Sunday, July 29, 2001

Price wars fierce at the pump

Gas stations keep eye on the competition - and buyers benefit

By James Pilcher
The Cincinnati Enquirer

        Some of the fiercest competition in America is happening at nearly every major intersection in Greater Cincinnati.

        Gas wars — where every penny counts — have brought Tristate motorists relatively low prices over the past three weeks.

[photo] Binoculars help Lynn Smith, manager of a Sunoco station in Crescent Springs, watch gas prices at the BP station a few blocks away.
(Tony Jones photo)
| ZOOM |
        But the gas wars are traumatizing dealers. Station owners and operators say the competition has become so brutal that they're forced to cut prices even if it means taking a loss.

        And some independent dealers say they can't survive much longer, hinting that if they fold and leave Big Oil to battle it out, lower prices will eventually go, too.

        “Competition is the name of this game,” says Robert Lusby, owner of the Sunoco convenience store at the intersection of Buttermilk Pike and Interstates 71/75 in Crescent Springs. His corner routinely has the highest prices in the Enquirer's Tristate gas surveys.

        “A lot of times, it doesn't even matter what I pay for the gas when I determine price,” Mr. Lusby says. “The only way I can even hope to get enough volume to stay afloat is to compete on price, even if I get killed.”

        Few other products are so driven by price, says oil analyst Peter Beutel of the Connecticut energy consulting firm Cameron Hanover Inc.

        “People don't care where they buy it, they just want the cheapest price, even if they drive 2 to 3 miles for it,” Mr. Beutel says.

        The result? “The gloves are off for everyone,” Mr. Beutel says.

Competition rules
        Motorists, who've grown used to seeing abrupt price swings, might think pricing at the pump is as complex as OPEC's hourly oil production formulas.

        But here's how it works: Station owners and managers drive around to see what the competition is doing. The lucky ones just look out the window, or walk to the curb — Mr. Lusby's station manager Lynn Smith uses binoculars to catch prices two and three blocks away. Some places might have to call a central office.

        Then they match any drop in price or come within a penny or two, no matter what they paid for the gas. If they don't, they watch potential business drive by, lured by a cheaper fill-up just down the road.

        As of Friday, the average retail price for a gallon of unleaded was $1.26 in Cincinnati, and $1.33 in Northern Kentucky. Friday's national average was $1.39, according to the Oil Price Information Service, an independent Lakewood, N.J.-based company that monitors developments in the oil and refining industry.

        The laws of supply and demand may drive other aspects of the gas market, such as wholesale pricing, which typically influences retail prices within a certain range. That happened last month and in June 2000, when retail prices passed $2 a gallon in much of the Midwest and approached that mark here.

Roundup of Tristate gas prices
        In those instances, wholesale prices skyrocketed because of problems making enough cleaner-burning, reformulated gas required in the summer in some areas, including Northern Kentucky. But since last month's runup, production has increased, creating almost-glut like conditions that have lowered the wholesale price.

        Nationally, the model is for stations to lose money or break even when wholesale prices rise, then recoup the losses by keeping retail prices high when wholesale prices drop, Mr. Beutel says.

        “It's sort of like a gentleman's agreement in most of the country,” Mr. Beutel says.

        But in Cincinnati, intensifying gas wars caused retail prices to fall as sharply as wholesale prices, keeping profit margins ultra-thin.

        “This summer, the most competitive market in the country has been southwestern Ohio and Northern Kentucky,” says Tom Kloza, publisher of a daily newsletter by the Oil Price Information Service, a Lakewood, N.J.-based company that monitors developments in the oil and refining industry.

        Jeff Lykins, chairman of the Ohio Petroleum Marketers Association, says he's selling more gas at his 15 area stores this year than last, but making less money.

        “I've never seen it this tough for this long a period of time,” Mr. Lykins says. “Street price has nothing to do with what I bought it for, and more about what the other guy is doing.

        “You live and die by the gallons.”        

America's toughest market

        No one is sure how or why the Tristate found itself in such fierce competition. Experts and local dealers say reasons range from an increase in local gas station ownership by oil companies to a potential turf war between two petroleum giants to simple geography.

        Nearly 40 percent of gas sold in the Greater Cincinnati and Dayton metro areas comes from top sellers BP or Speedway, according to Tulsa, Okla.-based MPSI Systems Inc., a market research firm that specializes in international retail petroleum products. Speedway is owned by Findlay, Ohio-based Marathon Ashland Petroleum LLC.

        Together, the two companies own about 100 Greater Cincinnati stores alone. Many of the remaining stations and convenience stores are owned by independent operators such as Mr. Lusby or by regional operators such as Mr. Lykins.

        Some independent dealers suspect that BP and Speedway are fighting it out for market share, which has led to an unprecedented free-for-all that could eliminate the little guys.

        BP and Marathon Ashland deny they're battling among themselves, saying they're competing for every dollar just like every other station.

        “It is a brutally competitive market for us just like everyone else,” says Linda Casey, spokeswoman for Marathon Ashland. “The price will be what the market can hold, and right now, the market in Cincinnati won't hold much.”

        Cincinnati also is in an ideal location to receive all the gas motorists can use, so supplies are plenty. Barges bring gas up and down the Ohio River, and there are 10 active refineries in Indiana, Kentucky and Ohio — a relatively high number compared with other regions of the country.

        That creates competition at the wholesale level, keeping prices there low as well, Mr. Beutel says.

        “And for the most part, the big chains own the refineries,” Mr. Beutel says. “If you've got big chains trying to be competitive at the retail level, it can create a big crunch.”        

A local skirmish

        Mr. Lusby, the independent Sunoco dealer, says he's not being crunched, he's being crushed. He relies on gasoline sales for 40 percent of his revenue but hasn't made a profit in nearly three years, he says.

        “You can only pack so much stuff inside your store,” Mr. Lusby says. “You've got to make money on gas if you want to make it. And for a lot of us, that just isn't happening right now.”

        His June operating expenses were $30,200, and revenues were just $26,000, meaning he lost more than $4,000, an occurrence Mr. Lusby says is becoming common.

        After competing with four other stations within a half-mile of his store, Mr. Lusby says he made money on gas maybe five days last month, and July hasn't been much better. He says prices in his area are generally higher than the Tristate average because of the increased cost of reformulated gas. He often gets caught with the highest price of all, he says, because he's trying to eke out a profit.

        “We're not supposed to talk about price, and be hush-hush about it,” says Mr. Lusby, who has been at the same location under two different brands for 29 1/2 years. “But this is the worst I've ever seen it. When prices go up, we're seen as the culprit. People don't realize that I haven't made any money for three years, even when prices were high.”

        As Mr. Lusby speaks, his manager Ms. Smith grabs a few foot-long plastic numbers for the gas sign from a closet in the cramped office she shares with her boss next to the beer cooler.

        A few minutes later, she's back, her task completed. The price out front on this recent Thursday morning now reads $1.39 for regular unleaded, a five-cent markup.

        The decision took even less time than the sign change. It was made after the nearby BP-owned station raised its price a nickel.

        “It's as simple as that,” Ms. Smith says. “We might have to do it later again today, or not again for another three days. It all depends on what the other guys do.”

        The potential costs or benefits of each decision are more complex. This time, the price hike helps Mr. Lusby. He won't miss any business because the other three stations at his corner have matched the hike or soon will.

        And it relaxes his margin — he had been selling gas at $1.34 a gallon after buying it for $1.30, the same wholesale price that most northern Kentucky stations paid that week.        

Big guns

        Pricing strategy is the same for the major chains, even if performed on a bigger scale.

        BP Amoco spokeswoman Linda McCrae says that managers at BP-owned stations can change price within company guidelines that she would not disclose. But she says that stores do not regularly, if ever, sell gas below cost.

        “We're not in the business of losing money on selling gas,” Ms. McCrae says.

        At Speedway/SuperAmerica stores (currently being rebranded exclusively in this area as Speedway), managers report daily on competitor prices, says Ms. Casey. that company's spokeswoman. Then officials at the pricing office in Enon, Ohio, decide on each store's daily price based on recommendations from the store manager.

        Unlike her BP counterpart, Ms. Casey says certain Speedway sites may occasionally sell for below their cost in order to stay competitive.

        “But we're reactionary — we don't try to lead any markets,” Ms. Casey says. “I won't say we don't ever make the first move, but we try to react so we can stay profitable.”

        Both BP and Ashland Oil, partner in Marathon Ashland, reported record corporate profits in the past year. Oil analysts say those profits came from oil drilling and refining, and not pricing at the pumps.

        Still, independent dealers like Dennis Stecht, who owns three stations in Northern Kentucky, say BP and Speedway constantly put him on the defensive.

        “I just stay competitive with the cheapest guy on the street, and that is always one of the big guys, either BP or Speedway,” Mr. Stecht says. “That puts the squeeze on us, to be sure.”        

Last man standing

        Some analysts wonder where the competition will lead.

        Mr. Kloza, the Oil Price Information Service publisher, cites Northern California as a cautionary example. Only three main chains compete in that area, he says, and gas was selling for $1.96 a gallon in San Francisco on Wednesday. Wholesale prices for that region, he says, are at a five-year low of nearly $1 a gallon.

        Greater Cincinnati “motorists may be the beneficiaries now because Speedway is not letting BP take its market share, but watch out if they're the only ones left,” Mr. Kloza says.

        BP's Ms. McCrae disagrees.

        “There will always be competition,” she says. “There may be differing numbers of competitors, but we'll always be after the same customers.”

        Mr. Lusby's lined face under the ever-present Sunoco cap still flashes a quick smile but shows the stress of the past few years.

        An Owen County native who now lives in Fort Mitchell, Mr. Lusby won't give his age as anything but “older than dirt.”

        He says he's keeping his station open by dipping into savings from good years. He says he had the station paid off until he had to take out an $85,000 loan last year to replace gas lines and the pump system to meet new environmental standards.

        Mr. Lusby says he'll duke it out as long as he can, as much for his employees as for himself. He says no one else in his family is interested in taking over the business; a grown son, Tim, is working as a steel guitar player in Nashville.

        “I'm not going to put these (employees) out on the street, especially when a lot of them have been with me for years,” Mr. Lusby says. “And if we don't stand up and fight, we'll be looking at $3 gas in five-10 years, you mark my words.”

BP vs. Speedway: a battle for turf

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