Article: Gas Stations Fume Over Refiners' Sales

The Wall Street Journal

Gas Stations Fume Over Refiners' Sales
Smaller Dealers Complain Big Oil's Practice of Selling Retail Outlets to Third Parties Hurts Business

By RICHARD GIBSON

Big Oil is having trouble with some of its little guys.

Dozens of gas-station dealers are lodging complaints with the major petroleum refiners over changes big producers want to make in the way they do business.

Some oil companies—including ExxonMobil, BP and Royal Dutch Shell—want to stop owning and leasing their own retail outlets, which some of them have said they regard as a low-profit business. They've been selling the properties, often to fuel distributors, who are becoming the dealers' new franchisers.

A spokesman for ExxonMobil, a unit of Exxon Mobil Corp., says such ownership transfers should be "transparent" to its consumers, who will still be "able to purchase gas at Exxon and Mobil-branded stations across the U.S."

But many of the small-business dealers who run those stations are worried about their livelihoods. Under the previous business model, refiners often gave dealers allowances and rebates on fuel prices. But when the station is sold to a third party, such as a fuel distributor, the distributor may mark up the price of fuel in order to recoup costs. The station is contractually obligated to sell only their refiner's brand of fuel, so it has no choice but to buy it from the distributor who owns that brand's supply contracts—and is now frequently also his franchiser.

In New Jersey, 20 BP dealers recently went to court to stop the oil giant from ending their long-standing business relationship. As an alternative to third-party purchasers, BP Products North America Inc., a unit of BP PLC, offered to sell the stations to the dealer-operators, but the dealers allege that the company is asking inflated prices. BP said it doesn't comment on pending litigation.

The U.K.-based company has already disposed of more than 550 stations in several states, including Arizona, California, New Jersey and New York.

The individual dealers say they're at a disadvantage in bidding for their stations against distributors and other bigger entities. "There are less headaches" that refiners have in doing business with a distributor willing to buy a bundle of stations rather than dealing with scores of individual buyers, says Ralph Bombardiere, executive director of the New York State Association of Service Stations and Repair Shops, an industry group.

A BP spokesman says the company has no preference on whether buyers are single-station dealers or multiunit operators.

Such franchise transfers—which have become a national concern among hundreds of small-business station operators—this past summer led to legislation in New Jersey giving dealers a "first right of refusal" in acquiring their stations from oil companies.

Sal Risalvato, executive director of the New Jersey Gasoline-Convenience-Automotive Association, which lobbied for the legislation, believes that the law deterred Shell Oil Co. from selling about 150 company retail outlets.

A Shell spokeswoman said the company would comply with applicable state and federal laws in transitioning from company-supplied stations.

The ExxonMobil spokesman said that while the company is evaluating its plans there, as yet no dealer-operated sites have been sold in that state.

The price they pay for fuel is among the dealers' chief concerns. Two Chicago-area gas station operators, Robert W. Juckniess and Nrupesh Desai, who bought 17 gas stations from BP in the Chicago-northern Indiana market, recently sued BP, alleging they didn't disclose before they bought the station franchises that BP might transfer their fuel-supply contracts to jobbers, or distributor middlemen, which it subsequently did.

The result, the plaintiffs allege in their federal district-court filing in Chicago, was marked-up fuel prices that made them less competitive and their profit projections unrealistic, forcing them on many days "to lose money on every gallon of gasoline sold at the pump... in order to remain reasonably competitive on the street."

The dealers' attorney, Carmen Caruso of Stahl Cowen Crowley Addis LLC in Chicago, says the lawsuit is "a matter of survival" for the station operators, who committed themselves to 20-year franchises that prevent them from changing brands.

In court papers BP denied all of the allegations but declined further comment.

ExxonMobil was named in another fuel-pricing lawsuit brought in New Jersey earlier this month. It alleges that the refiner deliberately manipulates the prices its New Jersey dealers pay for its gasoline, so as to increase revenues to the detriment of the dealers. The complaint also says that some dealers pay more for gasoline than others, depending on what part of the state they're in.

The Exxon spokesman said in an email that "ExxonMobil sets its wholesale price on a number of factors that are designed to allow our dealers to compete with competitors in their local trade area." As to the lawsuit, the spokesman's email said Exxon doesn't comment on pending litigation other than to say they'll defend themselves "vigorously."

Marc J. Gross, an attorney with Greenbaum, Rowe, Smith & Davis LLP, Roseland, N.J., who filed the lawsuit on behalf of nearly 100 Exxon franchisees-dealers, said such suits present a risk to the small-business people bringing them. Besides taking on a deep-pockets adversary able to carry on court battles for years, "it's like biting the hand that feeds you," he said.

Article: Anderson gas-station chain sues BP after 32-store deal sours

October 31, 2009
Peter Schnitzler
Click HERE to view the original article

Ricker Oil's Oct. 22 suit claims British petroleum giant BP is charging unjustified royalty fees while delivering no boost from its national advertising, its proprietary IT system or its bulk purchase pricing. Anderson-based Ricker Oil Co. a year ago bought all 32 of London-based BP’s Indianapolis-area locations, a blockbuster deal that gave Ricker access to the state’s largest market and made it the biggest Indiana-based gas-station chain.

But now that deal has soured, and Ricker is suing BP in federal court over poor performance of the 19 gas stations and mini marts that operate under BP’s franchised am/pm brand.

The Oct. 22 suit claims BP is charging unjustified royalty fees while delivering no boost from its national advertising, its proprietary IT system or its bulk purchase pricing.

The family-owned company claims it is now losing “thousands of dollars per month” as a result of the deal and that problems related to the am/pm stores are “crippling Ricker’s economic stability.”

“BP has continued to hold Ricker at bay from moving forward with this lawsuit by promising to remedy these issues but, to date, BP continues to fail to do so,” the lawsuit reads.

Jay Ricker, a former gasoline tank wagon driver, and his wife, Nancy, launched Ricker Oil in 1979. In addition to its Indianapolis locations, the 700-employee company operates 29 convenience stores along the Interstate 69 corridor in northeastern Indiana, and supplies 25 independent operators. Locally, Ricker Oil this year was the title sponsor of Conner Prairie’s $2.2 million “1859 Balloon Voyage” exhibit, and offered coupons for rides at its stores.

Ricker Oil didn’t disclose terms of its deal when it bought BP’s Indianapolis locations, and they aren’t listed in the lawsuit. Both Jay Ricker and his attorney declined to answer IBJ’s questions. So did a BP spokesman.

However, in court documents, Ricker Oil complains it expected to enjoy special discounted pricing, but soon found BP’s goods cost much more than it had been paying, with far longer delivery times.

Ricker Oil also grumbles about capital expenses it considers unnecessary, such as cigarette display cases it had previously obtained for free from tobacco manufacturers, or red product shelving BP demanded be replaced with white in every store.

And Ricker alleges BP requires it to order bulk quantities of items such as condiments, regardless of a store’s size or average traffic, most of which are wasted, “thereby costing thousands of dollars per month.”

BP’s “Retalix” pricing system also hasn’t worked properly for Ricker Oil, according to the suit. Under its own legacy IT system, Ricker Oil argues, it can quickly change prices across its chain for all its products. BP’s system requires a manager to make every change manually, which “costs Ricker thousands of man hours per year and provides larger error rates.”

The company alleges that system also can’t accurately track inventory. Under a buy-one-get-one-free promotion for candy bars, for example, the suit alleges Retalix counts only one bar, leaving managers to guess whether losses are legitimate or from shoplifting.

And Ricker Oil claims Retalix regularly fails to process credit card transactions, allowing customers to drive away from the pump without paying for their gas.

Businesses operating in less competitive industries might be able to ignore such problems—or at least wait longer to work them out before filing suit. But even before the recession, gasoline stations’ margins were incredibly thin, according to the Indiana Petroleum Marketers and Convenience Store Association.

Executive Director Scott Imus said that last year his members made just 3.9 cents on every gallon of gas they sold, and that’s before the cost of credit and debit card transactions is factored in.

And because drivers are highly price-sensitive, stations wait to increase their gas charges until their competition moves en masse, even if they’re squeezed when the wholesale cost of fuel rises dramatically.

“If the market is below cost, you have to be there,” Imus said. “If not, you might as well send your employees home for the day, because nobody’s going to buy fuel from you.”

Typically, card companies charge 2.5 percent to 3.5 percent off the top line, said Kelly McClure, president of Marion-based McClure Oil Corp., which operates 35 gas stations with 375 employees in northern Indiana. That makes a huge difference when you’re mainly selling magazines, soda pop and gum, all available from nearby competing groceries or drugstores.

“The credit card companies made far more off our business than we ever thought about making off our business last year,” McClure said. “And they didn’t do anything but clear the transaction.”

Even in the face of such challenges, companies with thin profit margins can prosper—a point Wal-Mart has proven—said Richard Feinberg, a consumer sciences and retailing professor at Purdue University

Feinberg expects BP to settle, allowing Ricker Oil to put aside the legal distraction. But if the case goes to trial, Ricker will need to prove BP over-promised and under-delivered under the terms of its franchise agreement, he said.

“Any franchise agreement spells out the contributions of the franchisee and franchisor. That relationship is like a marriage. Sometimes it’s tough,” Feinberg said. “There have been a lot of suits just like this. Usually, they’re settled. Usually, the franchisor says, ‘Let’s kiss and make up and go to bed together.’”