Local gas stations impacted by big box and grocery foray into gasoline sales- American Independent Business Alliance AMIBA

November 27, 2005

Out of gas

By Alicia Ebaugh, Journal staff writer

The lots sit empty, weeds sprouting through cracks in the concrete. Battered store signs advertising prices of $1.76, $2.09 are merely relics of the past, a time when the doors of these silent buildings welcomed customers who needed their services.

Now these doors are locked, most likely forever.

Closed gas stations like these can be seen on many main streets in Siouxland communities. But why?

Gas is a virtual necessity of everyday life, but area consumers are flocking to larger outlets like Wal-Mart and Hy-Vee to buy it -- where they can receive a few cents off per gallon as well as access to one-stop shopping for many other necessities, even if it's miles away from home.

Saving a few dollars at the pump became even more important when gas prices went through the roof just a couple months ago. Even though costs are down -- for now -- many independent and small chain gas station and convenience store owners say it's only a matter of time before they lose more business than they can afford.

Already about 10 empty stations can be found in Sioux City alone. George Peterson, former owner of the Southern Hills Amoco gas station that closed in December 2003, said that about five years ago that number would have been much smaller. Peterson said these store closings cost many owners' life savings -- even bankruptcy -- and caused the layoffs of numerous employees.

He said trying to match the nearby Wal-Mart's, and later on Hy-Vee's, prices was what finally broke his station. Many people were still buying gas at Peterson's store, he said, but that didn't mean he was actually making money on it.

"The main reason I closed was because of the lack of profit. I had at least hoped to use gas to supplement my auto repair business at that location, but it turned out I was losing $10,000 a month in the last year," he said. "When I bought it, it was making money. Nobody knew Wal-Mart was going to come in with gas stations. Who knew that grocery stores would get into the business, too?"

'Dog bite dog'

By 2007, the Federal Trade Commission estimates that large general merchandise and grocery retailers will corner nearly 15 percent of gas sales -- that's more than double what they had in 2002. In 12 more years, this could mean stores like Wal-Mart and Hy-Vee will gain more than half the market.

Muhammad Khokhar, owner of the Southern Hills Shell gas station, predicts it will most likely also mean even more empty lots and abandoned pumps.

Since he bought his station in March 2002 -- before the Singing Hills Wal-Mart opened six months later -- Khokhar said he has been fighting to make ends meet in a business where fierce competition and high credit card fees combine to make it nearly impossible to profit.

“Gas stations commonly make only 4.6 cents per gallon, but with credit card fees it's cut down to about 2.6 cents a gallon," he said. "There is no way to make it just on gas -- that money does not even pay one full-time employee."

Stores like Wal-Mart and Hy-Vee make it even more difficult for independent stores to keep customers who hunger for low prices because they have more buying power and can get gas at a lower price from wholesalers, Khokhar said. These "hypermarkets," as they have been termed, profit even more because they can use discounts on already cheap gas to get customers inside the store to spend money -- where Khokhar said they make the real profits.

"This is a dog bite dog economy. They will do anything to take my business," he said. "I can't fight them myself. All I can do is try to make my store more efficient and my service better."

Khokhar, who has a master's degree in finance, has dedicated his life to it, spending 90 to 94 hours a week at his station. He keeps a razor and shaving cream in his small office for early mornings. He even pumps gas for customers who want the service for no charge.

"I don't go nowhere -- my friends and family come here to see me," Khokhar said soon after an older relative brought him lunch on a tinfoil-wrapped plate. "I don't take a day off. I close the store every single night."

In the "rush to the bottom," he said, consumers are subsidizing low prices with their own money. For instance, it results in more state aid payouts to workers forced to take lower-paying jobs with larger stores after their former employers laid them off or went out of business, he said.

But spokesmen for both Wal-Mart and Hy-Vee, as well as many economists, say hypermarkets are giving consumers what they desire most -- the convenience of one-stop shopping and extra money in their pockets. In fact, they say, it's the future of business.

Wal-Mart spokesman Marty Heires said that people have told the stores time and time again that they value having access to so many low-priced commodities in one place. He said that Wal-Mart began installing gas stations at its stores for that reason, but said it doesn't account for all the chain's loyal customers.

"We don't have data that suggests one of our stores with a gas station does better than one without one," he said. "We don't even set the prices at a majority of our gas stations. Most of them are owned by Murphy Oil ... we do ask Murphy to offer prices that are complementary to our everyday low prices."

Ruth Comer, Hy-Vee assistant vice president of communications, said overall sales at locations with gas stations have grown since they were built. The food stores want to attract customers through low prices and added gas discounts, Comer said, but the point is not to put other people out of business.

"In an open economy, consumers will gravitate where they can get the best price, convenience and service for them," she said.

Besides, she said, even if Hy-Vee occasionally sells gas for less than what the chain paid, it can't afford to do it all the time.

"No business could stay in business if it continually sells below cost," Comer said.

'Level the playing field'

Independent gas station and convenience store owners in many surrounding states have taken their concerns about the possible annihilation of their businesses to their state legislators. About 13 of these states, including Minnesota, Wisconsin and Michigan, have passed "fair marketing" laws pertaining specifically to the petroleum industry, which either prohibit the sale of gas below a minimum price markup or below what it cost to buy it.

Iowa Business Alliance representative Threase Harms said her organization and others have pushed for a law like this in Iowa so independent owners could find a "level playing field" on which to compete with larger businesses. The IBA represents independent gas stations and other small businesses in Iowa.

"Their biggest challenge is the ability of some bigger box retailers being able to basically sell gas below cost with discounts and take a loss on gasoline in order to get people in other parts of the store," Harms said. "They don't have that line of product they can mark up or have a greater return on. There are an assortment of laws out there like this, for instance on cigarettes."

House Study Bill 282, introduced in 2004, was the result of that push, she said. The bill would require wholesalers to sell gas at a 3 percent markup above what it cost them to buy it, and for gas station retailers to add an 8 percent markup. These numbers are the lowest they can be for smaller businesses to basically break even on sales, Harms said.

Earlier this month, the Motor Vehicle Fuel Study Committee, made up of Iowa House and Senate members, met in Des Moines to discuss with businesses and policymakers whether a bill like this is needed in Iowa. Although the meeting was not meant to produce a final outcome, committee member Sen. Steve Kettering, R-Lake View, said one thing became clear: A bill like this would be hard to pass.

"Many legislators don't believe this is a proper government role, to basically protect businesses and thwart competition," Kettering said. "It's also an election year, and there's some consideration whether they would want to deal with legislation that would increase fuel prices."

Studies conducted in other states with similar laws have concluded gas prices jump 5 to 10 cents per gallon in the first year after the laws are passed, eventually settling at about 1 to 2 cents higher than they would be without them. However, University of Wisconsin - Whitewater economics chairman Mark Skidmore said many of these studies are flawed. He co-authored a study in 2004 that found prices spiked a little in the first year after a law is implemented, but were actually a penny lower than normal five years afterward.

"Other studies don't take enough time or breadth to examine the effects of the law. We took data from 1983 to 2002 from states, some that either adopted or repealed the law in those years," Skidmore said. "We also found that when a state adopts a law there are more gasoline retailers competing."

However, Skidmore's study also found that retail gas stations with fewer than five employees -- the truly small businesses -- gained little from these laws.

A "fair marketing" bill died in the South Dakota Senate in 2003, and a fight to repeal the law in Wisconsin -- the oldest one on the books -- has been raging for years. The FTC generally opposes such laws.

'Hands on the rope'

In presentations to the fuel study committee, executives from larger chains like Hy-Vee and Casey's General Store argued that struggle is inevitable and that some businesses will eventually close.

"My question for you to consider is: 'Does government protect some station owners that need high gasoline margins for their profit or is it the government's role to protect the consumer from artifically high prices?'" said Tom Watson, Hy-Vee assistant vice president for petroleum marketing, in a statement to the committee.

Roger Kanne, a supporter of "fair marketing" laws and owner of Community Oil Co., a small gas wholesaler based in Carroll, Iowa, said this argument against business protection is essentially empty.

"There are all kinds of laws out there to support businesses," Kanne said. "If we're going on that premise, we need to pull all supports for business, including agriculture."

In the meantime, small station owners continue to fight. For Khokhar, closing his business isn't an option, although he said he is aware that someday he may have no choice.

"I could be making more working eight to 10 hours a day for someone else, but I have my life here," he said. "When someone has put a rope around your neck, you have no choice but to keep your hands on the rope."

Although his station is closed, Peterson is still required to pay the hundreds of thousands of dollars he owes on the loan he took out to buy it. This has put pressure on his other business, Speedy Lube, to make up the losses, he said.

"It's not just putting me behind the 8-ball -- I had to lay off 14 people from the gas station, and four others from Speedy Lube," he said. "It wasn't an easy decision at all."

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