The 1990s – even more of the same
To a great extent the decade of the 1990s represented a continuation of the industry trends that began the 1970s and 1980s. The merger of convenience retailing and the gasoline offer accelerated. Self serve and pay at the pump were firmly entrenched and now dominant. The regulatory environment continued to become more expansive and rigid. Technology continued a slow but steady march into both the marketing and retailing sectors.
Economically, the decade began with the country still muddling through an up-and-down recession triggered by 1987’s "Black Monday" stock market collapse. It also started off with the first Gulf War that caused a jump in oil prices to the $40 per bbl. range. But by 1992 both issues were working themselves out and a solid economic recovery was under way. Oil prices were to average out with some stability at about $20 per barrel for the decade.
One feature of this time that lasted through the 2000s was the proliferation of large and powerful vehicles, of the type Americans typically prefer when gasoline is cheap. The SUV and the powerful sedan became commonplace modes of transportation to the point where it became difficult to find a true “econobox” on a dealer showroom floor.
Unfortunately, the fairly dramatic increase in regulation that started to come on the scene in the 1970s ramped up dramatically in the 1990s. When reviewing coverage in the magazine during those years two regulatory topics were dominant: the pending underground storage tank regulations set to take effect in 1998 and the continuing saga of vapor recovery in Clean Air Act non-attainment areas.
The 1998 deadline for compliance with stringent underground storage tank regulations established by the U.S. Environmental Protection Agency in 1988 were approaching fast. That meant that a lot of UST upgrading and new leak detection systems were required in the industry, at no small capital coast, and in a relatively short period of time.
Most operations were able to make the expenditures and enjoyed a smooth transition. However, many smaller operations went out of business or sold out to companies that could make the capital expenditures. That did not mean a decline in the volume of fuel dispensed, however, as the now fewer sites tended to be of a larger format capable of supplying higher volumes of gasoline to motorists.
An ongoing issue of concern is that once the deadline past, funding for enforcement has consistently lagged. There is a considerable concern that some operators are still in business without having made the required upgrades and that they have benefited competitively as a result. Efforts by industry trade groups, most visibly the National Association of Convenience Stores, have worked with mixed success to free up some additional federal funding for the states to assist in enforcement.
On the vapor recovery front, NPN has covered the issue at least annually for several decades. It is anticipated that once enough automobiles have onboard vapor recovery the need for fueling-site specific vapor recovery will end. While it is anticipated that this requirement should arrive in the near future, there is no definitive policy in place that defines specifically when “enough” will be achieved.
Perhaps the main unique development of the 1990s was the rise of the hypermarket fuel retailer, which started with a foothold in parts of Texas with companies like the grocer H-E-B. This concept had been explored in piecemeal fashion at various times over many decades. However, it was obvious by the late 1990s that that the format was more than just a regional trial and that a range of both big box and grocery players including Albertson's, Inc.; Costco Wholesale Corp.; Duckwall-ALCO Stores, Inc.; Food Lion; H-E-B; Kroger Co.; Meijer, Inc.; Safeway Inc.; Wal-Mart Inc. were making a commitment.
The threat to traditional marketers was that gasoline was to be used as a loss leader underwritten by store sales.
This fear proved to be somewhat correct, and such players had a tremendous impact on their local markets by reducing margins by as much as 25 percent in a 20-mile radius around their operations. In practice though, the expansion did level out and there was a return to more market driven prices among these now established industry members. Survival in this environment got back to the basics – low debt load, good service, good convenience and efficient operations.
At the convenience store level, site design also underwent significant changes during this period to match the growing “one-stop-shop” convenience profit center model where a large store and many fueling positions worked to drive more volume and profits from each square foot of real estate. More square feet, better lighting, more beverage, a strong coffee program, more parking area, a foodservice offer, more fuel dispensers, a car wash… as much of what ever made sense and could be fit on the lot. Even so, the center island marketer still exists to this day and provides good service in some areas, particularly those where urbanization limits available real estate or where there is limited competition.
The final major development of the 1990s was the broad consolidation at the major oil level at the end of the 1990s. The British Petroleum/Amoco merger of 1999 set the stage (with ARCO added later), the Exxon/Mobil merger followed the same year, Chevron/Texaco in 2001 and Conoco/Phillips in 2002. Although the FTC was very lenient during this period, refining and marketing networks underwent some notable juggling as a result, but nothing that significantly impacted overall industry dynamics.
The 2000s, a time of price volatility
As with the 1990s, the 2000s got off to a start with a recession, in this case caused by the bursting of the “.com” stock bubble and the terrorist attacks of 9/11. The economy managed to work itself out by the middle of the decade and a time of rapid and expansive (though in retrospect, shaky) prosperity ensued.
The decade started off with the assault on the gasoline additive MTBE, which had been added to some gasolines since 1979 to boost octane as a replacement for lead, and in much larger quantities as an oxygenate in non-attainment areas to improve combustion and therefore air quality under the Clean Air Act of 1990. It was found that MTBE moved rapidly through the soil and water table when a leak occurred, and produced a foul taste and odor in well water. Various health concerns have not been verified. MTBE has since been dropped as a fuel additive (replaced by ethanol) and various remediation-focused lawsuits are still being litigated.
Majors exiting retail?
In July 2002 NPN began its regular coverage of the ongoing transition of the major oil companies away from a direct involvement in retailing – both company operations and direct supply. “Fading from the scene -- petroleum retailers are asking some hard questions about their traditional brand relationships,” clarified what was becoming apparent.
In the wake of the integrated major oil company mergers of the late 1990s downstream petroleum was becoming even less critical as a central business focus to these exploration and production driven giants. Over a year later, in the October 2003 issue, NPN first posed the question: “Majors exiting retail?” At the time, a number of major oil companies had started selling off sites and rearranging their dealer relationships. In a major move, ConocoPhilips had divested itself of 2,000 Circle K stores to be followed in 2004 by over 1,000 additional sites.
"All the major oil companies have done is replace the cookie cutter island marketer of the 1980s with the cookie cutter 4,000 square foot convenience store of today," noted Jim Fisher, CEO and Founder of the industry retail sales and fuel forecasting consultancy IMST in the 2003 NPN article. "They cannot operate the units profitably, and this is true with any national company with a single market application. You cannot get true uniqueness and convenience in a location when you say, ‘We have 2,000 locations and everything will be the same.’ They can't address the needs of the market. They put too much money in the sites and too much General & Accounting cost and too much operational cost and they can't make money."
On the oil price front, OPEC started the decade determined to bring some stability to oil prices (at a higher price point than the 1990s) by maintaining a “price basket” of between $22 and $28 per bbl. At the time this was considered to be controversial. That goal did not last long, and prices began to gradually increase overall until the $2 per gallon range was commonplace as world demand grew through globalization. And, stability was a lost cause domestically with refined products.
The deregulation of the industry in the 1980s allowed for a rationalization of the refiner sector to where maximum output closely matched maximum demand. So closely, in fact, that in the case of a refinery fire or pipeline disruption there are extreme but generally localized and short term price spikes. Similarly, the switchover from winter to summer formulations and required refiner maintenance has notable an impact on wholesale and retail prices.
In the case of a disruption, the balkanization of the fuel supply into numerous specialty blends has not helped. Different states managed to mandate a variety of different blends of gasoline to meet EPA Clean Air Act compliance goals. This compounds the difficulty in substituting an available non-approved formulation for that mandated in the impacted area.
The most disruptive natural event of the decade that impacted fuel prices was Hurricane Katrina, which made shore on Aug. 29, 2005. Katrina shut down 25 percent of U.S. crude production, 20 percent of crude imports and 10 percent of domestic refining in addition to damaging numerous off shore platforms and impacting major pipeline operations. Some eight refineries were significantly damaged. On Sept. 24, 2005, Hurricane Rita hit the same general area taking 20 refineries off line during the storm period and leaving seven additionally damaged afterward. Recovery was steady but slow in the months that followed.
The public saw oil prices shoot to a then extreme $70 per bbl., and retail prices in the impacted areas soared to $3 per gallon or higher. The public was outraged and politicians jumped on the bandwagon trying to score points with accusations of price gouging. The industry, with some success, defended itself.
“What enraged me with Katrina was all this talk of gouging - what were they talking about?” said Bill Douglass, CEO of Sherman, Texas-based Douglass Distributing in an Oct. NPN article on the gouging accusations. “They show somebody putting up a sign that says $5 - what they didn't talk about is that there wasn't any fuel available. They were told there wasn't any fuel coming for weeks. I have 14 cents per gallon total, rack to retail. I was paying 7 cents per gallon on the credit card, and they want to tell me I'm gouging?”
Unfortunately, $3 per gallon retail gasoline (and higher) was not to be limited to natural disasters. The boom time of the middle decade, fueled by interest rate policy at the Federal Reserve, politicized real estate lending requirements, and a lack of oversight on shady real estate-related financial instruments began to start falling apart in 2007. As the cracks became more apparent in 2008 the price of oil began to dramatically rise.
Some linked this to supply and demand issues relative to the developing nations and the global economy, combined with “peak oil” theory. Others noted that the investment money pouring into commodities was fleeing previous investment areas that were now collapsing, and that likely as much as 80 percent of the trading activity was unrelated to traditional market players and activities. At its peak, oil reached nearly $150 per bbl. in July 2008. Retail gasoline prices surpassed $4 per gallon. The high fuel product costs associated with the wholesale prices, and the margin pressures such retail prices generated were becoming dire for many companies in the industry.
However, as the “Great Recession” rapidly set in late in 2008 the price of oil collapsed to the $30 per bbl. range before climbing up to around the current $70 per bbl. To some extent the recession represented a reprieve for the industry, though it comes with many negatives of its own.
Much of the current run up in prices—well ahead of supply and demand pressure -- is similarly linked to non-traditional players again rushing to commodities over inflation concerns in the wake of recession-linked stimulus deficits and other ambitious government spending proposal under both the previous Bush and current Obama administrations. Organizations, such as the Petroleum Marketers Association of America and the New England Fuel Institute, have taken leadership roles in pursuing legislative market reform to make sure there is greater trading transparency into minimize potential manipulation in this new oil trading environment.
NPN did manage to be out front on the oil price collapse at the height of what appeared to be an unstoppable and permanent rise in the March 2008 article “Only Fools Rush In.” Energy analyst Peter Beutel, president of Cameron Hanover, noted: “A lot of people have convinced themselves that $100 per barrel is going to be the norm. And now you have Goldman Sachs out there saying that $150 or $200 per barrel and apparently there is nothing stopping you from going to any of those numbers. They may be right. But, it's not going to stay. If we go to $200 even that isn't going to stay there very long and if we look back at this entire period we are going to be able to take the number of days we saw prices over $80 and it will be a very small slice of this period of time in which we've used hydrocarbons.”
One of the top costs of doing retail business for the industry in recent years has been the credit association (most obviously Visa and MasterCard) interchange fees. It’s not been uncommon for the credit associations to make as much if not more profit on the sale of a gallon of gasoline as the retailer. The high prices seen during the 2000s have only magnified this issue for the industry.
The credit associations, which because of the overlapping board structure have virtually a monopoly position, have shown little desire to work with their retail partners in adjusting interchange fees in what is basically a non-competitive environment. The associations typically assert that the fees support transaction risk and that no merchant is forced to offer credit. The industry points out in return that the risk doesn’t seem to match the excessive fees and that customers demand “The associations are basically saying, ‘I don't need to worry about the retailer, I'll always have them,’” said Gray Taylor, who at the time was serving as an industry consultant on the issue. “They get up every morning and they know that if they've lost a customer it's been because the customer went out of business. You can talk to any retailer and they will tell you that the credit card customer spent 20 percent more than the cash customer. We have a real appetite in our industry for plastic. We'd take beaver pelts if that's what the customer wanted - a sale is a sale.”
The industry, with leadership from the National Association of Convenience Stores, has been pursuing both legal and legislative initiatives to break open this impasse between the credit associations and industry merchants.
The 2000s also mark a high point in the steady push for renewable fuels and an increased focus on controversial global climate change initiatives. The Energy Independence and Security Act of 2007 ensured that gasoline sold in the United States contains a minimum volume of renewable fuel. As USEPA notes, the Renewable Fuel Standard program will increase the volume of renewable fuel required to be blended into gasoline from 9 billion gallons in 2008 to 36 billion gallons by 2022. Most of the focus is on ethanol, with some requirements for biodiesel. The industry has made the broad transition to a fairly traditional 10 percent (E10) blend with an alternative 85 percent ethanol blend (E85) for flex-fuel vehicles.
However, a major concern has cropped up with the program. The current recession and previous price-driven drop in demand has resulted in a “blend wall” where there is not enough gasoline to blend the surplus at E10 and limited demand for E85.
There have been discussions – an aggressive push from the government and ethanol producers, actually – about allowing E15 or higher blends at sites with equipment that is currently certified only for E10. However, there are liability issues related to potential failures in the storage infrastructure leading to leaks should a higher blend cause problems. Similarly, most cars are not warrantied to run on higher blends. These serious issues are currently in the process of being addressed.
Technology and PCI
Technology has also come into its own in the latter part of the decade. Although digital solutions have been available to the industry for some time, and the .com era pushed these concepts with some force in the late 1990s, adoption was lackadaisical beyond point of sale systems and card readers and general back office. In many ways the industry remained a phone, fax and note card operation, particularly at the marketer/jobber end. The high inventory costs and plummeting margins seen in the 2000s made issues like inefficiency and shrink no longer tolerable.
One aspect of technology though, comes with a price. “Hackers” have been increasingly successful since the rise of digital technologies at penetrating these systems and committing fraud. As NPN has extensively covered, in September 2006 a coalition of credit card companies formed the Payment Card Industry Security Standards Council in an effort to combat fraud. Now all merchants who accept payment card transactions must comply with the Payment Card Industry Data Security Standard or pay hefty fines. These requirements range from how a company manages its data network to the physical equipment used to process credit cards in the store or at the pump. For example, most retailers will be required to have upgraded their physical transaction processing infrastructure by July 2010. Unfortunately, the industry is lagging well behind on instillations relative to the deadline. “It’s probably number 11 on the Top Ten list of marketers’ important issues,” said Bob Renkes, executive vice president of the Tulsa-based Petroleum Equipment Institute in an August 2008 NPN article, “but it should be number-one.”
The industry currently faces a number of serious regulatory threats as it moves into 2010. The Obama administration is driving both environmental and labor regulation that is poised, if passed to have a serious impact on the industry. From Cap and Trade to union organizing there are initiative that will potentially change the face of both business and the country. At this time, many of these initiatives are stalled and nothing definitive can be reported. NPN will be covering them in detail as they develop in our 101st year of continuous publication.