Wal-Mart gas plans fuel controversy

/ Source: CNBC

Gasoline price have been edging lower in the last few weeks. And as retail giant Wal-Mart continues to increase its gasoline sales, prices could be headed lower still. Some of Wal-Mart’s competitors, however, worry that the world’s largest retailer may not be playing fair.

Imagine for a moment that you own a corner gas station. You make anywhere from 2 to 15 cents a gallon profit. Then, you hear that Wal-Mart is coming to town and plans to sell its gas not just below your price, but below its own cost. How do you fight that?

That’s what New Jersey gasoline retailer Larry Ray is trying to figure out. He grew up in the family gasoline business, which now owns 15 gas stations in central and northern New Jersey.

Ray said he had a delayed reaction when he heard that the world’s largest retailer, Wal-Mart, plans to sell gas in hundreds more locations — though Wal-Mart hasn’t specified what states they’re going into.

“I really didn’t think anything of it until I heard the horror stories,” he said.

Those “horror stories” include gas station owners in Florida, Alabama and Oklahoma taking Wal-Mart to court for allegedly pumping gas at less than cost.

“If somebody sells below cost, I couldn’t compete with that,” said Ray. “Not for a long period of time.”

The judge in one of the cases agreed. He wrote: “We do have in this case prima facie evidence of intent to injure competitors and to destroy or substantially lessen competition.” Wal-Mart is appealing that case.

Dan Gilligan, who runs the largest gas station owners trade association in the country, said Wal-Mart was the major topic of discussion at its recent national convention.

“For Wal-Mart, or any mega-retailer, to really make any progress they’re going to have to sell gasoline at a loss,” he said. “The effect of loss-leader retailing of gasoline — that sort of destabilizes the local market and eventually eliminates a lot of the independent marketers.”

For several years, smaller gasoline retailers have charged that Wal-Mart — the so-called “category killer” in everything from CD’s to food — pushes smaller competitors out of the way by undercutting them on price.

“A lot of the traditional gasoline stations aren’t going to stay open,” according to Tom Kloza, chief analyst with the Oil Price Information Service, or OPIS, which tracks gas prices everyday at 85,000 pumps around the nation. “Typically, when they come into a market, they’ll sell at 5 or 6 cents under the average prices posted by traditional retailers ... but they can basically keep this in court for a long, long time with the mighty power that they have as one of the biggest companies in the world.”

Wal-Mart said in a written statement, “We have never priced our gasoline below our own cost. We seek only to provide our customers with the lowest price on gasoline.”

Some retail economists agree with Wal-Mart’s strategy, and say ultimately it’s good for consumers.

“What Wal-Mart is going to do is the same thing that they’ve done in every other product category for the history of their business,” said Richard Hastings, an economist at Bernard Sands Co., a New York-based retail consulting firm. “They’re going to drive out distribution costs. They’re going to simplify the business. They’re going to get the product to the consumer at a lower price.”

If the gas battle heats up and generates headlines again, it could spell more bad public relations for the nation’s largest retailer. Wal-Mart is already smarting from charges of wage discrimination, poor benefits and use of undocumented foreign workers to clean its stores.

In Oklahoma, Wal-Mart has appealed the preliminary injunction preventing it from selling gas below cost there. The appeals court could hand down a decision any day.

Wal-Mart won’t say how many stations it plans to build, but it has already installed gas pumps in 855 company locations. One oil industry newsletter predicts 350 more will be installed within a year.