Loss of Price Supports Hurting Small Retailers

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Loss of Price Supports Hurting Small Retailers

By John Lofstock - 05/05/2003
Smaller mom-and-pop operators could be forced out of business in coming months as cost-conscious drivers increasingly queue up for cheaper gas at stations operated by major retailers such as Costco Wholesale Corp., Safeway Inc., Albertson's Inc. and Wal-Mart Stores Inc.

Independent operators in Washington and Oregon are dealing with issues on several fronts. Like station owners nationwide, they are grappling with a crimp in cash flow as the result of a rapid rise in wholesale prices. But operators in the Pacific Northwest also face unusually strong competition from hypermarket operators and an end to the price supports that helped them stay competitive.

Last month, several major oil suppliers decided to drop generous price supports that have enabled certain independent station owners in Washington and Oregon to compete against their national hypermarket rivals. Price supports ranged between 2 cents to 20 cents per gallon.

"They were getting tired of subsidizing the markets," said Bruce Holmstrom, president of Vancouver Oil Co. Inc., which supplies gas stations in Washington and Oregon. "They felt it was bad policy."

Larry Wall, general manager of Olympia Fuel and Asphalt Inc., which owns and operates six gas stations in the Puget Sound area, said ending price supports contributed to a rise in pump prices. "I think the price supports got out of hand to the point where the oil companies were not making money either," he said. "I think they just abandoned them to try to restore the market to everyday competitiveness."

In Washington, hypermarkets — a national grocery or discount warehouse chain that couples a retail store with a parking-lot gas station — have captured about 15 percent of the market, almost triple the national average.

The hypermarkets' share is roughly equivalent to the market share held by the major oil companies, which operate slightly more than 5 percent of stations directly, with another 12.5 percent leased to their dealers, said Tom Osborne, spokesman for the Society of Independent Gas Marketers of America (SIGMA).

The national retailers are large enough to reduce their costs by buying their gas directly from the major producers, while smaller fuel operators must buy through a middleman, a regional wholesale supplier.

For the hypermarkets, the hope is that consumers will fill up their gas tanks at the outside pumps, then stay to fill up their shopping carts inside the main store. With higher store sales to offset cheaper gas prices, these big-box retailers are formidable competitors for independents who may be able to sell their customers only a cup of coffee and a pack of gum along with their gas. Cigarette sales at convenience stores are also down now that cheaper prices are readily available online and through stores on Indian reservations.

To counter the lack of size, independent operators are emphasizing services that offer customers added convenience. Some store owners are adding features such as Internet kiosks where customers can download maps or send e-mail.

Overcrowded Marketplace

Another factor affecting independent operators in Washington is that the market is overbuilt, said Tim Hamilton of the Washington Oil Marketers Association in Port Orchard, Wash. He estimates there are 500 independent gas dealers statewide, with most flying the flag of a major oil company.

The number of independent operators in the state has quadrupled over the past six years, following a wave of consolidation in the 1980s. In the '90s, independent operators were able to build stations more easily and cheaply than the major oil companies because they could work more closely with local building authorities and contractors. Initially, sales volumes were high and profits were strong. But then the market became overbuilt, a condition worsened by the introduction of hypermarkets that began cutting away at market share, Hamilton said.

With sales volume dropping and wholesale prices rising, margins have become skimpy. "Margins typically in the range of 10 cents to 15 cents per gallon have fallen to 8 cents to 11 cents," Hamilton said. "That's put a lot of stations at the point of economic bankruptcy. So many are in financial difficulty that lending institutions such as GE Capital have red-tagged them and said, 'No more.'"

Meanwhile, higher prices don't appear to be hurting Costco, which has eliminated credit-card sales to cut its costs. "Because we can leverage our costs against much higher volumes, we do not need as many cents per gallon to break even," said Paul Latham, vice president of gasoline sales at Costco.