We would like to point out that the foregoing is an oversimplified statement of pricing as it relates to the branded jobber but time does. not permit further elaboration although further elaboration is necessary in order to put this picture in its proper perspective.

THE CAUSES AND EFFECTS OF SO-CALLED PRICE WARS

There can be considerable argument over the causes of so-called price wars. If every gasoline marketer in the United States, from Standard Oil Co. of New Jersey down to the smallest retailer, were asked the question, "Have you ever started a price war?" the answer in every instance would be a resounding "no."

First let us consider price wars at the retail or service station level. It is our belief that one of the basic, root causes of price wars at this level is an oversupply of gasoline, as related to demand, in the hands of a multiplicity of refiners, each of whom is trying to cram a maximum of its volume into the marketplace.

In brief, gentlemen, all refiners are trying to put 5 pounds of sugar in a 3 pound sack, and it just won't fit.

This produces the intense competition which enables private brand resellers to purchase at prices considerably lower than those paid by branded reseller competitors. When the private brand reseller uses this price advantage in the marketplace he begins to take volume away from the branded reseller who, in turn, begins to fight back to retain his volume and the war is on. Some private brand resellers particularly large chains spread throughout the country-are more vigorous in their discounting than others. We believe that most of the price wars in the past 5 years have been attributable, first, to the oversupply situation, and, second, to the ever increasing portion of the market being taken by private brand resellers which resulted in the principal brands fighting back to retain their market position.

Through a typographical omission one sentence was left out there. That reads "one of the principal methods of fighting back that provoked price wars was the introduction of subregular gasolines by some branded suppliers, such as Gulf Oil Co., with its brand Gulftane, who priced this product at the same price or slightly above the price of the principal private branders."

Some price wars have been started because large companies selling a secondary brand through a subsidiary have attempted to sell at prices equal to or below private brand resellers. The primary brand resellers, with the aid of their suppliers, have fought this competition as well as that of the conventional-type private brand reseller. We believe that the majority of private brand resellers would be content to operate on a basis of selling slightly below the retail price of the branded reseller but, unfortunately, among the private brand ranks there are a few "rotten apples" who insist on a wide differential in price and it is this category that usually starts the war or aggravates the retail pricing

structure.

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The effects of price wars on the branded jobber are very severe. a business which measures net profits in a fraction of 1 cent per gallon, it is obvious that a jobber with a 3.25 cents normal margin is seriously hurt when that margin is reduced to 2.5 cents per gallon. This is particularly true with the jobber who has endeavored to expand and modernize his chain of retail outlets which he leases to dealers who are

also suffering the tragic effects of inadequate income to meet their obligations under price-war conditions. There are thousands of branded jobbers in the United States who have not had a normal margin, except for short periods of time, for the past 5 years. These jobbers have suffered and will continue to suffer-in fact, will be compelled to go out of business-if the market structure does not again reach some level of sanity.

Now as to the cause of price wars over commercial consumer accounts. The root cause of such wars is basically the same as that in the retail situation-mishandling of an oversupply of product. In brief, the integrated companies are simply dumping gasoline into the commercial consumer market at prices and under conditions that have almost driven the jobber out of this area of marketing. When a jobber loses a profitable commercial account the effect is obvious. He must make up either this profit loss from some other phase of his business, which he cannot do with a retail price war raging, lose money, or, at least, break even.

COMPETITION BETWEEN BRANDED AND UNBRANDED GASOLINE AND BETWEEN INTEGRATED AND NONINTEGRARTED REFINERS

The comments on this subject will be limited to the competition between branded and unbranded gasoline at the jobber and retailer level. Let it suffice to say that this competition for the better part of 5 years has been of the "dog-eat-dog" variety. The branded jobber, the branded retailer, and the private brand reseller who is content with a small price differential are simply caught in the middle of a battle between refiners of primary brands and the remaining private brand resellers who want larger differentials in price plus higher volumes.

On the subject of gasoline grades and qualities additives and octane ratings-on this subject we believe that refinery representatives are better qualified to give information to the Commission than we are, since the subject requires the knowledge of petrochemistry as well as automotive engineering knowledge which we do not possess.

OTHER MATTERS PERTAINING TO COMPETITION IN THE MARKETING OF AUTOMOTIVE GASOLINE

There are many other factors which impair the jobber's ability to compete in the marketing of gasoline. Some of these are discussed in the following, others we have outlined in more concise form in the earlier part of this statement:

Let us first look at the average jobber's contract with his supplier. The jobber starts with a contract wherein (with the exception of one company-Texaco) the jobber's purchase price is such as the supplier wishes to make it at the time and place of delivery. Any other agreements with reference to margins, the relationship of the jobber's purchase price to his selling price, as well as minimum guarantees are generally all verbal and are subject to changes at the whim and caprice of the supplier. Generally speaking most suppliers honor this portion of their verbal commitments. However, a trend is already moving up in the State of Colorado-where some suppliers, without even consulting their jobber customers, have reduced the minimum margins from 2.5 cents per gallon to 2.25 cents per gallon. There are already some indications on the horizon that the so-called

"normal retail prices" in many areas will be reduced to a more realistic price and the jobber's existing maximum margin will be cut. Whether these latter trends will spread remains to be seen. After 5 years of price wars, where the jobber's margins were related, in most instances, to a fictitious "normal" price established by major oil companies, the jobber now is spending sleepless nights worrying about what the next change will be in these verbal commitmentsand he can only expect the worst.

Many jobber contracts do not contain specific provisions as to advertising allowances, painting of stations and trucks, but only some vague, verbal commitment. These verbal commitments have slowly been repudiated by many suppliers during the past 5 years.

Another oppressive feature in the contract of most jobbers is substantially the same as the following, which was taken from an actual jobber contract:

If during the term of this agreement or any renewal thereof, Buyer shall decide to sell, lease or otherwise dispose of Buyer's business in petroleum products or any assets or properties used in connection therewith, Buyer agrees Seller shall have a First Refusal Option for a period of ninety (90) days to purchase, lease or otherwise acquire on the same terms and conditions the business, properties or assets as those on which Buyer is willing to sell or dispose of the same to any other party, and Buyer agrees not to accept any offer during the period of such option. Buyer agrees promptly to submit to Seller the full terms of any bona fide offers received from any third party which is acceptable to Buyer and Seller shall thereafter have ninety (90) days within which to exercise said option. During said ninety (90) day period, Seller shall have complete access to all of Buyer's books and records in respect of the business assets and properties involved in such offer. Any failure by Seller to exercise any such option in one case shall not affect the preemption of this privilege in other cases thereafter, whether involving the same property as that covered by the first acceptable offer or other property.

This provision in essence requires that, if the jobber seeks to sell or lease his business, he must provide his supplier with a copy of any proposal from another potential purchaser and afford the existing supplier an opportunity to meet such proposal. At first blush this might not appear to be too oppressive but, in actual practice, it is. It is rare for another supplier to submit a formal offer when such supplier knows that the existing supplier will have an opportunity to meet its proposal. The end result is that when a jobber decides to sell out-regardless of cause-about the only potential purchaser he can deal with is his own supplier. This in actual practice, in our judgment, is a restraint on trade.

I might add at this point that about the only potential customers when a gasoline jobber gets ready to sell out, except an extremely small rural community gasoline jobber, are the larger major oil companies. They are about the only potential customers there are.

Another very oppressive situation is imposed on many jobbers. There are many jobbers who do not have the capital, and cannot obtain it on a long-term basis (15 to 20 years), through conventional channels, to expand or modernize their businesses. This has produced a means of financing through and with their suppliers which virtually bind the jobber to that same supplier for the tenure of time necessary to pay off the obligations.

This method of handling may vary from company to company, but the general structure is as follows: A jobber may wish to build a service station on a selected corner. He communicates this fact to his supplies who sends a man to approve the site, as well as approve

the type and cost of the service station structure which the jobber wishes to build thereon. In some instances the jobber may buy the land and seek financing for the building of the station. In other instances he may want 100-percent financing for both land and building. In either event, with the approval of his supplier, he acquires the land and constructs the station, usually with money provided by the supplier or through the supplier's bank, with a first mortgage as security, coupled with the contractual provision to lease the facility to the supplier for a period of usually 15 years, and in some instances, with one or more 5-year additional options on the lease. When the station is completed, he executes a mortgage either to his own bank or more often a bank selected by his supplier and, in addition, leases the station to the supplier for approximately 15 years on a basis which will pay out the cost of the money advanced, with interest, in equal monthly installments. The jobber then assigns the proceeds from this lease as additional security to the bank. The supplier then releases the station to the jobber for approximately the same period of time (but usually without the option provisions) and usually for the same amount of money.

The jobber then in turn subleases the station to a dealer. What has happened in this transaction is that the supplier has in effect loaned its superior credit rating in return for a longterm lease on the jobber's station. If the jobber decides to go to another supplier, the supplier having the lease keeps the station until the tenure of the lease period has run out. There are many instances where jobbers have as much as 50 percent or more of their station properties tied up in such financing transactions, even though their basic supply contract with the supplier is on a year-to-year basis (in some instances for longer terms).

The jobber who gets himself caught in this financing vice is hooked and his chances of changing to a supplier offering more advantageous terms are, as a practical matter, negligible. It would mean, in many instances, surrendering a substantial volume of his business to give up these stations, and he is even further impaired if he wants to sell out because of the fact that no major oil company wants to be in the business of leasing stations to another major competitor. One might say that the jobber does not have to enter into these transactions if he wishes to retain his independence.

I would like to interpolate there by stating that the jobber had better expand in his territory, otherwise he will wake up and his contract is terminated at the end of the first period it is permissible to terminate or in the alternative, the supplier will move in and build stations in his area.

While this is true, it is nevertheless a fact that the average jobber cannot expand with the growth of markets except be getting long-term capital which is difficult to obtain for single-purpose properties. We definitely feel that this is an oppressive arrangement and that some method should be devised whereby the jobber could be relieved from this oppression if he is able to satisfy the bank by way of relieving the leasing supplier from their obligations under the assignment of rental income.

Another problem faced by the jobber was posed by the General Services Administration in its recent procurement policies as related to gasoline sold on credit cards to Government employees engaged in

Government business. They demanded discount contracts, even on price war prices, and instructed field personnel not to purchase gasoline from any station, except in an emergency, unless they had a contract with the station, the station's supplier, or the station gave them a 1-cent-per-gallon discount.

The whole group of independent marketers-branded and unbranded is faced with meeting the competition of integrated suppliers who have tax advantages through the depletion and intangible drilling cost allowances which most jobbers believe are used, directly or indirectly, to subsidize marketing operations. This, in addition to the usual advantages that a well-capitalized integrated oil company has over any marketer who must derive his profits, if any, exclusively from marketing operations.

The new highway program has produced many disadvantages for for jobbers and dealers. Service station sites on the access roads are selling at astronomical prices and usually are so high that few jobbers or dealers could ever hope to amortize the cost of land and station out of marketing profits derived from this property. The major companies do not seem to be bothered by these excessive costs even though they would not do any better job of marketing from such outlets than the independent jobber or dealer.

The branded gasoline jobber is becoming extinct in large metropolitan areas, primarily for the reasons that (a) he cannot economically amortize the cost of stations and station sites, and (b) these large volume areas are more attractive to the major companies for direct distribution. This pattern or trend toward direct distribution in volume markets is continuing on down to cities having populations of 50,000 persons or more. The jobber is, therefore, compelled to the conclusion that the suppliers must be subsidizing their marketing operations from other phases of their business. This is particularly noteworthy to those jobbers who have lost money during price wars while seeing their suppliers' profits increase with each succeeding year even though price wars were raging throughout the country.

I might add at this time that on all the reports I have seen of the first-quarter profits of the major integrated companies, every single one of them is showing extensive profit increases over the similar first-quarter profits of 1964.

On the issue concerning loss of commercial consumer account business, I am submitting to the Commission as a separate exhibit I many other examples which show suppliers selling to commercial customers at prices cheaper than the jobber's purchase price and considerably cheaper than the dealer's purchase price.

These are not all the jobber problems but they do reflect some of the more important, and we hope that the Commission will ask questions, thus enabling us to elaborate in more detail on some of these problems which we cannot completely cover in the time allotted to us.

Now, as to the conclusions: It is obvious from all of the facts that have been and will be presented to the Commission that the gasoline marketing structure of the petroleum industry is extremely complex; in fact, possibly more complex than the marketing structure pertaining to any other single commodity in the United States. The variety of types and practices of refiners, the variety and methods of marketing by the so-called independent jobbers and dealers both branded and private brand is such that any attempt to generalize in describing the