Awash in Profit, Exxon Fights for Pennies While Raising the Rent
By Steven Mufson
Washington Post Staff Writer
Sunday, May 25, 2008; A01
Every time Sohaila Rezazadeh rings up a sale at her Exxon station on Chain Bridge Road in Oakton, her cash register sends the information to Exxon Mobil‘s central computers. If she raises the price of gasoline a couple of pennies, chances are that Exxon will raise the wholesale price she pays by the same amount.
Through a password-protected Web portal, Exxon notifies Rezazadeh of wholesale price changes daily. That way the oil giant, which is earning about $3.3 billion a month, fine-tunes the pump prices at the franchise Rezazadeh has owned for 12 years.
Now, however, Rezazadeh says she cannot stay in business. Credit-card fees are eating her profit margins. Exxon, which owns the station land, last week handed Rezazadeh a new lease raising her rent about 30 percent over the next three years. She stuck a copy on the window of her station to show customers who are angry about soaring pump prices. Rezazadeh has told Exxon that she cannot make money with the rent that high. Her territory manager’s reply, she said, was simple: When you go, leave us the keys.
Rezazadeh, who fled to the United States from Iran in 1979, is part of the long chain that links motorists with the big oil companies. Major integrated U.S. oil companies — which produce crude oil, own refineries and sell gasoline — have been reaping billions of dollars in profit from high oil prices over the past two years, but they are still working to extract every penny they can from the marketing end of the business. Exxon Mobil doesn’t break out its earnings from marketing alone, but its 2007 profits in worldwide refining and marketing — known as the downstream part of the oil business — reached $9.6 billion, 43 percent of that coming from the United States.
Although Exxon owns and operates few stations anymore — less than 10 percent of the 12,000 Exxon outlets in the United States — it uses franchise agreements to maintain tight control over stations that bear its brand. The company dictates everything from the number of pumps to hygiene practices to the placement of food on convenience store shelves. “They monitor everything,” Rezazadeh said.
Exxon says it does all this to maintain uniform quality, while recognizing dealer needs. “We recognize . . . that we are in a difficult time with the run-up in crude oil prices,” said Ben Soraci, director of U.S. retail sales for Exxon. “Retailers are under a lot of pressure, and they are on the front lines every day with the motorist, who is also feeling a lot of pressure.”
Ultimately, Soraci said, “it’s in our interest to see them succeed. It’s not in our interest to see them hand us the keys.”
But some Exxon dealers say the company is trying to squeeze too much out of them.
Like Rezazadeh, Scott Burnham was struggling to cope with low margins and rising rents. On May 9, he closed his station on scenic Knickerbocker Road in Closter, N.J., and abandoned it to Exxon. In March, Exxon had said it would raise his rent by a third over two years. Burnham tried to line up buyers for the franchise, which he purchased for $475,000 just two years ago. But one backed out, saying that the station would lose money no matter how much gasoline it sold.
“Why is the government giving Exxon subsidies and tax breaks when they’re making billions of dollars and when they squeeze every dime they can out of every dealer who made that profit for them?” Burnham said.
Soraci said rent increases reflect rising real estate values. “We have excellent real estate out there that is superior to our competition,” he said, which allows the dealers to “compete more effectively.”
Even some of Exxon’s successful and loyal dealers complain. Jerry Daggle owns five Exxon stations in Northern Virginia, and even though they have different competitive conditions and prices, “Exxon magically lets me make about 8 cents a gallon” at each one, he said.
He said micromanaging extends to the snacks sold at Exxon’s On the Run convenience stores. The company uses a “planogram” to show dealers where to put candy bars and soda. “If I want to put Coke on a different shelf, I have to get special permission,” Daggle said. Recently he was reprimanded for selling mulch on the perimeter of his award-winning Gainesville station; the mulch, though popular in the neighborhood, wasn’t an approved product.
Technology has enabled Exxon to tweak its wholesale prices not just by region or state, but by zones as small as a street corner. Although such practices bring cries of outrage from some station owners, they elicit shrugs from some economists.
“Retailers put a lot of effort into understanding local markets, whether they’re in the airline business where prices for every seat are often determined on daily basis, or book sellers,” said Richard J. Gilbert, an economics professor at the University of California at Berkeley, who has studied the gasoline marketing business. “There’s a lot of fine-tuning to adjust prices to local market conditions. The gasoline companies are not very different in that regard.”
“We feel very strongly that zone pricing is a method of pricing that at end of the day allows our dealers to be as competitive as they can be at the retail level,” Soraci of Exxon said. “It gives us the opportunity to give a particular retailer or trade area a lower price if competitive conditions require that.”
Daggle, who has been an Exxon dealer for two decades after working his way up from pumping gas, said he has done well. But he still cannot fathom how the oil company can charge him different wholesale gasoline prices for each of the five Northern Virginia stations he owns. The stations all sell the same Exxon-branded gasoline, delivered from the same terminal in Newington, where it arrives via the same pipeline. Sometimes, Daggle said, it’s even dropped off by the same truck and driver hours apart on the same day.
The only thing that’s different is the price, which can vary by 35 cents per gallon, Daggle said. “If I could have driven a truck to Gainesville and drive the gas from there to Shirlington, I could have made 50 cents a gallon.”
On occasion, he said, he has persuaded Exxon to lower his wholesale price to help match price cuts by a station next door in Gainesville.
Historically, gasoline marketing has been a low-margin business. For decades, when oil was plentiful, margins were kept low to move as much crude oil through the system as possible. Now, major companies don’t have to fight to move product, but they are still battling for nickels and dimes at the pumps.
Like other parts of the retailing business, gasoline marketing has become more concentrated and high volume than it was in the days when mom-and-pop gas stations lured customers with free drinking glasses.
Cambridge Energy Research Associates, a consulting firm, noted in a report that in 1977, the United States had 223,118 gasoline outlets. By 2007, the number of outlets had declined to 164,292 — even as the amount of gasoline sold increased. The average station now pumps 73 percent more than in 1977. And companies are trying to boost revenues by attaching convenience stores to the stations. In 1977, only 5 percent of gas stations had convenience stores; now, 65 percent do.
“The industry we’re part of is an extremely competitive industry,” said Exxon’s Soraci. He said major oil companies’ market share has dropped 20 percent in recent years as mass merchandisers such as Costco vie for customers.
Oddly enough, when prices are rising rapidly and consumers are most upset is usually when profit margins are slimmest for station owners. When prices are falling, as they were in September 2006, is usually when jobbers and station owners make the most money.
How much depends largely on Exxon. “If I had raised my gas, within a couple of days, almost inevitably, they would have raised my wholesale price. It’s an unspoken rule,” Daggle said. He said his Gainesville station makes most of its money from repairs, not gas sales.
Selling gas remains a cutthroat business in an industry awash in profits. Three years ago, when Daggle bought the Gainesville station, a share of Exxon stock was about $50. Buying and fixing up the station has cost him $800,000, and he hasn’t yet drawn a profit from it. “If I had bought the stock,” he said, he would have nearly doubled his money and would have “never lifted a finger.”
Staff writer Tomoeh Murakami Tse contributed to this report.
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