Retailers in trouble, but also colluding?
Tuesday 15 Jul 2008 | Posted By Ed Aboufadel | Commentary
Comment on last Wednesday’s prediction: Prices jumped on Friday the 11th and again today, to a new record of $4.25, so the prediction was quite WRONG.
Tuesday, July 15, 2008, 8:45PM: If you follow my postings closely, one theme is that the retailers really aren’t making much money selling gas, taking in between 0 and 20 cents per gallon before paying the costs of running their stations. Is it possible, though, that the retailers aren’t doing so well AND there is some sort of collusion going on? Price behavior like this week’s makes me wonder. Nearly every time there is a price hike, Speedway hikes first, and the rest of the stations follow. This can happen without any information passing between competitors. However, when you see other stations hike first, like the $4.25 at the Marathon in Standale, while Speedway is dropping their price to $4.11 down the street, and then the next day Speedway is $4.25, I start to wonder which stations are on the secret price-hike mailing list. Yes, I know Speedway and Marathon are owned by the same corporation, but too often I’ve seen Marathon be the last to hike, and I can’t remember the last time they were the first. A few weeks ago, it was noted by others that Meijer’s appeared to be the first to hike one day. If there was a place for the media or an attorney general to investigate, I would say that they study the anatomy of a price hike, finding out who gets the e-mail and when.
Meanwhile, although prices re-set to $4.25 yesterday and today, a big drop in the wholesale price this afternoon will allow retailers to drop the price quickly if they want to. Maybe we’ll get back to under $4 after all. (Not a prediction!)
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Some observations from the Twin Cities, another market that SSA dominates.
While SSA is a subsidiary of Marathon Petroleum, there’s a big difference between the brands. Every Marathon is independently owned (franchised) while I believe every Speedway and almost every SuperAmerica is owned by SSA. (The fact that there are franchised SAs goes back to pre-merger days.)
Corporate ownership is one of the keys to the SSA price spike. About 150 of the 900 stations in the Twin Cities metro area are SSA-owned SuperAmericas. That means when the price setters at SSA HQ in Ohio put out the word, within minutes, you’ve got 150 stations raising their price. Contrast that with the ~100 Marathons here, each individually owned. You’d be lucky to be able to just get a hold of the owners within a day, much less get them to agree on a uniform price.
I think the phenomena that you’ve seen where non-Speedway stations have taken the lead is simply a matter of economics. IMHO, the key to SSA’s spike-and-dribble-down pricing strategy is the dribble-down part. If they simply hiked the price, none of the competition would follow. But, by dribbling the price down by a cent or two a day, they force competition to continually lower their profit margin so that, when SSA spikes, the competition has little choice but to also increase their price.
What we’ve seen in the Twin Cities is that, several times this year, SSA hasn’t spiked when they should have (as seen in the latter part of February on this graph of Twin Cities gas prices when the average retail price (the pink line) was below the minimum selling price (the blue line). In those situations, we saw some independently owned BP stations and Kwik Trip, a well-managed mid-sized chain, increase their prices. And, no surprise, SuperAmericas that were near those BPs and Kwik Trips also increased their price.
SSA has enough resources to be able to sell gasoline at minimal profit. The owner of a single Marathon station probably doesn’t. Meijer does but apparently wasn’t willing to.
I had a couple things to point out here. First of all, I can guarantee you that every station owner checks prices at least twice as often as the most price conscious customer. There always has and always will be a nearby station trying to get away with pricing an extra penny below you. The quicker we can match them, the less likely they will think they can get away with it. So, whenever a station moves (up or down) most of the stores in town will know within 2 hours.
Plus, for some odd reason customers tell our clerks about Speedway going up within minutes (after they fill up of course). It’s been happening for years and we can’t figure out what their motivation would be. The only thing I can come up with is they want to be the last person that got gas before it went up, so they want us to change as soon as they are done.
As for the Marathon / Speedway thing, Marathon has always stayed out of operating Marathon stations and used Speedway, Super America, Rich’s, and a few retired names (United being the main one) for their retail stores. They do own some Marathon stations that they lease out though. But, for some reason a couple years ago they decided to have Speedway operate a few stores as Marathon (the one in front of Cabella’s is the only one I’ve seen), I’m not sure if this is still happening. So, almost all of the 4,400 Marathon stations are owned by small businesses; I would guess that over half of them are single station owners.
The last thing I wanted to point out is that there is basically 3 types of station owners; stores the oil companies operate (less than 3% of the total stores nationwide, and pretty much just Speedway in MI), stores operated by Jobbers (Jobbers are they only companies approved to by from and deal with the oil companies), and stores operated by Dealers (Dealers are either supplied directly from the oil company if they lease their station, or from a Jobber if they have their own store).
The oil companies change prices to Jobbers every night (M-F). We are always paying attention to what price we paid yesterday, what price is today, and what the market is showing for tomorrow. It is very difficult for us to figure out the cost of the gas in the ground, and we tend to always think of pricing in terms of replacement cost. When we are selling gas close to or below today’s price, we are constantly looking for Speedway to make a move.
Jobbers all have different programs for their Dealers. Most bill them for the cost of their last delivery, and some keep their tanks full and lock in a cost every couple days. Either way that makes it easier for them to keep track of their inventory cost, and they tend to look at pricing based on their last delivery cost or last locked in price. If you were a dealer making 10 cents per gallon and get a new delivery that is 15 cents higher, you might decide to raise your price 20 cents regardless of what Speedway does.
I have no doubt that certain groups of station owners’ talk about prices, but I’m sure it is extremely rare. It is illegal, and most people wouldn’t think about doing it. Technically, it is illegal for Meijer to send me a text message telling me when they are going to raise their prices. Should I turn them in?