Regulations big force behind America losing gas stations

LOS ANGELES -- For 20 years, Mike Donley was the ramrod of the pump islands and repair bays at his Union 76 station on Burbank Boulevard in suburban Van Nuys. He relished the title.

Then on a springtime Monday last year, he simply walked away from the grease and the gas.

Does he miss it? "Tremendously," said Donley, who now works for a company developing auto repair-related software. "I can honestly say that I actually envisioned me staying on until I was old and gray and receiving that plaque as the oldest living 76 dealer. It was a very hard decision." As is usually the case in matters of business, economics trumped emotions. Career moves like Donley's have been the rule rather than the exception for most of this decade across California's service station landscape. While the state's population -- and the number of drivers -- has increased, the number of places to buy gasoline has declined. In 1991, there were 10,600 service stations scattered across California, the nation's biggest gasoline market. That number had shrunk to 9,490 by last year, according to state statistics. And this trend is not likely to reverse itself anytime soon, industry analysts and officials say, as refiners wrestle with daunting environmental costs, dealers grow weary of thin profit margins and the industry consolidates even further. "Gasoline is not a growth industry in Los Angeles," said Don Gunness, retail manager for Chevron Products, a unit of San Francisco-based Chevron, one of the region's dominant retailers. Today, the Los Angeles area market is in a state of flux. Some companies like Tosco, Exxon and Unocal have scaled or are scaling back operations, while companies like Atlantic Richfield and Chevron expand their presence. Further consolidation is likely, though. Texaco and Shell have formed a marketing alliance that operates through an Equilon subsidiary, so some of those stations in the same market area could be closed or change nameplates. Exxon wants to buy Mobil, but federal regulators are expected to require the companies to sell gasoline stations, refineries, pipeline interests and other assets as conditions of approving the sale. Arco is being bought by BP Amoco. And while there is little, if any, overlap of their service stations in the Southern California market, some analysts question whether the new, British-based owner will be as committed to being the low price leader, and thus the market share leader, as has been Arco's management. And on Friday, Texaco, the third-largest U.S. oil company, and Chevron, the fourth-largest, were reported to be talking about a merger. These discussions are still in the early stages and an agreement may not be reached for months, if at all, a source said. Still, it creates a situation that may eventually lead to a blurring of brands. "If these two come together, they will give the three other supermajors a run for their money," said Fadel Gheit, an analyst at Fahnestock & Co. in New York. But the industry's biggest landscape shifts occurred Dec. 22, the deadline for the upgrade of buried gasoline storage tanks to meet federal Environmental Protection Agency standards. Oil companies had about 10 years to comply with the rule, and many stations continued operating right up to the deadline, then closed their doors for good. Their owners cited the cost -- potentially hundreds of thousands of dollars per facility -- as reason No. 1 for closing down. A little more than 800 stations nationwide closed in December, then the number doubled in January, according to the widely read Lundberg Letter, which tracks gasoline prices and related developments. In February, the closures dropped back to a little more than 600. "The government delivered another kick out the door to marginal gasoline retailers, leaving the landscape even more ripe for super- tough street competition," publisher Trilby Lundberg wrote in an April edition. "The impact of the December 1998 deadline will be felt for many years." Lundberg conservatively estimates that 8,760 stations closed during 1998 and the first quarter of this year. Nearly 1,600 stations went out of business between Dec. 17, 1998, and Jan. 22 of this year. That's a shuttering 1 percent of the nation's service stations in a one-month period centered around the federal deadline. The final count could go even higher because Lundberg notes that her estimates do not cover many rural areas where closures were likely. Unocal 76 facilities took a double hit. Not only did they have to deal with the underground tank issue, the stations had been bought by Tosco in 1997 and the new owner embarked on a streamlining mission. Ninety-five stations, many of them franchised operations, closed last year in California because of the federal rules requiring tank upgrades. Additionally, seven stations quit pumping gas but the mini- mart facilities remained open. Tosco closed 30 stations in 1997 because of duplication in the immediate market. "The reason why there is a decline in sites is basically the environmental regulation. They have become increasingly strict, and independent business owners are taking a look at those costs in what is a very marginal business and determining that the expenditure is not feasible for them," said Julie Igo, a spokeswoman at Tosco Marketing. She also noted that property values have been rising, so station operators can sell their sites at a profit rather than take on expensive environmental remediation costs. "A lot of them are franchised and independent business owners and just couldn't justify the cost of making these improvements," she said. These kinds of properties sport "For Sale" or "For Lease" signs these days. Others encircled by chain link fences, like several Chevron stations throughout the San Fernando Valley, are in the midst of complete remodelings as companies try to make over their image in a highly competitive marketplace. This, too, is an expensive proposition, costing $1 million or more per station, said Chevron's Gunness. The company's major remodeling program has been going on for the past five years and the company has added about 100 stations in the Los Angeles area during that time. The company owns all new stations it builds. "Our economies are better than a dealer-owned station. Chevron enjoys the full gross margin on the products it sells," Gunness said. Meanwhile, service is being factored out of the operating equation of service stations. It is more profitable and less costly to operate mini-marts, fast- food facilities and carwashes than to staff full-service islands or service bays. "We are still researching what the future retail offerings for the customer will be. We don't think this market is standing still with the traditional convenience store. We're going to have to enhance it and make future improvements," Gunness said. It may well be a case of less is more. One Texaco dealer, who asked not to be identified, said some operators have already been told they will be switching to the Shell brand or their stations will be closed. "They will close uneconomical sites and you haven't seen that yet. All you have seen is the closing of sites that had environmental costs associated with it," the dealer said. Company officials were in Las Vegas for meetings last week and unavailable for comment, a spokeswoman said. Mike Donley, the former Unocal dealer, agreed that economics -- his -- was the reason he sold out last year. Today the new owner is operating a self-service mini-mart facility. Donley decided the rent structure implemented by Tosco was not working to his advantage. "If you lower your profit margin and go for volume you could actually lower your rent. What I saw over the years was the profit margin got smaller and smaller, and the rents kept getting increased," Donley said. Selling out was his best reward. "I made a couple of bucks, not enough to retire, paid off my bills and moved on. There are guys in the Valley that have thrown their keys under the door and walked away," he said.

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