Many of Faulhaber’s customers - lured by Costco’s lower gas prices - headed to the retailing giant to buy fuel.  Since then, Faulhaber’s business bounced back slightly, but his station is pumping about 20% less gas than it did a year ago.  He frets that his days as a service station owner may be numbered.  “The future is not a bright future,” Faulhaber said.

Across Oregon, independent station owners worry about their ability to com0pete against a growing number of gas-dispensing grocery and discount chains, which sometimes charge 10 cents to 20 cents less per gallon than they do.  One day, station owners fear, they will go the way of pharmacy, bakery and floral shop owners who lost their battles against grocery stores and shut down.  “Our reaction is one of utter fear,” said Brent DeHart, spokesman for the Oregon Gasoline Dealers Association.

Whether the entry of such chain retailers as Costco, Safeway, Albertson’s and Fred Meyer ultimately kills independents, as well as weaker oil-company owned stations, remains to be seen.  But the trend, which has already altered motorists’ fuel-buying habits in Oregona and other states, promises to significantly change competition in gas retailing, experts say.  “Some of the traditional gas retailers are going to get hurt,” said Joe Leto, president of Energy Analysts International Inc., an energy consulting firm in Westminster, Colo.

Costco was the first mass merchant to start selling gas in Eugene-Springfield, but other retail chains have plans for the area.  Consider:
 

The Grocery store/gas station combinations are called hypermarkets.  The term and the trend originated in Europe.  French grocery stores began to se4ll gas in 1985; their British and American counterparts soon followed suit.  Grocery stores in the United States started selling gas in earnest during the 1990s.  Boise-based Albertson’s, wanting to attract customers by adding the service, started selling gas in Idaho in 1997.  It now has 167 fuel outlets in 20 states.  “Our goal is to enhance the one-stop shopping experience for our customers,” said spokeswoman Jeannette Duwe.

Gas sales accounted for a small share of Albertson’s $36.7 billion revenue in 2000, retail analyst Laurie Breidenbach said.  But sales are not the point.

The company is selling fuel for the same reason that it has added pharmacies, photo developing, delis, bakeries, ready-made meals and Starbucks Coffee stands to its stores, she said.  “It helps to drive customer traffic into existing stores,” said Breidenbach, of Ragen MacKenzie in Seattle.

Price War

When they open, grocery store fuel outlets and their aggressive pricing can have a dramatic effect on surrounding gas stations.  Costco’s Eugene station has 16 pumps - double the number of a typical independent outlet.  It pumps more than 20,000 gallons a day, or 600,000 gallons a month.  Over a year, that’s more than 7 million gallons of gas that would have been sold by other gas retailers in lane County.

Recently, Ed Bowles of Oakridge filled up his Nissan Sentra at the Costco during a shopping trip to the store with his wife.  Costco was selling regular unleaded for $1.39 a gallon, 10 cents cheaper than many Eugene stations, including Faulhaber’s Texaco down the street.  Bowles said he didn’t mind that Costco attendants only pump gas and don’t was windshields or check under the hood. “Anymore you don’t have service stations.  You have pit stops,” said Bowles, a comment that makes full-service station owners like Faulhaber cringe.  “Any why should you pay more for gas when you are not getting service?”

Tyrell Wise, a retired truck driver who lives in Yoncalla, recently filled his Buick LeSabre at the Cottage Grove Safeway so he could save one penny a gallon over the price of a nearby Exxon station.  “If it’s cheaper than the next place, I will buy it,” he said.  “I will save a penny wherever I
can.”

This type of consumer behavior has left some service station owners reeling.  Faulhaber, for one, suffered a 25% drop in volume immediately after Costco opened.  His sales have recovered slightly, but his volume remains about 20% less than for the same time last year.  In response, Faulhaber did not hire a replacement for an employee who quit.  He has two station attendants on duty when he previously would have had three.

In Cottage Grove, the Safeway has sold gas to motorists who have Safeway Club cards for 10 to 12 cents less than competing gas stations.  Doris Sorensen, who operates a Texaco less than 2 miles away, on Highway 99, said her business dropped 1,000 gallons a day with the arrival of the Safeway gas outlet.  Recently, Sorensen’s business has picked up because her station narrowed the price gap with Safeway to 2 cents a gallon on regular unleaded gas, though Safeway Club card members can save another 5 cents off the posted pump price.  “If I would have had to take money out of this station for the last three months, I would have had to lay help off,” she said.

A 15-cent mark-up

How can retail chain s sell gasoline for so much less than a traditional gas station?  One reason is that chain retailers buy less expensive, unbranded fuel on the open or spot market, service station owners say.  Some service station owners also say that gas sold by discount retail chains may be inferior and lack additives and detergents put in by major oil companies.  The dealers also say that grocery stores offer gas at or near cost because they don’t rely on fuel sales to keep them in business.

Service station owners, by contrast, try to mark up their fuel by about 15 cents a gallon to cover expenses and provide a profit.  Gas purchased by retail chains in the open or spot market comes from independent refineries and from 3excewss production from major oil companies.  Ironically then, big oil companies are supplying gas to their own retail rivals, a fact not lost on independent dealers who wonder if Texaco, Chevron and the other major refiners eventually will offer independents lower prices for fuel.

Station owners shouldn’t count on it, oil industry experts say.  Philip Verleger Jr., a California-based economist who analyzes the oil industry, said that with the cost of oil and the expense of refining and transportation, the major oil firms are selling gas to their dealers for about as cheaply as they can. “The oil companies have no profit flexibility,” he said.

Costco Chief Executive Jim Sinegal said his company’s gas pricing strategy leads to new customers in order to get the gas, you must become a Costco member - but he disagreed that Costco operates fuel outlets as a loss leader.  “We sell gas because we think we can save our customers money,” he said.  “That’s the only reason why we are in any business.”  Sinegal declined to say who Costco buys gasoline from, but said that “it’s every bit as good” as major-brand fuel.  “We would welcome any tests,” he said.

Big Oil and Big Boxes

If independent retailers are squeezed out, service station owners say, most places to buy gas will be controlled by the major oil companies or mass merchants.  And such a consolidation will ultimately lead to higher gas prices than in today’s more diverse and competitive market, said DeHart, of the Oregon Gasoline Dealers Association.  “All that will be left is big oil and big box stores,” he said. “We don’t think that is healthy for the public and Oregon’s drivers.”

Not everyone agrees that consumers would be hurt.  Verleger, the California-based economist who works for the Brattle Group, predicts that in 10 years there will be one-third to one-half as many gas stations, and many will be owned by retail chains.  But, even though the number of gas outlets dwindle, he said, competition among remaining retailers should keep prices low. “It’s hard to find anything wrong with the evolution” in the retail gas industry, Verleger said.
 
Today, about 1,250 so-called hypermarkets pump more than 4 billion gallons of gas a year, according to a survey by Energy Analysts International, the Colorado energy consulting firm.  The market share of grocery and discount stores is only 3.3%, but EAS projects that by 2005 they will sell 22.7 billion gallons, or 16.1% of the market.  Verleger said some independent gas station owners in the Eugene-Springfield area will survive this onslaught, but much will depend on their location. “If you’ve got a station off Interstate 5, no problem,” he said.  “But if it’s a dealer located across the street from a hypermarket, he’s out of business, pure and simple.”

Service station owners hope to sell gas close to the price of the supermarkets but are mostly counting on service to help keep going.  Besides full service at the pump, Faulhaber’s station, for example, has a garage where mechanics change oil, perform tune-ups and do repairs.  Faulhaber, 52, recently signed a lease with Texaco to operate the station for another three years.  With such uncertainty surrounding his business, Faulhaber declined to predict what will come after that.  “I don’t know what will or will not happen at the end of that time,” he said.  Source: The Register Guard, April 1,
2001, by Ed Russo.

Editor's Note:  On April 10, 2001, the Florence Planning Commission approved the design for a new Fred Meyer gas station in the Fred Meyer Retail Complex north of town.