TESTIMONY OF E. R. BRADLEY, SUN OIL CO.

Mr. BRADLEY. Mr. Chairman, members of the Commission, my name is E. R. Bradley. I am general sales manager with Sun Oil Co., having offices in Philadelphia, Pa.

The statement we have filed with the Commission covers in some detail the history of our company in the gasoline market, but in the interest of time, I will not attempt to cover this in today's presentation. Through Sun's history, it has followed the principles of competitive innovation and competitive marketing.

For many years the company sold only one grade of gasoline, a premium grade fuel at regular grade price, and more recently we introduced the custom blending system, which makes it possible to dispense up to nine grades of gasoline from one pump.

With regard to Sun's gasoline marketing policy, its efforts are in creating an acceptable image that will appeal to the motoring public and provide the competitive tools needed by its dealers and distributors. Improvements in product quality, construction of new, modern stations (at ever-higher costs), modernization of existing stations, training of prospective lessees, development of new merchandising and sales promotion methods, advertising programs-all contribute to this total effort.

Sun's longstanding policy is to market only through Sunocobranded outlets. It does not sell gasoline to individual dealers, service station chains, distributors, chain grocery stores, auto accessory stores, or others who market under private brands, feeling that, in the long run, such a practice will work to the disadvantage of its own branded gasoline customers.

For the same reason, Sun does not market under so-called satellite or secondary brands. Neither does it have a great number of company-operated stations. At the end of 1964, there were 39 Sunoco stations considered as "permanent" company operations, many of which are used as training facilities for dealers or salesmen, and 99 "temporary" company operations which will be turned over to lessees. Another phase of Sun's policy is to price competitively to its dealers and distributors; offering the consumer eight grades of gasoline has made the Sunoco dealer a total competitor of every other major supplier, regardless of the competitive system employed.

The introduction of Blue Sunoco 190 as the lowest octane of these eight grades enables Sunoco dealers to compete with other major subregulars, such as Gulftane and Kentucky Standards Economy Crown, and with private brands in attracting and satisfying the demands of the compact car owner and price buyer.

Sun's several grades of premium fuels compete against various competitive premium grades.

Share of market position has a relationship to this discussion. Regarding Sun's position, a tabulation of its share of the gasoline market in those States in which it operates for the years 1953 to 1963 is included in our statement. It shows a wide variation in its position in one State versus another. In some areas, Sun has come to be reasonably well represented while in others, it is a newcomer, with little distribution. In some States, Sun has had a relatively low posi

tion during this period. This points up the fact that public acceptance of the Sun brand differs in one area versus another.

Considering the position of competitors in general, any company's position in a given market is by no means fixed or static.

The shifting position of a company can be determined from the taxable gasoline sales figures available in many States. A company with a very small share of market at one time may be a major factor in the same market a few years later, and vice versa. There is no need to burden this presentation with statistics in this regard.

A change in the market position of the so-called private brand retailers of gasoline has been quite marked in the last decade. Although it is not possible to obtain accurate share of market data, some trends in the number of these outlets illustrate their sizable growth.

Surveys made by Sun in 1954 and 1960 showed that private brand stations increased about 67 percent, from 4,755 in 1954 to 7,941 in 1960, in those areas where Sun markets. In Connecticut, Florida, and New Jersey the number of private brand outlets more than tripled between 1954 and 1960. In the same period, the number of stations selling the so-called major brands increased by about 2 percent.

These two surveys showed that many private brand marketers had a marked growth. For example:

Also, some private brands that did not even appear in the 1954 survey had become fairly sizable chains by 1960.

Private brand

Number of stations in 1960

Scot: Baltimore and District of Columbia.

Bay: Florida___

Payless: Ohio, Indiana, Michigan, and western Pennsylvania__-

A special 1959 study of private brand stations in areas where Sun is represented made clear that a majority of the private brand marketers are chain, or multiple-unit, operations rather than individual service stations. This study revealed that:

About 32 percent of the private brand stations belonged to chains with 25 stations or more.

About 18 percent of the private brand stations belonged to chains with 10 to 24 stations.

About 25 percent of the private brand stations belonged to chains with 2 to 9 stations.

Only 25 percent of the private brand stations were single station brands.

These figures indicate that many private brand marketers are rather sizable organizations. Many of their stations are salary-operated

units of a chain. Thus, the individual major brand dealer near such stations is often competing with a retail chain of considerable size. Some of the large private brand marketers are integrated oil companies. The 1964 National Petroleum News Factbook issue reports the following 1963 figures for three such companies operating in the same area as Sun:

Others, although not integrated backward through refining and production, are of substantial size. For example, we understand two well-known private branders (Martin and Hudson) each have assets rated at millions of dollars.

Many other private brand stations, chains or others, are supplied by major oil companies. Published summaries of the House Small Business Subcommittee 1963 questionnaire to the oil industry disclose that 16 out of 21 responding majors sell to unbranded jobbers and retailers who market in the same areas as their branded customers.

As a general rule, chain-operated private brand stations have a solid impact on the market around them. Their pricing decisions are not made by an independent small businessman, but by a centralized headquarters of the chain. In addition to a lower price, they generally feature large properties, easy access, multipump service, prominent signs, excellent lighting, and good quality products.

It should be noted here that practically all of Sun's dealers operate only one station, mostly as sole proprietorships or partnerships. They represent, most realistically, the small businessman.

The position of these customers as the "small businessman" is in sharp contrast to some of the competition which they encounter, as indicated above.

With respect to retail pricing generally, in our written statement we briefly reviewed some of the underlying factors which in our opinion have an influence on retail prices. Some of the factors mentioned in our written statement were supply and demand, crude supplies, and import quotas. I do not feel that I can add to what has already been said at this hearing regarding these factors, or to what is contained in our written statement. Therefore, in the interest of time I would like to deal with the direct marketing aspects of our business, particularly the matter of evaluating the retail market.

Evaluating the retail market is basic to pricing policy. A great variety of competitive situations exist when comparing one market to another. Indeed, the very nature of a market may change over a period of time. One with a history of stability may erupt into a long-term period of price disturbances. Another may show a trend in the opposite direction.

In order to provide a competitive position for Sunoco dealers and distributors, Sun's day-to-day pricing activities require constant surveillance of markets and the exercise of judgment in evaluating the unending variety of situations and factors that develop.

55-013-66-vol. 1-29

One phase of the gasoline pricing activity is the marketing area. Perhaps one of the most difficult and basic problems in this connection is to define a "marketing area." Such an area could involve only one Sunoco station in competition with one or more stations marketing other brands. On the other hand, it might embrace two or three or several Sunoco stations and many more competitive outlets, or even an entire metropolitan area.

Conversely, a large metropolitan area may contain several separate and distinct markets with price differences that seemingly have no materials effects, one versus another. In fact, two separate towns which might appear to be distinctly separate markets may have an influence, one on the other, if a price differential of any consequence exists for a period of time.

The actual price differential that may develop between one area and another, the distance between the two areas, the pattern of traffic flow from one to another, and the time factor-how long a difference in price may exist-all have a bearing on a specific case.

The influence of one or more elements in an area may grow or diminish as various factors change. The building of a new road, improvements to an existing one, a change in traffic regulations, a change in competitive dealers, construction of a new station or the closing of an old one, the development of new housing, shopping or industrial facilities-all of these may alter the competitive situation in an area, or perhaps change the area.

Thus, even this one phase of the gasoline pricing activity-in determining the competitive marketing area-does not lend itself to the creation of formulas, mathematical or otherwise, to solve the day-today problem situations that arise.

Many other factors influence retail prices.

After having determined what the limits of an area might be, many other elements enter into the picture to complicate the problem, and, indeed, to create the constantly recurring competitive situations that have prompted this Commission's inquiry.

The circumstances with respect to each station in a particular area will vary at least to some degree. It is unlikely that the economics, the pricing philosophy, the service rendered and overall image or customer appeal at any two stations will be precisely the same.

Some number of dealers in an area may be leasing their stations from their supplier or from a third party owner. The effective rental rate per gallon paid by these tenants will vary, depending upon how desirable the particular station may be and the negotiating ability of the parties involved. At any rate, variations in the per gallon rental will produce variable cost factors, one station versus another.

Other dealers may own their own stations, again with varying costs, depending on a dealer's equity in the property, his carrying charges, taxes, maintenance costs, and so forth. In other cases, pseudo-realestate arrangements, with a lease and lease back between dealer and supplier, may provide an additional income per gallon to the operator, giving him an advantage not stemming from efficiencies or lower operating costs.

A major distributor may operate a retail outlet, thus having a combined retailer-distributor margin that could give him some price advantage.

Recently another development has appeared right here in the Washington area and in Richmond, Va. The stations of a large private brand marketer have been converted to a major brand, displaying both the private and major brand identification signs. Newspaper advertising invites the motorist to join a discount club at no cost. In addition to the regular club discount, there is a promise of special discount offers from time to time. Observations in the Richmond market indicate this special discount can amount to 2 or 3 cents a gallon.

All of the variables and others probably could be added-are compounded by the fact that they could apply to a major brand station, a major brand with a subregular grade, a secondary brand of a major company, a large private brand chain, or a one-station private brand dealer.

Add to this the major brand and private brand premium grades and intermediate premium grades, with various price differentials for these grades versus regular gasolines-perhaps those from 1 cent to 5 cents and it can be appreciated how the complications of the pricing pattern continue to multiply.

In certain markets that experience constantly changing prices, it has been noted time after time that private brand stations are extremely slow to take advantage of improved retail price levels. On many occasions, they completely ignore an upward trend in the market and remain at relatively low levels, maintaining a wide price differential under most of the market. Anyone familiar with the basic operating economics of a station would have to conclude that these wide differentials could not possibly result from lower operating costs; that is, a more efficient operation.

Therefore, it also must be concluded that some circumstance exist to warrant such practices. Perhaps it is the ability to secure and build up large low-cost inventories prior to a price increase; or it may be due to some advantageous buying arrangement, such as a minimum margin guarantee, that largely removes any incentive to advance the retail price.

It should be noted that the accumulation of the abnormal low-cost inventory, the minimum margin arrangement or any other accommodation that may give the private brand marketer an undue advantage under certain circumstances are possible only within the knowledge of the supplier. At times the supplier may be a major company publicly voicing concern over unstable marketing conditions and suggesting a statesmanlike approach to gasoline pricing and marketing. Whatever the reason, when private brand stations behave in this fashion, it is not long before major brand suppliers reestablish lower prices to their dealers to enable them to be more competitive. Any market improvement that may have been developing is dissipated with great rapidity.

At other times, a private brand chain may initiate at a single station a sharp drop in price for no apparent reason except to create a substantial differential versus the existent general level of major brand postings. In most cases, the reaction of others supplying dealers in the area can be predicted reasonably well-the whole market comes tumbling down to reestablish a more competitive price relationship. Of course, major brand dealers in the marketplace may act in somewhat similar fashion. The term "maverick dealer" recently has