By Camilo Smith
By Craig Malisow
By Jeff Balke
By Angelica Leicht
By Jeff Balke
By Sean Pendergast
By Sean Pendergast
By Jeff Balke
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.
One former Shell marketing manager, who asked to remain anonymous, says the zone prices in his area were set by computer. Select stations in each zone would be surveyed daily, fed into the computer and an average price calculated. The zone price would then be six to eight cents below the average in order to control the dealer's profit margin.
Of course, exceptions could be made. "If the district manager didn't like the guy or he wasn't pricing the way we wanted,"he says, "up went the price."
With the specifics of zone pricing so nebulous, companies can pretty much charge whatever they want, wherever they want, as long as consumers are willing to pay. The potential for abuse -- and mounting evidence contradicting the industry rationale -- has spurred a number of legislative looks at the practice. And while zone pricing has been upheld as legitimate in the courts, elected officials such as Connecticut Attorney General Richard Blumenthal would like to change that. "Zone pricing is invisible and insidious,"Blumenthal testified before the U.S. House Judiciary Committee in April. "It benefits only the oil companies, to the detriment of consumers."
TBill Schutzenhofer had a vision for Shell. The former head of Shell's marketing operations who retired in 1996, Schutzenhofer believed that the company's interests were best served by a professional network of dealers who could build brand loyalty by providing community-based service the way only a small-business owner can. Though gasoline retailing changed radically during his 14 years in charge, he says, the essentials -- good service, image and price -- have been the same for half a century. "For us to succeed,"Schutzenhofer says, "we had to have futuristic thinking without ignoring tradition."
For him, the future meant a transition from the old-style service station to the modern, convenience store model; from stations that pumped 30,000 gallons a month to stations that averaged at least five or six times that figure. And though the one-station dealer with a mechanical bent might not have a place, tradition still meant the dealer, albeit a savvier breed that could operate several locations. "I can assure you that the dealers who ran multiple leased service stations for Shell had a passion to succeed,"Schutzenhofer says. "And they would do anything Shell wanted them to do."
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."