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I am a great believer in the American entrepreneurial spirit. As an economy, we stand or fall by our ability to provide enough space to allow small-time folks to pursue big-time dreams.
However, when times get tough, some little folks end up under the bus.
Take Sam, for instance.
I introduced you to this fellow last summer in "The Future Price of Gasoline, According to Sam" (August 6, 2010). He is the proprietor of an out-of-the-way rural service station outside of Pittsburgh. I have known him for years.
Thanks to an arrangement with his only sister's husband (he can never quite bring himself to call the guy his "brother-in-law"), Sam would get his gasoline delivery two days before most everybody else in the area.
And he would provide me with a two-day "heads up" on where local retail prices were moving. In that way, Sam became my ready barometer into the local gasoline market.
Stopped by his place this weekend, intending to chew the fat and catch up on the latest market musings from a fellow who has been there for more than 40 years.
Got something else instead.
Sam Is Throwing in the Towel
The station is closing.
Sam had an arrangement with one of the top five U.S. providers of retail fuel – you know, one of the "Big Boys." He ran a quasi-independent operation. The station was his, but he was still required to contract for his gasoline with the Big Boy whose sign hung out there on the state road.
Sam was a proprietor but not completely his own man.
This Big Boy determined the pricing at the pump by setting the price Sam had to pay for the gas it sold to him.
When wholesale prices rose quickly – as they have nationwide over the past several weeks – guys like Sam could not pass all of that increase on to the retail customer. The competition just down the road, in the larger communities, would eat him alive.
So, just like last summer, that meant he was stuck relying on sales from his tiny convenience store – maps, candy, etc. – to make up for the shortfall at the pumps.
This time, however, something else was afoot.
The Oil Major Ran Him Right Out of Business
I asked Sam if the station would revert back to the company on the sign, the one having a contractual right to set his prices.
"No," Sam answered. "[---] has decided to consolidate its brand market share and redirect traffic to its larger stations locally."
Sam's station only has six pumps (when they are all working). He has a difficult enough time competing as it was. This time around, [---] made it impossible to compete by effectively reducing his margins to virtually zero.
By deliberately pricing his gasoline high, the unnamed Big Boy just ran him out of business.
As I said, Sam could never just charge what he needed to overcome the shortfalls. Nor could he cut his prices to generate additional business, hoping to increase sales volume.
For one thing, he had insufficient alternative revenue flow to make it for very long.
Besides, he is tied into a supply agreement with a major vertical oil company, the kind that controls the process from fields through refineries and distributors to setting the effective price at retail outlets, even those the company does not control.
If Sam did try to cut prices to generate business, the Big Boy providing the product would penalize him for undercutting the larger distribution market (which is home to other stations owned by or leased from the major).
And, in any event, the major makes far more money controlling access to product area-wide than it gets paid by the likes of Sam. So the Big Boy's control over pricing is increasingly important to its bottom line.
If the major decides it is time for guys like him to leave the business, Sam has nowhere to go.
Genuine Competition Is Falling By the Wayside
Sam's son Tony was also working when I stopped by.
I asked Tony if he would buy the station, to keep it in the family. He simply shook his head.
"No future here," he finally admitted.
Nobody else is likely to buy it, either – at least not as a gas station. They will probably dig up the tanks, do an EPA evaluation, and ultimately turn it over to the next apartment complex developer.
OK… so I recognize that this is how markets operate. The planned destruction is needed to make way for the next generation of development.
Only the next time you complain about the rising price of gasoline, remember this: One of the primary reasons the price can rise so quickly – and stay there – is the decline in genuine market competition. And a good part of the lack of competition comes from having fewer Sams.
We will still see each other now and then for a beer at the VFW hall. But it won't be the same.
I have also lost my "early window" into local market prices.
Then again, there should be a bigger station that also has an early delivery schedule. But how do I strike up a conversation with a credit card slot?
Sincerely,
Kent Moors.
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