Getting Pumped Up

Times Staff Writer

Tom Runyans pays $45 a year to shop at Costco Wholesale Co., but not for the super-sized tubs of salsa.

“The reason I come to Costco -- and the reason I signed up to be a member -- is for the cheap gas,” Runyans said on a recent weeknight, filling his Nissan Sentra at the Alhambra store.

By paying $1.98 a gallon for regular, Runyans forked over 7 cents a gallon less than the motorists tanking up at a nearby Chevron station. The discount varies, but since Runyans hits the pumps twice a week and drives 70 miles a day, he figures he will save more than $100 this year, easily enough to offset the membership fee.

To the dismay of neighborhood gas station owners across the country, Runyans and others are increasingly passing them by to gas up at big-box discounters such as Costco and Wal-Mart Stores Inc.

Supermarkets also are in the game, with Albertsons Inc., Safeway Co. and Kroger Co. leading a parade of grocery chains that are expanding their fuel sales.


With their market share ballooning, these relative newcomers are sending shock waves through the gasoline retailing world. Service station owners fear the discount chains such as Costco in particular, having seen them muscle their way into everything from electronic gear to photo processing.

“Every time one of these opens up, two or three neighborhood service stations will close in that community,” said Dennis DeCota, executive director of the California Service Stations and Automotive Repair Assn., a trade group based in San Francisco. “They’re breaking people who have invested their lives in those corner stations.”

Since 1993, 17.7% of the nation’s traditional service stations have gone out of business, according to the Department of Energy. Experts say the decline reflects spiraling costs and the trend toward fewer, higher-volume sites, as well as the onslaught of new competitors.

Indeed, an aggressive and well-placed warehouse store can sell up to 1 million gallons of gasoline in a month, dwarfing the typical station’s flow of about 150,000 gallons a month, according to industry analysts.

“You’re seeing a revolution happening ... and it’s scaring the hell out of the traditional gas station retailers,” said David Hackett, president of the oil industry consulting firm Stillwater Associates.

The benefits for motorists are obvious. Wal-Mart, Costco and their lot typically charge 7 cents to 10 cents a gallon less for regular gasoline than competitors nearby.

“Gasoline more and more is viewed as a commodity, and people are really shopping for price,” said Paul Latham, vice president of gasoline sales at Issaquah, Wash.-based Costco. “There’s also a general distrust of oil companies, and I think that’s what has driven a lot of volume to places like Costco.”

Tapping into the nationwide obsession -- and frustration -- with pump prices, unconventional gasoline vendors are expected to sell more than 11 billion gallons of gasoline this year, up from 4.4 billion gallons in 2000, according to EAI Inc., a Westminster, Colo.-based consulting outfit.

Their market share, now nearly 7.5% of U.S. retail fuel sales, is expected to reach 13% by 2007, EAI said.

France saw a similar trend begin in the 1980s, and the one-stop shops now account for more than half of that country’s fuel sales, according to the National Assn. of Convenience Stores in Alexandria, Va.

For a variety of reasons, some experts think the new wave of gasoline sellers will top out with 20% to 30% of market share in the United States. For one thing, discounters and supermarkets can’t build enough sites to meet the traveling public’s needs, and they are especially ill-suited for many of the busy corners and remote freeway-adjacent parcels where smaller gas stations thrive.

In addition, much of the growth thus far has been fueled by supplies from independent refineries, which have limited production capacity. Some big oil firms have begun to sell to the newcomers, but companies such as ChevronTexaco Corp., Royal Dutch/Shell Group and BP have their own retail stations and cannot be expected to open the spigots if it would hurt their branded outlets, said Amy Myers Jaffe, a senior energy advisor at Rice University’s Baker Institute.

The discounters and grocery stores are making their biggest gasoline gains in such places as Utah, Texas and the Midwest, where there is steady growth, less zoning friction and ample land to accommodate both a large store and gasoline pumps in the parking lot.

In some of those regions, mass merchandisers and grocers have grown to control 13% to 16% of the fuel market.

The effect has been less dramatic in California, where discounters and supermarkets have an estimated 3% market share. High land costs and environmental restrictions have slowed development of big-box stores in many areas, and tight gasoline supplies have complicated construction of new fuel stations of any kind.

That meager incursion is expected to grow, however. Costco and most of the supermarket chains are expanding their fuel sales here. Wal-Mart -- the nation’s largest gasoline retailer among discount and grocery stores -- is planning to open 40 Supercenters in California over the next few years, and most will sell gasoline.

Wal-Mart currently sells gasoline at 16 stores here, mostly at its Sam’s Club membership outlets.

“We are growing and continuing to find that our customers really like this feature,” said Robert McAdam, a Wal-Mart vice president. “So wherever it makes sense, we try to have gasoline.”

Trade groups representing independently owned gas stations and their suppliers have complained loudly that the big-box retailers are engaging in predatory pricing, selling gasoline at prices competitors can’t possibly match without closing up shop. The federal General Accounting Office is investigating such concerns at the request of Sen. Mary Landrieu (D-La.).

Costco and Wal-Mart deny these charges, saying they can offer cheaper fuel because they buy in bulk, sell huge volumes and get discounted rates from oil companies in return.

Some in the industry believe fuel sales play the role of “loss leaders” at many of the warehouse stores. But it’s difficult to prove that the strategy constitutes predatory pricing, said Rice University’s Jaffe, who notes that service stations often make more profit on their convenience markets than they do on fuel.

“To have traditional gas dealers whining that Costco sells cheap gasoline so people will come inside and buy something ... well, that’s true of most gasoline stations. It’s a bit like the pot calling the kettle black,” she said.

Nonetheless, 17 states have enacted laws specifically prohibiting the sale of gasoline below cost, Wal-Mart estimates, though the methods for determining what constitutes “cost” vary widely. Other states, such as California, have general laws that make predatory pricing illegal.

In 2001, a federal judge in Alabama barred Murphy Oil Corp. -- which owns and operates nearly 600 Wal-Mart stations in 21 states -- from selling gasoline below cost anywhere in the state. The judge said Murphy set prices low with the intention of harming two competitors.

McAdam, the Wal-Mart vice president, said the chain “does not sell gasoline below cost. That’s not what we do.”

Most of the state laws on pricing, he added, “are designed to protect the people who are in the business already, many of whom are very large businesses. Their premise is that customers should pay more so that they can stay in business.”

EAI, however, suspects that aggressive discounting on gasoline will become muted once big retailers, also known as hypermarkets, have nabbed the amount of market share they are after. EAI’s conclusion is based on the pricing trends in Dallas-Fort Worth, where hypermarkets have sold gasoline the longest, and where the newcomers’ retail prices have begun to drift up after several years of intense discounting and market share gains.

“Once they become established,” said Paul Rolniak, an EAI vice president, “then they’re not going to be 10 cents under street price; they’ll probably be close to street price.”

For his part, ChevronTexaco Chairman Dave O’Reilly said he wasn’t losing sleep over Wal-Mart’s and Costco’s march into gasoline.

The one-stop-shop sites offer low prices, but they typically have little else, he noted -- no coffee, no squeegee and no one to take your cash. At places like Costco and Sam’s Club, you have to be a member. And on weekends and some weeknights, there are lines at the pumps.

“We’re not competing with them,” O’Reilly said. “Our philosophy is to offer convenience, speed, ease of entry, ease of access, ease of exit, so we’re competing for a different customer.”

Indeed, some see a future with two types of gasoline retailers: the big-box discounter and the convenient stand-alone service station.

“I think there’s a place in this market for everybody,” said McAdam of Wal-Mart. “I fully expect that the person that tends to buy gasoline at one of our stores is also buying gasoline at other kinds of stations too.”