SIGMA’S 50TH ANNIVERSARY—A LOOK BACK, AND FORWARD
HISTORY: THE 80s

By Mark S. Ward Sr.

As SIGMA celebrates its fiftieth anniversary, each issue of Independent Gasoline Marketing during 2008 will recall a different decade in the history of the petroleum industry. Mark Ward, who has reported to IGM about the industry for more than twenty years, will look back through the pages of the magazine and other sources to reconstruct the highlights of the five decades in which the association has represented independent marketers.

After the oil shocks of the 1970s literally turned the petroleum industry upside down, the 1980s might seem calm by comparison. “But it was a time of transition,” recalls Carl Bolch Jr., SIGMA past president (1987-89) and CEO of Atlanta-based Racetrac Petroleum, “a time when we saw the merger of two industries, gasoline marketing and convenience stores.”

As reported by Independent Gasoline Marketing in 1988 (October/November) when SIGMA marked its thirtieth anniversary, as “the decade began, nearly 26 percent of SIGMA members were in the c-store business, and less than eight years later that figure would increase to almost 50 percent.” By 1989, according to the 1990 SIGMA Statistical Report, the figure had risen to 58.5 percent. “For the first time,” the Report noted, “more than half of all stations supplied by SIGMA members are c-stores.”

“You had to learn to be a good marketer and, though there were survivors from both the petroleum and c-store sides of the industry,” observes Bolch, “the transition was more difficult for gasoline marketers. It required real concentration of your efforts and capital on retailing.” In 1967 when Bolch entered the business his father had founded, Racetrac locations “sold maybe ten items, so that all we needed was a small kiosk and a cashier. Then self-service brought the customers into the store. By the 1980s we were selling 50 items,” he says.

Building widths kept increasing. “They’d get bigger by 10, 20, 30, then 40 feet,” Bolch remembers, “until there was no parking. By the end of the 1980s we decided to put our buildings on the back of our properties—though of course, across the industry there were a lot of center-island marketers still in business.” Moving the building to the rear also permitted marketers to install more pumps to boost throughput.

President Michael Kirschner of Kirschner Brothers Company, Haverford, Pennsylvania, also a SIGMA past president (1983-85), recalls how “we spent a lot of money during the 1980s converting service bays into c-stores. Industry-wide the c-store business was really growing.”

Industry Restructuring
That growth was fueled by a confluence of world events, social changes, industry issues, and new technologies. Self-service gasoline emerged in the 1960s—Racetrac Petroleum, for example, introduced the concept to Georgia and Alabama—and became a common practice by the 1970s.

About that time, in 1974, Congress ended the oil depletion allowance by which the major oil companies received substantial tax breaks for selling their own product. “The depletion allowance had driven the gasoline price wars of the 1960s,” explains Bolch, “but during the 1970s, with oil prices under government control, the effect of removing the allowance wasn’t felt as much. But when decontrol happened in 1981, that action unfroze the industry. Without the oil depletion allowance, the majors started the long-term process of realizing there was no advantage for them to be in the gasoline marketing business.”

With the growth of the interstate highway system, the nation’s car culture was well established by the 1980s. “Location was always important,” Bolch relates, “but you needed a different kind of location for a c-store, compared to a gasoline-only operation.” Even in the four years between 1980 and 1984, the percentage of SIGMA member-supplied stations with c-stores nearly doubled from 26 to 47.5 percent. As Kirschner points out, “The 1980s saw the introduction of electronic fuel dispensers and point-of-sale devices.” Bolch recounts, “It took about five years for electronic dispensers to become reliable. But as the years went by, your pumps became part of your image. Mechanical pumps became a bad image, while electronic pumps were modern.”

Thus with the majors starting to exit the marketing side of the industry, and with self-service bringing customers into the stores, the stage was set for a boom in c-store retailing and the growth of independents. “The 1980s was certainly a growth spurt era for SIGMA,” says Kirschner. And because the oil depletion allowance was gone, adds Bolch, “The inefficiency of the majors was no longer protected by the government.”

The allowance had distorted the market so that “the majors didn’t have true transfer prices and became inefficient,” Bolch observes. “They didn’t know how individual stores performed. So when the allowance went away and the industry was decontrolled, the majors no longer had their tax benefit and the industry restructured. Independent marketers had a chance to leverage their traditional advantages of responding fast and flexibly to the needs of their markets.” When crude oil prices collapsed in 1986—after OPEC nations ratcheted up production to regain market share lost during the 1970s oil embargoes—domestic demand for petroleum rose steadily in the second half of the 1980s. With average crude oil prices down from $23.29 per barrel in December to only $9.85 the following July, the U.S. economy expanded. Temporary conservation measures instituted in the 1970s were rescinded. Travel increased and independent marketers were in a prime position to serve the motoring public.

Unintended Consequences But the economic forces unleashed by oil decontrol in 1981, and then the oil price collapse of 1986, had unintended consequences for independent marketers. “The c-store business really grew,” Bolch points out, “but the transition also meant there were winners and losers. We started a period of consolidation among the independent marketing sector. Some of the consolidators did well, and others didn’t.”

Consolidation also occurred among oil refiners, adds Kirschner, “and that was a great concern for marketers because supply was—and is—our lifeline.” When oil price and allocation controls were removed in early 1981, explains the Energy Information Administration (EIA) in its Petroleum Chronology of Events, “For the first time since the early 1970s, market forces replaced regulatory programs and domestic crude oil prices were allowed to rise to a market-clearing level.”

Soon, the agency continues, “Many small refineries and older, inefficient plants could no longer compete and were forced to shut down.” In the first four years after deregulation the number of operating U.S. refineries fell from 324 to 223, a loss of 101 refineries. Operable crude oil distillation capacity decreased from 18.7 million barrels per day in 1981 to 15.7 million in 1985. Imports increased, but surviving U.S. refineries also increased their utilization rates. And decontrol, by allowing domestic oil prices to align with foreign prices, boosted incentives for domestic exploration and production.

But then, explains EIA, “The collapse of crude oil prices in 1986 reversed the upward trend in U.S. production of the first half of the decade. Many high-cost wells, which became productive after the oil crisis of 1978–1980, became unprofitable in 1986 and were shut in. Domestic crude oil production began dropping in early 1986. After the world price fell more than 50 percent between January and March 1986, drilling plummeted. Since then, domestic drilling and production have gradually declined.”

For privately branded gasoline marketers, the shrinking number of fuel suppliers became a growing worry. Marketers who once had, say, six or eight suppliers now had to buy from three or four. For its part, recalls Bolch, “SIGMA had been started as an association for private-brand marketers, but realized its focus needed to be on ‘non-refiner’ retailers.” “Branding up” became a big question for many independent marketers during the 1980s, affirms Kirschner. Yet because the majors were beginning a long-term exodus from marketing via their own company-operated outlets, adds Bolch, “In the 1980s the opportunity opened up for independents to consider branding some of their sites. Things had changed since the 1960s when the majors exercised tight control over branded outlets.”

Those observations are corroborated in an Independent Gasoline Marketing that appeared in October 1987—only the third issue of the magazine which had been launch in May of that year. Several fuel suppliers were interviewed for their comments on the evolving relationship with independent marketers.

A vice president for Ashland Petroleum commented, “SIGMA used to be a small group of marketers and refiners dealing in unbranded gasoline only. Now the membership consists of a mixture of those dealing in branded and unbranded. The picture of the independent is not as clear as it used to be,” although the “relationship between gasoline marketers and fuel suppliers seems to be maturing.”

The domestic wholesale manager for Mobil Oil cited a “mutuality of interest” between his company and independents, adding that Mobil “wish[ed] to build strong relationships with its independents” and had established local and national distributor advisory councils.

And the vice president for wholesale marketing at ARCO noted, “The extremely competitive environment that has existed since the federal government lifted controls in 1981 has placed a premium on innovation and efficiency.” He expressed his admiration that independents “who have survived are extremely sophisticated and sharp,” so that “independents have a strong, valid niche in the marketplace.”

Though the number of total outlets represented by SIGMA members grew by only 450 between 1978 and 1988—from 16,200 outlets to 16,650—volume sold nearly doubled from 12.5 billion gallons to 21.8 billions. By 1989 the figure reached 26.5 billion gallons, or nearly one out of every five gallons of motor fuel sold that year in the United States. Of those gallons, 71.7 percent were private-branded and 28.3 percent were major-branded.

And in the final year of the decade, the number of SIGMA members selling major-brand products exclusively jumped to 13 percent, a sharp rise from the 8 percent recorded a year earlier in 1988. Those who were exclusively privatebranded fell from 38 percent to 33.5 percent. As the 1980s ended, a majority of SIGMA members—53.5 percent—sold both branded and unbranded fuels. Price wars with the majors, which had characterized marketing a generation earlier, had given way to a new kind of supply relationship.

Environmental Challenges
The 26.5 billions gallons of motor fuel sold by SIGMA members in 1989 also reflected a major shift in product formulation. The 1990 SIGMA Statistical Report noted, “Leaded gasoline sales dropped by more than 50 percent in a single year, continuing and accelerating a trend. Leaded premium has all but disappeared. Leaded regular, which had been the number one grade until 1983 and was still number two as recently as 1987, has now dropped to fourth place.” Unleaded grades “now account for more than 90 percent of total gasoline sales” in 1989, as unleaded regular climbed above 60 percent for the first time.

The EPA first included lead within the National Ambient Air Quality Standards in 1978, and then in 1982 reduced allowable lead in gasoline to 1.1 grams per gallon. Further reductions in July 1985 and January 1986 cut the maximum of 0.1 grams. When a lead credit program was eliminated at the end of 1987, the maximum was strictly enforced.

As early as 1974 the EPA required that all gasoline stations of a certain size offer at least one grade of unleaded fuel. By 1980 unleaded fuel accounted for 27 percent of motor gasoline produced in the U.S. And the 1973 introduction of catalytic converters, which are incompatible with leaded fuel, helped push unleaded gasoline to 55 percent of domestic consumption by 1983. “There were worries about the effect of unleaded gasoline mandates on the fuel supply,” recalls Bolch. “But the refiners stepped and produced enough supply, so that the problem wasn’t as big as initially feared.”

Nevertheless, other environmental regulations caused concerns for independent marketers. “During the mid 1980s,” reported Independent Gasoline Marketing in its October 1988 thirtieth anniversary article, “another crisis of note occurred; namely the unavailability of pollution liability insurance for underground tanks.” To address the issue SIGMA was compelled to intervene and sponsor a low-cost group insurance program.

A lively debate over Stage II vapor recovery systems versus onboard canisters was begun in the 1980s, as SIGMA “succeeded in winning EPA support for onboard canisters over the more expensive Stage II,” according to an October 1987 report in IGM by association president John Wickland. Two years later, independent marketers were dealing with Reid vapor pressure (RVP) mandates adopted by the agency. Phase I of the regulations required in 1989 that the average summer RVP in motor gasoline be reduced from 11.5 pounds per square inch to a maximum 10.5 psi, and as low as 9.0 in certain areas of the country.

In 1988 the EPA promulgated a mandate destined to have an historic impact on petroleum marketing. That year the agency announced all underground storage tanks (USTs) must be upgraded or replaced within ten years. “That meant a huge capital outlay,” remembers Bolch. “The focus changed from not losing any product for economic reasons, to compliance with environmental regulations. And that meant a lot more expense for things that provided no additional economic return.” In the end, thousands of stations were shut down by the 1998 deadline. Many marketers and dealers could not afford the expense or decided the outlay could not be cost-justified. But that is a story for the 1990s.

Through all the transitions of the 1980s, however, independent marketers started learning lessons that remain important today. They not only entered the c-store business but incorporated new electronic technologies, began to understand the growing importance of credit as a form of payment, and launched marketing innovations such as unattended fueling and fleet programs. “We became better, more efficient marketers,” says Carl Bolch, “and those lessons from the 1980s continue to serve us well.”