Industry Money-Maker : Gimmicks Fuel Sales of Gasoline
Each time you buy eight gallons or more of Mobil premium unleaded gasoline in Southern California this month, you can get a drinking glass dressed up with a Rams, USC or UCLA insignia. Mobil intended to offer Raiders glasses too, but Shell had already signed them up.
If the whole idea puts you in a time warp, that’s understandable. Mobil says it has not done this sort of thing since the days leading up to the Arab oil embargo of 1973, the event that marked the end of cheap energy and made the Sunday drive a costly proposition.
Then, gasoline was inexpensive and barely profitable for the oil companies, and there were so many service stations that they did headstands to set themselves apart. Dealers were giving away drinking glasses, Green Stamps, strawberry preserves and stainless-steel cutlery to hang on to their share of the business.
Nose Dive in Oil Prices
Now, after a long period of high prices, dealer attrition and declining or sluggish demand for gasoline, the great 1986 nose dive in oil prices has stirred up the market anew. This time, the marketing whizzes are under pressure for a different reason:
Gasoline is suddenly a big money-maker for an otherwise reeling industry.
“It’s a hot market. You’re seeing tiger-in-your-tank style advertising; they’re giving things away at the gasoline pumps, and the glory boys in the companies are the retailing guys,” said Scott T. Jones, a former Atlantic Richfield economist who is now a vice president at Chase Econometrics in Bala-Cynwyd, Pa.
Promotions come and go in the gasoline business, and it remains to be seen whether the nation’s motorists will be inundated with free drinking glasses. With so many dealers doubling as snack-shop operators, they’re just as likely to offer discounted Pepsi to get motorists into the store.
Two Ways to Sell More
“The whole idea is to make more money by selling more gas, and there are two ways to do that,” says Duvall Webster, vice president at Turner, Mason & Co., an energy consulting firm in Dallas. “One is with cute things like glasses and the other is to cut the hell out of your prices. But with prices already so low, customers aren’t that price-sensitive. I don’t care much whether I pay 69.9 or 72.9 cents a gallon, but if one guy’s giving away sweat shirts I might go to him.”
In any case, the major oil companies can be expected to pull out the stops to exploit what is about the only bright spot in their business: the refining and marketing of oil products.
In spite of today’s sharply lower prices, the refining and retail segment of the oil industry is generating king-size profits that have significantly blunted the financial blows dealt to the major oil companies by last winter’s collapse in the price of crude oil. Analysts say profit margins in some parts of the sprawling oil distribution system are nearly double the level of a year earlier.
“While they’re taking it in the chops on oil production, they’re making a killing on gasoline,” Jones said.
He was referring to the opposite economics that apply to the two halves of the oil industry, known as the “upstream,” which finds and pumps oil, and the “downstream,” which refines and distributes oil products to the public. Because the downstream buys the newly cheap crude oil from the upstream, it has benefited from the price collapse even as the upstream suffers severe dislocations.
Not All Savings Passed On
“Margins in our end of the business historically were never that great,” Roger Beach, president of Unocal’s refining and marketing division, said. “We’ve always been something of a stepchild. The money was made in the upstream. Now the shoe is on the other foot.”
One reason is that the industry has not passed on to consumers the full benefit of this year’s collapse in crude-oil prices. In time-honored fashion, those who handle the cheaper product as it moves through the system--refiners, various distributors, and service-station owners--have kept a little something extra for themselves by not lowering prices as much as their costs have dropped.
Trade publications say refiners and “jobbers,” the industry’s term for the various distributors and brokers who buy and sell refined products, have taken advantage of the volatility and confusion of crude prices and enjoyed most of the higher profit margins. Dealers, by contrast, have seen little of the action (though many are jobbers as well).
Higher Profit Margins
The Lundberg Letter, a publication of the Los Angeles-based Lundberg Survey Inc., calculates that the apparent profit margins for jobbers leaped from 7 cents a gallon of regular unleaded last November to as high as 24 cents a gallon in spring. By midsummer, that margin was down to 14 cents, still double the spread of seven months before. Major-brand dealers over the same period saw margins climb from 5 cents a gallon to a peak of 8 cents before dropping back to 6 to 7 cents.
“A penny for you, a penny for me,” says Norm Aebersold of Norm’s Union Service in Pasadena.
Ron Appel, a Long Beach man who is a jobber and owner of a dozen Texaco, Arco and independent service stations, concurs: “The dealers certainly aren’t getting fat. But the jobbers are different because there isn’t as much competition.”
But there’s more to it than profit margins. Motorists are consuming record volumes of gasoline; there are tens of thousands fewer service stations to divvy up the bigger pie, and the shutdown of about one-fifth of the nation’s refining capacity since 1981 has made refined products inherently dearer.
Sophisticated Engines
Moreover, the latest automotive trends are dovetailing nicely with the oil industry’s profit needs: Today’s more sophisticated and performance-oriented car engines need the most expensive (read that profitable) products the oil industry can dream up.
The recent advertising blitz for gasolines that will “clean fouled injectors” is a reflection of the mechanical troubles that some gasolines are causing for fuel-injected car engines. But it just so happens that most of the additive-laden, higher-octane products that solve or prevent various “drivability” problems carry the highest profit margins.
These premium unleaded fuels are thus the focus of most of the promotion hoopla, including Mobil’s drinking-glass giveaway and an Exxon deal whereby motorists can get a liter of Coke or a synthetic tiger tail if they buy eight gallons of “Exxon Extra” with the secret ingredient “XCL-12.”
Jan Lundberg of the Lundberg Survey says gross profit margins for station operators are 3 to 6 cents a gallon higher on premium unleaded than on regular unleaded. And premium unleaded, which accounted for a mere 8% of gasoline sales five years ago, was grabbing 20% this summer as its price dropped to the $1-per-gallon range.
‘10 Cents Apiece’
“Premium unleaded’s the best game in town,” Webster says. “I’d give away glasses too, if it got people to buy that stuff. Those glasses probably cost them 10 cents apiece.”
Typical of the “quality” marketing pitch that is going over so well now that customers can afford it, Amoco has introduced a whole family of top-of-the-line, high-profit oil products under the “Ultimate” label. It ranges from premium unleaded gasoline to a sort of upscale synthetic grease aimed at luxury sports cars.
Appel, who says he lost money the last four years, concedes: “We now have it like it used to be. The consumer is buying more gasoline and he’s buying a better grade of product. As long as crude is down, our financial position is a lot better.”
For the big oil companies with upstream and downstream operations, all this has translated into dramatic profitability gains at the refinery and retail level--helping to ease the woes created by the lower prices they are receiving for crude oil. Typically, their biggest customers are their own refinery divisions.
Soaring Earnings
Downstream earnings in the first six months of the year soared 1,500% at Texaco, 350% at Exxon, 400% at Mobil and 90% at Amoco, according to Chase.
Those don’t exactly qualify as windfall profits, of course, because the oil-field arms of those companies generally lost more money than the downstream units made. Overall industry earnings, especially those of independent exploration and producing companies, are down dramatically and in many cases have vanished. An estimated 100,000 jobs have been eliminated. Most worrisome is the fact that oil exploration has slowed to a crawl.
But over a period when the world price of crude oil plummeted by about 50%, the 30 oil companies tracked by Carl H. Pforzheimer & Co., a New York investment house, recorded a mere 14% earnings decline during the first half of the year. In the second quarter, when downstream profit margins were especially generous, the companies actually earned 14% more than they did in the year-earlier period.
‘Fool Some ... All the Time’
Competition is supposed to eventually beat down these kinds of profit margins, but the volatility in crude-oil prices prevented this from happening until recently. Chase’s Jones says, “You can fool some of the people all the time if prices are constantly going up and down.”
Stuart H. Pearman, manager of retail business for Exxon U.S.A. in Houston, said the claims of inflated margins are exaggerated and cautions against interpreting “a snapshot of the industry on any given day. Once (prices) leveled out, the margins have come down.”
Unocal’s Beach said, “I see the downstream for some years to come being a bigger contributor to the bottom line. But I don’t think we can expect the kinds of margins we’ve seen the first six months of this year.”
Meanwhile, the stepped-up pace at the pumps goes on, sometimes without a lot of enthusiasm at either end of the distribution system. On hearing of Mobil’s glass giveaway, Beach said, “You’re kidding. That’s ludicrous. I’m sorry to hear that. I hope we’re not going to start getting into that kind of thing. I question whether you can buy grass-roots market share with drinking glasses.”
Moreover, many of the promotions cost the station owners money unless sales goals are achieved. They must buy the drinking glasses from Mobil, for instance, and the tiger tails from Exxon.
