The Miami Herald: Shell game?
Posted on Sun, Feb. 15, 2004
BY CHRISTINA HOAG
Independent Shell gas station dealers from around South Florida say the giant oil company is manipulating gasoline prices in a bid to drive them out of business and replace them with a management scheme that pumps up Shell's profits.
Shell Oil Products US, meanwhile, while denying that independents are being treated unfairly, admits that, at some stations, the company is putting in a system that enables it to control the pumps.
''We recognize the contributions that strong retailers and wholesalers bring to the network and anticipate independent retailers will remain a part of our network,'' Shell spokeswoman Anne Peebles wrote in an e-mail to The Herald.
Last month, about 30 Miami-Dade and Broward dealers formed the Florida Petroleum Retailers Association to share grievances that they believe contravene the Motor Fuel Marketing Practices Act, the state statute designed to level the field between retailers and refiners.
Some have already taken action. Last year, 15 dealers, located from Lantana to Miami, sued Shell's marketing arm, Motiva Enterprises. And in November, the Palma family, which runs two Miami Shells, filed a complaint with the state.
''We feel what they're trying to do is take over all the stations,'' said Martha Planes, a North Miami Beach independent. ``They're killing us.''
Gasoline retailing is a scrappy business driven by price differences of a penny or two, said University of Richmond finance professor Raymond P. Fishe.
''Not too many businesses put their prices on the roadside,'' he noted. ``It's very competitive.''
As such, friction between same-brand dealers and refiners is not uncommon. When refiners directly operate stations, they have a cost advantage as they produce, distribute and retail the fuel.
An independent functions as a franchise-type business. It must pay the refiner rent and buy its gas at the company's price. The dealer sets the retail price, based on the wholesale price, and profits from the difference.
The situation of a supplier competing against its customers has led to regulations designed to protect independents from unfair practices by refiners in several states, including Florida. Over the years, it has also resulted in dealer lawsuits against such majors as Amoco and Exxon. A few states now ban refiners from operating stations if they supply independents.
Ten dealers interviewed for this article said they had worked well with Shell until it formed Motiva in 1998. Since then, wholesale prices have escalated unreasonably, they said, making their retail prices less competitive even as rents doubled or even tripled. In the three years since Shell took over Texaco, the crunch has heightened and Shell reps have become unreceptive.
One 39-year Shell dealer in Broward requested anonymity before saying that the company had always been a solid business ally but that now its reps were often downright ``sarcastic.''
''Shell was never like that'' before, the dealer said.
Shell's Peebles, however, denied charges that the company prices uncompetitively and lacks goodwill.
''The marketplace ultimately sets street price, and our retailers and wholesalers set their own street prices,'' she wrote. ``Shell respects the role that dealers play within our network of service stations. Independent retailers remain a valued part of our network, and we work hard to continue a good relationship with those retailers.''
She added that it wouldn't make sense to pit Shell stations against each other since they all carry the same consumer brand.
KO'D BY MSO'S
But, over the past year, Shell has been converting locations to ''multi-site operator'' (MSO) management. Many of the stations, dealers said, were given up by independents after they'd started losing money.
Under an MSO, Shell gives management of some 10 to 20 stations to a contractor, paying him about $2,500 a month for running each location, dealers said. Shell sets the retail gas price and nets the profits, while the operator runs the convenience store.
Shell says the MSOs are aimed at strengthening its retail network, but dealers say that the MSOs pose unfair competition. Some retail their fuel below independents' wholesale cost, causing the dealerships to lose both customers and money.
While Shell denies that, Peebles wrote: ``At the locations where we do set the [retail] price, we are dedicated to setting a competitive price. We encourage our independent retailers and wholesalers to do the same.''
Dennis Paschalis, who runs the Shell station at SW Eighth Street and 87th Avenue in Miami, said that his prices had always been within a penny or two of the nearest Shell, over at 107th Avenue, while it was dealer operated but that when that station switched to an MSO on Oct. 1, that abruptly changed.
At 7 a.m. that day, he said, he noticed that the other station's price was the same as his -- $1.65 -- but by noon the 107th Avenue price had dropped to $1.47. Since then, the neighboring Shell has stayed routinely priced about five cents lower than Paschalis' -- and his sales have predictably plummeted.
''I have complained and complained and complained,'' he said, 'and they say, `You know what, Dennis? Maybe you should do something else.' That's what they want.''
North Miami Beach's Planes cited a similar situation. After she and her husband, Max, gave up their station at NW 67th Avenue and Miami Gardens Drive because Shell had canceled the lease, that locale switched to an MSO. Prices dropped about 10 cents under the Planes' remaining station, 10 blocks away, and so did their sales volume.
As for the Broward dealer, he closed up after 26 profitable years at a Plantation station after losing $60,000 in two years due to what he called the new pricing ''game'' and a series of hikes that jacked his rent from $4,200 to $14,000 a month.
Adrian Palma, who runs the Fifth Street Shell in Miami Beach, said it would be cheaper for him to buy gas from the nearest Shell station than the tanker. When he asks Shell to explain the discrepancy, he said, all he gets is obfuscatory answers.
''The tankers all come from Port Everglades to Miami Beach,'' he said. ``There's no reason for it.''
Like other dealers, he complains that his wholesale price does not allow him to compete with the Amoco a block away, which generally undercuts him by up to 10 cents.
''In the last two years, the company has gone crazy with the prices and they have killed our ability to compete,'' Palma said. ``Our volume has dropped 25 percent.''
And whenever they raise their retail prices in hope of reaping more profit, the dealers say, Shell raises its wholesale price the same amount.
On top of that, the dealers are left to answer to irate motorists.
'They come up and yell, `You're a thief!' '' said Juan Carlos Díaz, who runs four Shell stations, including a pricey one on US 1 in Coral Gables. ``I try to tell them it's not my fault, that it's Shell charging me the high price.''
Los Angeles lawyer Thomas Bleau, who represents the Florida dealers in their suit, said related situations were occurring nationwide. He has filed similar suits for Shell dealers in Chicago and Los Angeles, and a case is pending in Boston.
In the Florida case, a judge recently refused Shell's petition to dismiss the suit.
Art Williams, a state investigator of complaints from gas stations, said the dealers may be confused about the pricing law. Some, he pointed out, obtain their fuel from different sources, such as a middleman, than the refiner stations.
Also, the law allows stations to sell below cost if they meet such exemptions as pricing off competition. Refiners can determine their competition by a ''relevant geographic market,'' the statute states.
That phrase translates into the controversial refiner practice known as zone pricing, whereby wholesale fuel is priced according to various factors in a given area, including competition.
Companies do not disclose how a zone is determined or what the zones are, leading critics to charge that they can be used to inflate prices or shield discriminatory pricing.
''The problem comes when you slice the salami too thin and make these zones too small. A zone of one or two miles in Miami ignores the reality that Shell dealers compete with Exxon and other Shell dealers,'' said Tallahassee gasoline-industry lawyer Geoffrey Schwartz. ``When the zone is too small, it is price discrimination.''
''The moment Shell takes over, the zone changes,'' Díaz said.
The dispute points to the fierce nature of U.S. gas retailing, one of the world's most competitive, according to energy economist Andrew Kleit.
''These different distribution methods,'' he wrote in a December study, ``can come into conflict with each other.''