Oil Firms Streamline Marketing Operations : Several Majors Pull Out of Entire Regions, Concentrate on Few Key Areas

Chevron’s decision last week to sell a network of 4,000 gasoline stations in 10 Northeastern states demonstrates a fundamental change in the way gasoline is sold.

As thin profits make nationwide retail chains uneconomic, oil companies are disposing of thousands of stations in their weakest markets while expanding aggressively in a few select areas.

San Francisco-based Chevron, for example, has agreed to sell its Northeastern gas stations to Cumberland Farms, a Massachusetts convenience store chain. The nation’s No. 2 oil company may also dispose of 275 gas stations and a refinery in Puerto Rico. But it plans to spend $500 million to modernize gasoline stations in the West and Southwest, where it does well.

Other companies are making similar moves:

- Atlantic Richfield has disposed of 2,000 East Coast gasoline stations but is buying stations in key Sun Belt cities. It doubled its sales in Phoenix, according to analysts, after buying 21 stations in that Arizona city last summer.

- Mobil, a strong East Coast marketer, is shutting stations in Oklahoma and Kansas while spending $400 million in key metropolitan areas to upgrade stations by adding convenience stores and new equipment.

- Shell Oil has disposed of 4,400 stations since 1980 but moved to No. 3 in Atlanta after buying 31 stations there this summer. It strengthened its position on the East Coast when it bought 400 Arco stations in July.

Further, in an exchange that observers predict will become more common, Arco has agreed to swap its stations in Chicago for some owned by Shell in Las Vegas and Phoenix and others owned by Mobil in Northern California.

“I think you are going to see more selectivity,” said Clifton C. Garvin Jr., chairman of Exxon. He said that oil companies are likely to concentrate on markets close to refineries and pipelines. “That is going to lead to more regionalized marketing,” he said.

Oil companies say it has become too expensive to maintain extensive marketing networks. Frequently, gasoline must be shipped to regions that are distant from the refinery where it is produced, and those transportation costs aren’t easily recovered. Shell withdrew from Pennsylvania a few years ago rather than continue shipping gasoline from the Gulf Coast.

Analysts say a higher concentration of gasoline stations in any market gives retailers a better chance to make money. Bruce Lazier, an oil industry analyst with Prescott, Ball & Turben in New York, said that a gasoline retailer must sell about 5% of the gasoline in a market area to cover its costs. “Anything over that is gravy,” he said.

Some believe the trend toward a more regional marketing focus will lead to shortages and higher prices in areas abandoned by one or more oil companies. This has already happened in Upstate New York, according to Ralph Bombadier, president of the New York Service Station Assn., where 62 of 114 stations have disappeared since 1976 from the Elmira area. Bombadier said gas is 5 to 10 cents more expensive there than in the rest of the state, despite lower local taxes.

Victor Rasheed, director of the Service Station Dealers of America, a trade group, accused the major oil companies of “carving up the nation.” Oil company spokesmen deny this.

Oil industry spokesmen contend that the marketing shifts are dictated by economics. An oil glut, excess refineries and cheap gasoline imports help keep gas prices low. At the same time, gasoline consumption is way down. Fuel consumption has fallen more than 10% in the last decade, according to government statistics, and the decline is expected to continue. The Department of Energy estimates that Americans in 1990 will use no more fuel than they did in 1970.

For these reasons, refining and marketing profits have come under severe pressure. For the industry’s top 25 companies, 1983 domestic refining and marketing operating income was $1.4 billion, a decline of 63% from 1980. Most experts don’t expect the business to do well this year, either. George M. Keller, Chevron’s chairman, recently estimated that the industry would break even on gasoline refining and sales this year.

In search of efficiencies, major oil companies have each reduced the number of stations that they supply by 5% or more. Arco, which now sells gas in only five Western states, slashed its service station network by 80% since 1981. The nation had 220,000 traditional gas stations in 1970, but that number has dropped to 130,000 today.

“I know some view this as a sinister trend, but it’s really nothing more than Economics 101 at work,” said Willis J. Price, Chevron senior vice president for domestic gasoline marketing and supply.

Industry spokesmen said federal policies are to blame for the sudden shifts. Government controls in effect from the early 1970s through 1981 prevented major oil companies from getting rid of uneconomic stations because they were required to continue supplying them.

Oil companies are improving sales in key markets by offering independent dealers powerful incentives, such as rebates or discounts, to switch brands. The Society of Independent Retailers, a trade group, said that more than half of its members last year sold gasoline under major brand labels, an 11% gain from 1983.

Sometimes the battle for increased sales leads to aggressive price cutting, especially in cities in the South and West.

Competitive Consequences

While Rasheed of the Service Station Dealers acknowledges that consumers benefit from price wars, he contends that fewer gasoline retailers will be left when the wars end, leading to later price increases.

Indeed, many small wholesalers, who buy gasoline from refiners and resell it, have already gone out of business. The Petroleum Marketers Assn., a trade group representing gasoline wholesalers, said it lost one-third of its members since 1981 and expects to lose another 30% over the next decade.

However, the competitive consequences of the trends in gasoline marketing aren’t clear. Oil companies don’t disclose their city market shares, and the government doesn’t keep statistics. A 1981 study by the American Petroleum Institute showed that the nation’s top four gasoline retailers sold 28.5% of the gasoline in 1980, much less than in earlier years. But gasoline sales are subject to wide regional fluctuations. For example, the top four retailers in Houston sold 54% of the gasoline during the first half of 1984, according to National Petroleum News.

Mark Schildkraut, an antitrust lawyer with the Federal Trade Commission, said there’s no clear evidence that the overall market for gasoline in the United States is less competitive. “If anything, it appears to have become more competitive,” said Schildkraut, who was involved in post-merger divestitures by Chevron and Texaco.

Schildkraut said that large regional withdrawals have provided new opportunities for smaller companies or newcomers. On the East Coast, Dutch oil trader John Deuss acquired Arco’s marketing network in New York and Pennsylvania along with its refinery in Philadelphia. Cumberland Farms’ recent agreement to buy Chevron’s stations will boost it from a tiny marketer with 600 stations to one of the biggest in the Northeast.

The withdrawal by Arco in Upstate New York benefited independent marketer William Campbell, owner of Campbell Oil in Oleana, N.Y. He said his business has increased significantly since Arco announced its pullout last April. “We saw our opportunity,” he said.