV SUMMARY OF METHODS USED BY THE INTEGRATED PETROLEUM COMPANIES AND THEIR RESELLERS TO DESTROY SMALL BUSINESS COMPETITION. The prior section reviewed the fact that several of the large integrated petroleum companies are set on a course of action to eliminate their independent dealers and to integrate forward into marketing of gasoline. This section will explain in more detail the techniques that they are using to destroy small businessses. The impression is often given by the majors that independent dealers are suffering since they are not as efficient as large businesses. It will be demonstrated that independent marketers are as efficient, or are more efficient, than the refiners if they are given the opportunity to compete on equal terms with the integrated companies. THE DEALER TANKWAGON PRICING SYSTEM The branded leasee dealers purchase gasoline at the "dealer tankwagon" (abbreviated D.T. W.) price. This is a long standing pricing system used by the landlord-suppliers to discourage price competition by their dealers at the retail level. This price system is structured, as will be explained, to force most branded dealers to emphasize service and other non-price methods of marketing. Historically, leasee dealers have been charged about 4.5¢ more per gallon than the price paid by the branded jobber. In addition, leasee dealers have been required to pay an additional 1.5-2.0¢ more per gallon of gasoline as rent on the service station. What the D.T. W. rent pricing method does is to create high variable occupancy cost to the dealer before the dealer includes a margin to cover utilities, interest, promotional and other operating costs. The 6.0-6.5¢ per gallon occupancy cost of the branded dealers is in many cases more than the total cost of the private brand marketers and direct operated outlets of branded jobbers. Since the private brander and jobber own their own stations, many have been able to lower occupancy cost to 3¢ or less per gallon of gasoline by selling on a low price, high volume basis. Add another 3c per gallon to cover operating cost and the total cost of doing business by private branders is close to 6¢ per gallon - approximately what the majors charge their dealers to occupy a station. It is simply not the case, as spokesmen for major refiners have inferred, that dealers are inefficient and hence sell at higher prices. Given the nature of the D.T.W. pricing system, leasee dealers have had little choice other than to compete on a non-price, service basis. Further contributing to dealers being forced to sell at higher price than company operated stations have been enormous rent increases of from 50300 percent in recent years. Also dealers are increasingly required to pay for station maintenance and to pay sooner for the gasoline they purchase. All of these changes plus the normal inflation factor have driven up dealer costs and prices. Additionally, many leasee dealers are only able to purchase from their refiner 70, 80, or 90 percent of the gasoline they sold in the 1972 base period year. This means that dealers have fewer gallons over which they can spread their operating costs and as a consequence are required to further increase their margins and prices. Given these recent developments, and adjustments for inflation, dealer operating margins have doubled over the past few years. ILLEGAL MARGIN CONTROL One of the long standing methods used by refiners to control dealer operations and profitability is margin control. Two general techniques have been employed to force dealers to reduce prices to levels detrimental to them, but profitable to refiners. One of the frequently used methods is to harrass and threaten dealers with lease cancellations or to deny dealers other valuable services unless they lower their prices. The second primary method used to control dealer margins and profitability is company operated stations. Strategically located company operated units can post low prices and force dealers in surrounding areas to reduce what they charge for gasoline. The Judicial Branch of the Federal government recognizes that a supplier can exert unfair pressure on dealers forcing them to sell at price levels detrimental to small businesses operation. Both the Justice Department and the Federal Trade Commission were successful in their suits against ARCO for illegally interfering in the pricing of product at their leasee dealer stations. The FTC issued its final order against The Atlantic Refining Company on December 6, 1965. This order prohibited ARCO from: (1.) Establishing, maintaining, continuing, cooperating in, or The final judgment of the Justice Department against The Atlantic Richfield Company was entered on August 12, 1971. ARCO was: V enjoined and restrained from entering into or adhering to any agreement, arrangement or understanding with any... dealer to fix, maintain, or stablize prices at which any... dealer shall sell gasoline; ... for a period of five (5) years from the date of entry of this Final Judgment. and restrained from: VI (2.) coercing any of its... dealers to adhere to such defendants In 1972 ARCO presented a program designed to improve the profitability of its marketing operations. To improve performance the report recommended that ARCO concentrate on: Specific steps to accomplish the above included “Reduce Dealer Margins", "Raise D.T.W... (Past five (5) years shows this hasn't been successful)", and "Revise Price Structure... Eliminate Subsidy". Following the preparation of this report ARCO along with other refiners did "Stabilize Retail Price Levels", "Raise D.T.W.", and "Eliminate Subsidy". In the week around August 15, 1972 all of the large refiners on the West Coast simultaneously ceased giving price allowances to their dealers and the retail prices stablized. A short while after the stablization of retail prices, the D.T.W. started increasing at an unprecendented rate. Beginning around the middle of 1974 ARCO implemented policy aimed at "reducing dealer margins”. An ARCO memorandum of July 15, 1974 stated: It is now assumed that all personnel have a full understanding of The current mandatory priority is the selling of gasoline The record shows that over the next six months ARCO's sales representatives exerted continuous pressure on dealers to lower their prices. and margins. Those sales representatives having dealers with low prices were praised while those having dealers selling at higher prices were instructed to correct the situation. For example, on December 8, 1975 a supervisor for ARCO wrote to one of his representatives as follows: We have problems in your area! -I've indicated where I believe we Dealers selling for 53.9 were indicated as "ok!" and "great!" Those dealers selling for 56.9 through 59.9 were noted and marked for special attention by the sales representative. Later this same sales representative was instructed that the "THRESHOLD IS 51.9 - LET'S DIRECT OUR EFFORT TOWARD THAT..." Of the 18 stations supervised by this sales rep only one was at 51.9 cents at that time, while most were 3 - 5 cents higher. Subsequent reports of this sales rep showed that his supervisor was continuously pressuring him to convince his dealers to lower their prices and their margin. The supervisor noted that volume of individual stations had fallen below a year ago and that "We need a price". The pressure on the sales rep continued as indicated by the following note from his supervisor: 79-549 0-81--27 Let's not let up on your threshold pricing campaign in your area. PSI units were direct company operated stations where prices were automatically lowered to the level desired by the company. According to affidavits of several ARCO dealers, they were threatened that unless they lowered price and increased volume, their station would be “redlined" and closed. Others were told that their leases would not be renewed unless they improved their volume which required them to lower prices. A letter allegedly written by an ARCO representative to his dealers explained that even though ARCO's price to dealers had been among the highest in the industry, the company nonetheless expected its dealers to purchase and sell all of their allocation. It was pointed out that several dealers were not helping the company move their allocation and the field rep asked the dealers to commit themselves "to selling the gas regardless of the hardship involved". If not, he suggested that they should "get out and look for something else". He went ahead to state that "I don't like being a cop, writing lease violations, conducting hours checks, etc., but I get paid to do these things and I'll do them". To further encourage dealers to lower price ARCO developed a special rental program for self-service and mini-service operations in early 1975. Once a dealer reached 85 per cent of his monthly allocated gasoline entitlement, he was eligible, if he so chose, to enter into a special program if he would dedicate one island for self-service or mini-service. Then ARCO encouraged dealers to sell gasoline at the limited service islands at extremely low margins which did not cover the cost of doing business. The rent subsidization program and the low prices at which dealers were instructed to sell the limited service gasoline contributed to a hyper-competitive market situation. ARCO's enforcement of lower street prices and margins and its special limited service pricing program put tremendous financial pressure on ARCO dealers and dealers of other brands. As ARCO enforced its margin control program, the average price at its stations fell in comparison to other major brands until they were close to the lowest in price in the marketplace. This intensification of competition at the retail level forced the permanent closing of thousands of independently run service stations. It has been shown that ARCO has controlled the retail price of gasoline, to the detriment of dealers, and in violation of the Consent Decree. SPECIAL CIRCUMSTANCES AND THE FORWARD INTEGRATION OF PETROLEUM COMPANIES AND RESELLERS INTO DIRECT MARKETING An analysis of the movement of the integrated petroleum companies into direct marketing must be put into the proper time perspective. The market conditions before and since 1972 are strikingly different and it has primarily been since 1972 that the majors and their resellers have made their moves into direct marketing. |