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Race to the bottom

Safeway’s arrival has brought good gas prices to consumers, but some believe it will be short lived after the local competition goes belly-up
News Editor
   Since the new kid arrived on the block, things just haven't been the same.
   Safeway's hyper-market has fueled a race to the bottom in the gas business since the grocery chain began offering gas at Madras' lowest rate.
   The fierce competition has led to good prices for consumers as several stations have lowered their costs to stay even with the best buy in town. But the competition already has driven one gas distributor out of business and some locally operated stations are wondering who's next?
   "Safeway has certainly hurt us because they have a predatory pricing program in place to gain business," said John Gold of Madras, owner of the the Texaco station on the corner of 4th and D streets. "Until they meet their gallon projection they will keep that price down."
   On Monday, regular unleaded at Gold's Texaco was selling at $1.19 a gallon -- the highest price in town. At that price, he's only netting 4 cents a gallon in a business where station owners need to make between 15 cents and 20 cents per gallon to stay viable. Texaco's fixed wholesale cost to its distributors is $1.15.
   "At one point there was no sense in trying to be competitive with Safeway," Gold said. "When you're buying your gas for 8 cents more there's no point."
   Safeway, which lists its gas price at $1.11, currently has the best deal in town. Consumers with the grocery chain's club cards get an additional 3 cents off per gallon.
   The scenario unfolding in Madras is not a new one as chain stores with heavy corporate muscles, like Costco and Wal-Mart, have gotten into the gas business.
   Box-stores with gas pumps have been dubbed "hyper-markets" and advocates of preserving locally owned businesses say these ventures are wiping out the little guys through unfair practices.
   Safeway's local general manager, Jeff Nordstrom, said he was not permitted to speak to the media. However, the company's Portland-based public affairs director, Bridget Flannagin, said Safeway plays a fair game.
   "We've been in the grocery business for 75 years and our job is to run a lean mean machine efficiently," Flannagin said. "You can't stay in business if you're not efficient any more and we've now done that with fuel."
   Critics of hyper-markets say the low cost of gas they bring to consumers is short lived. The chains are often accused of selling their gas at, below or near cost to wipe out their local competition before raising prices. Congress is even considering legislation to prohibit hyper-markets from selling gas below cost.
   "They are known for doing this in every town they walk into," said Barb Schmidt, who owns and operates Leathers through a lease with the Gresham-based company. "If you have the money behind you and you're a big corporation you can sustain that loss."
   On Monday, Leathers was selling regular unleaded at $1.09 but Schmidt said they would raise their prices. She said she's laid off five employees, slashed her hours and is still making only half of what she did before Safeway moved in on the market and before the events of Sept. 11.
   "I'm not out to be angry," Schmidt said. "Business is slow and of course when another station comes in it takes a piece out of everybody's business. But I'm tired of playing the game."
   When asked about volume and wholesale prices, Howes said Safeway's figures were "proprietary information." She said the company, which has opened 13 gas stations in Oregon and Southwest Washington, had "absolutely not" been selling fuel below cost. Safeway buys its gas from Tesoro.
   "We give the consumer choice and a competitive price and that's what America was founded on," Flannagin said.
   "People vote with their shopping dollar. Safeway is a union operator that pays family wages and benefits for not only the employee but also the family. And there are a lot of nonunion operators with little or no benefits."
   Local gas prices have changed daily. Towne Pump, Leathers and Space Age had followed Safeway to the bottom offering their gas at $1.08. But on Monday, Towne Pump raised their prices to $1.17 and Space Age moved to $1.11 while Shell slipped in and grabbed the second lowest mark at $1.09 for a gallon of regular unleaded.
   Manzoor Hussein, who manages Space Age Fuel through a lease, said the only thing keeping him in business are his diesel sales. He said gas stations normally need to pump at least 100,000 gallons of gas per month to stay viable. Stations in Madras have historically pumped a combined 600,000 gallons per month on average.
   Mike Ahern, who owned Mike & JAC's Gas next to his former mini-mart, was the first local gas distributor to go bust after Safeway moved into town.
   "They won't let anyone under them," Ahern said of Safeway. "I think it might take them four or five years but if they can close down a few stations they'll start making their buck."
   Ahern inherited his station last September when it was abandoned by its former owner and said he's not bitter or angry he went out of business. He, John Gold of Texaco and Rick Allen of the Chevron-Tiger Mart are the only locals to own their stations outright.
   Ahern sent four employees looking for new jobs when he closed shop two weeks ago. He sold off the remainder of his gas for 99 cents a gallon.
   "This is reality," Ahern said. "It's the invisible hand of capitalism and it's reached out and choked me.
   "I'm not trying to say it's all wrong, it's just hard on small businesses. They suck a lot of consumer dollars away from us. I'm just trying to call a spade a spade."
   Allen, who dropped his prices 4 cents to $1.15 on Monday, said Madras' price wars have drawn more volume away from the Redmond area but it's a small consolation.
   "There's no mystery to any of this," Allen said. "Safeway's probably not even covering their costs let alone a profit but at some point that will change. You talk to people in other markets were Safeway has been there a year or two, the prices are back up."
   Flannagin said local residents have the ability to determine their businesses own fate.
   "People seem to forget that if you want your local businesses to stay in business you support them and maybe you have to pay a little more.
   "That's the choice we make every day."