Gas pains

While drivers enjoy low prices Chico station owners face daunting competition from supermarket chains

PUMPED UP AND OUT After Safeway opened up a gas station on Mangrove Avenue, Gary Lewis, who owns the Arco AM PM at East Avenue and The Esplanade, closed another station he owned at the same intersection.

PUMPED UP AND OUT After Safeway opened up a gas station on Mangrove Avenue, Gary Lewis, who owns the Arco AM PM at East Avenue and The Esplanade, closed another station he owned at the same intersection.

Photo By Tom Angel

Fuel fact:
According to the California Department of Energy, a $1.53 gallon of unbranded (not tied to Chevron, Exxon or other big names) gas breaks down this way: 9 cents for the dealer, 49 cents for the crude oil cost, 48 cents for refinery costs and profit margin, 11 cents for state and local sales taxes, 18 cents for state excise tax and 18 cents for federal excise tax.

When Ken Kirkman’s father-in-law, Sherman Frost, opened a gas station in Chico in 1947, there were only eight or nine stations in town, and it was the start of a family success story.

Times have changed, Kirkman says.

Opening a gas station is a venture that the small, self-funded businessperson would never be able to undertake now, with startup costs for a new station running about $2 million.

Some Chico station owners foresee a time when the market is turned over entirely to out-of-town corporations.

Late last year, Safeway was the first to bring to Chico what in Europe is called the “hypermarket"—a trend started by the French in 1985, who saw the potential of combining gas sales with grocery sales.

Across the nation, companies such as Wal-Mart, Costco and (in the West) WinCo are installing gas pumps alongside their superstores.

Safeway came to Chico with comparatively low prices and a club card discount on top of that. Other dealers had to follow suit or face abandonment by fickle, money-conscious consumers. Critics say the chains can afford a smaller profit margin on gas sales, since they’re already making plenty on groceries.

At Kirkman’s Frost Beacon station at Fifth and Mangrove (one of four the family owns), gasoline sales went down 40 percent after the Safeway station opened down the street.

Gary Lewis says he shut down his Beacon station at East Avenue and The Esplanade as a direct result of Safeway’s opening. “Overnight, as soon as Safeway opened, it went unprofitable. Safeway took a lot of business from a lot of people.” He retains an Arco AM PM station catty-corner to the now-vacant lot and says sales there went down 20 percent after Safeway’s station opened.

“Yes, these retailers do hurt the little guy. It is putting some of us out of business,” says Lewis, who is still doing a brisk business at his remaining station and is confident it will survive.

For now, local motorists are enjoying some of the lowest per-gallon gasoline prices in the state. AAA reported that unleaded gas was selling for $1.50 a gallon in the Chico-Paradise market the week of Jan. 20, when the state average was $1.63 and prices were as high as $1.90 in the Bay Area.

According to the California Department of Energy, the reason for the geographic disparity is almost completely due to competition—the more stations there are, the more likely it is that prices will be low. (The cost of transporting the gas is a smaller factor.)

Alexander Winslow, a Pleasanton-based spokesman for Safeway, says the supermarket chain’s goal in getting into the gas-selling business was “to provide a service to our customers. They find it wonderfully convenient.”

He also said Safeway would never flaunt the regulations that prohibit gas dealers from trying to break competition by selling their product for less than they paid for it. “We make sure we of course do everything by the book,” Winslow says, adding that, “we do price according to our competition.”

The only place he’s heard of competitors’ concerns is in Chico.

Consumers’ euphoria over low gas prices will be short-lived, say station owners. “You’ll find that most of the smaller independents will go away and you’ll be left with the big retailer,” Kirkman says.

Agrees Lewis: “Where this ultimately hurts the consumers isn’t in the short-term, because everybody loves the lower gas prices. They want to gain the market share and drive the competitors out.” Then, he says, prices “might even be higher than before.”

“I know we’re all in a cutthroat business, but the hypermarkets aren’t playing fair,” Lewis says.

The pricing of gasoline is incredibly complex, with crude oil prices being controlled not so much by refiners or retailers, but by a handful of oil companies operating within a “vertically integrated monopoly,” says Dennis DeCota, executive director of California Service Station and Automotive Repair Association, who also serves on the state attorney general’s pricing committee.

He’s seen locally owned stations suffer a decline in business every time a Safeway, Costco or Wal-Mart station sets up shop. But he perceives a different villain. “The major oil companies are using the big-box retailers,” DeCota says. The oil companies, which control the market to a large extent, prefer to sell their product to high-volume buyers. “It’s a good, effective way to bring the gas to the market.”

He sees the squeezing-out of local gas dealers as part of the oil companies’ strategic plan. “The oil companies are the ones behind this scheme. Once they drive out those independent stations,” DeCota predicts, “they’ll simply raise the prices.”

Philip Verleger, an economic consultant based in Newport Beach, has testified before Congress on energy markets and has said in interviews that he expects the number of fuel stations to decline by one-third to one-half, with many of those left being owned by retail chains.

Dick Brooks got in the gas station business in 1975, intrigued by the supply-and-demand frenzy sparked by the gas shortage of the era, when for a brief time motorists were allowed to buy gas only on certain days, based on their license plate number.

He’s owned the Maderos-Brooks Chevron station on Ninth Avenue between Broadway and Main for 20 years.

“We [consumers] are really lucky right now in Chico,” he says. “We should be 20 cents higher.”

The advent of Safeway’s station has made only a small dent in his gas sales, which he attributes to two things: His Chevron is not in the same traffic pattern as the Mangrove route, and he sells pricier, higher-quality “branded” gas.

“It has hit us a little bit,” Brooks says. “Maybe 1 percent of our gasoline volume.”

Still, Brooks states what traditionally capitalist, free-market small businessmen may have a hard time chewing on: “I’ve always felt like a town should only allow so many gas stations, coffee shops, burrito places. … There’s not enough people to have all these places.” He makes a point to shop at mom-and-pop stores as much as possible, placing the most loyalty with merchants who have treated him well.

Even so, Brooks says, owning an existing gas station isn’t a bad way to make a living. “The average service station makes 10 cents a gallon,” he says. “We’ve had times where we’ve made 50 cents a gallon, and we’ve had times where we’ve made 6 cents a gallon. [Owners] aren’t getting rich, but we can make a living.”

Kirkman is frustrated by how little it takes for a motorist to go somewhere else for gas. “I think the retail consumer perceives that their [Safeway] club card is a great savings,” he says. “If try to match them retail price wise [and] they see the 3 percent discount, where are they going to go?” To Safeway, to save perhaps 30 cents to fill up their tanks.

Lewis tried, for a time, offering motorists the same discount if they would show their Safeway card but buy gas at his station instead. His guerilla marketing efforts earned him a letter from Safeway’s legal department and a congratulatory write-up in the trade publication Convenience Store News.

Lewis admits he has a long-standing beef with the city of Chico, which denied his request to build a gas station on Mangrove Avenue but gave Safeway a permit to do the same. “Every time I drive by that Safeway, I feel ripped off.”

Gas station owners, like many other retailers, were already suffering the effects of the economic downturn and consumers’ tighter hold on their pocketbooks. But many owners had already diversified by adding mini marts to boost sales. At Kirkman’s Mangrove station, gas sales account for about 30 percent of the business, with the rest coming from convenience store purchases. At Lewis’ station, it’s about 50-50.

Kirkman isn’t sure how long he can keep up the 55-year Frost family tradition of selling gasoline to Chicoans. "Personally, I’m probably going to try something different."