Improve the balance sheet or hurt small firms?

For oil companies periodically to cull their branded service stations is common. It happens even in good times, but when it coincides with the announcement that a major oil company is doing it while offering itself for sale, it attracts more attention than usual.

In KwaZulu-Natal and elsewhere in the country, service stations that have received short notice that their contracts with Chevron/Caltex will end – delivered with minimum and little if any sympathy for its impact – are objecting with more than the usual vigour.

On the surface, they have good reason to claim that the cancellations are brutal, often with no reasons given, no account is taken of the goodwill created sometimes over many years by service station operators and there is a complete disregard for the impact on the livelihood of the affected pump attendants.

Here one must explain how the regulated petroleum industry works when it comes to service stations in this country. Oil companies may own the service station site and the forecourts, but they are not allowed to operate them. They can and do own the corporate livery identities.

Because of this oil companies often buy the land, build the service station and rent it or lease it to an operator, who may be an individual or a company. They may in turn lease it to an operator. At other times, the oil company will enter into a supply agreement with a person or company that owns the land and the service station in return for the right to brand the property in its own colours.

Supply contracts overwhelmingly favour the oil company. Service station operators, for example, take full responsibility for their staff. The oil company does not employ the pump attendants: Their pay and conditions are the responsibility of the service station. This neatly stymies trade union pressures.

Operating milieu

Regarding profits, both the oil companies and the service stations are subject to regulation, limiting the price they can charge for diesel and petrol. Broadly speaking this is the milieu in which the retail fuel industry operates.

Chevron/Caltex, a few years ago, sold clusters of service stations in rural areas to what they call brand marketers. These individuals or small companies manage the Caltex brand for each cluster. They also inherited the franchise agreements.

Now to focus on Chevron’s recent dealings with a sample service stations bearing the Caltex brand against the background of its decision to put itself up for sale. The sample is mainly made up of service stations operating in KwaZulu-Natal, and marginally in the Eastern Cape.

In all cases, the amount of fuel they sell each month on average is now regarded in the industry as small – less than a million litres a month. Even in normal economic conditions, they could be unprofitable to supply. However, such sites were once profitable to the oil company. While unprofitability today is a legitimate reason for cancelling supply contracts, the reasons in this sample sometimes reveal different motives or show no appreciation of the different circumstances of each case.

Most cancellations highlighted here do not bother to give reasons at all. In some cases where Chevron/Caltex own the land, and may or may not have built the service station, leasing it to private operators as the law demands, the whole caboodle has been sold without telling the leaseholder who is then promptly evicted.

* Caltex-owned site. Franchise agreement cancelled after 34 years. No reason given.

* Caltex-branded, brand marketer operated. Contract cancelled after 27 years. No reasons given.

* Caltex-owned site, franchisee-operated. Verbally informed, no reasons given. Lessee recently spent R2 million on a Fresh Stop convenience store on site.

* Caltex branded marketer site operated by franchisee. Branded marketer rejected offer by a buyer to buy out franchisee. No reasons given.

* Alleged that lessee told by persons unknown that his contract would be terminated unless he paid R2m.

* Allegations of a similar demand as above for R3m.

* Caltex and branded marketer unable to reach agreement on the responsibility of the costs of a site upgrade.

* Sold to a private developer without the lessee’s knowledge. Site has been in the family for 45 years.

* Sold secretly (as above) by Caltex to a private developer. Site has been in the family for 20 years.

The two allegations of attempts at extortion cannot be laid at the door of Caltex. They are included here as examples of abrupt contract cancellations, and the resultant dealer vulnerability.

What appears to be a sudden rush of supply contract cancellations indicates three possibilities.

The first may be a desire by Chevron/Caltex to liquidate as many contractual obligations as soon as possible to make the company more attractive to potential buyers (possibly these actions are a requirement by a buyer).

The second, at worst, may be an attempt to compel retailers to invest in property owned by Caltex by, for example, paying for the building of a Fresh Stop convenience store.

The third is what appears to be a complete disregard for corporate reputation. Ruthless behaviour may be common elsewhere in the world but is not the norm in South Africa.

Many of these sites have been trading under the Caltex flag for decades, contributing to the company’s reputation. The same applies to the pump attendants who in some cases have worked for the same dealer for 20 to 40 years. They too will be out of a job.

Ways of doing business

What it also suggests (running counter to the clean-up-the-balance-sheet theory) is that Caltex is discounting the goodwill created by each retailer against opportunities to evict retailers to sell the sites to new entrants, at a considerable profit.

One could say that all this is a moral issue, not a business one, and that it must bow to shareholder interests. But there are ways of doing business – the brutal way, and the decent human way. After more than 60 years in South Africa, selling through dealers that have shown brand loyalty stretching over decades, surely the second way is best.

The brutal way leaves a distinctly bad taste. Worse still, it gives ammunition to those who would destroy private enterprise and substitute a centrally driven socialist economy that would have disastrous consequences for all South Africans.

Not that Chevron head office managers care one whit. They probably want to exit as fast as possible a highly regulated market delivering minimal profits. And for that, they can hardly be blamed.

* Keith Bryer is a retired communications consultant.

** The views expressed here do not necessarily reflect those of Independent Media.

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