ARCHIVE:: OCTOBER 2001 :: COVER STORY

Wal-Mart Pays at the Pump
Discount Giant Tangles With Small Gas-Station Owners-and Loses

By Russell Gold and Ann Zimmerman
Staff Reporters of The Wall Street Journal

By any measure, Wal-Mart Stores is a business colossus. Its annual revenue of nearly $200 billion makes it one of the largest companies in the world, in the same league as General Motors and ExxonMobil. Its market power and pricing strategy are enough to frighten many small businesses.

But as a recent skirmish over gasoline prices proves, Wal-Mart isn't invincible. When businesses compete, the bigger contender doesn't always win. And sometimes, the consumer doesn't either.

This spring, as fuel prices zoomed to their peak, Wal-Mart wanted to use inexpensive gasoline to lure motorists to its new parking-lot gas pumps. But in order to sell lower-cost gas, Wal-Mart first needed to overturn laws in many states that require a certain markup above cost at the pump.

In the chummy world of statehouse lobbying, Wal-Mart was no match for an entrenched network of independent gas-station operators and allies who have been around longer, made more campaign contributions and developed deeper relationships with legislators. Although hardly small itself, the gas-station lobby in state after state successfully painted Wal-Mart as a giant intent on wiping out the small-business man by undercutting prices. When all was said and done, the nation's largest retailer couldn't claim a single victory.

In fact, Wal-Mart actually ended up worse off in Minnesota, where legislators passed a tough new law marking up gas at least eight cents a gallon above its cost and allowing state officials to padlock the pumps of any violator. Maryland strengthened its existing law by requiring the state comptroller to investigate allegations of below-cost gas sales within three days. Lawmakers in Florida, Wisconsin, Louisiana, Tennessee and Washington all kept the status quo.

"I think the mistake we made is that we didn't start developing relationships a long time ago," says Jay Allen, Wal-Mart's vice president of corporate affairs. "A crisis is a bad time to develop friends."

No Advantage

While the markup laws don't stop Wal-Mart from building gas stations, they do cancel out the marketing advantage it counted on by preventing it from offering customers a cheaper price. Twelve states have laws that specifically ban below-cost gas sales or require a minimum markup. Another 23 states have general "fair marketing" laws that ban below-cost sales of merchandise or "predatory pricing." The laws grew out of Depression-era efforts to protect consumers and small businesses from monopolies that slashed prices just long enough to drive competitors out of business, then raised them to fatten profits.

Supporters of the gas-markup laws argue that they're still needed to protect smaller, independently owned gas stations, and that more stations ensure competition and keep prices low. Otherwise, says Dan Gilligan, president of the Petroleum Marketers Association of America in Arlington, Va., large retailers would sell gasoline below cost for just long enough to crush rivals. "When the competition is gone, they are free to exact whatever price they want," he says.

Wal-Mart argues that the laws are arbitrary and unfair, preventing it from offering its advertised "everyday low prices." They rarely needed to be enforced until about two years ago, when Wal-Mart and other discount and supermarket chains began to more aggressively open gas stations. By the end of this year, Wal-Mart hopes to have stations at about 520 of its large discount centers-25% of its total stores-and nearly all of its 480 Sam's Club outlets.

Wal-Mart and Murphy Oil Corp., which has an agreement to operate stations at Wal-Marts in 21 states, started getting hit with lawsuits almost immediately that alleged they were selling gas below cost. Murphy's pump prices actually often match prevailing prices in the area, but customers who use pre-paid Wal-Mart gift cards get a discount of several pennies per gallon, which can drop the price below the wholesale cost.

In Alabama, a federal judge in May issued an injunction barring Murphy from selling below cost at 25 Wal-Marts in the state. The judge ordered Murphy to raise its prices by at least seven cents a gallon.

Rather than fight the battle one lawsuit at a time, Wal-Mart and Murphy decided to go to statehouses and try to repeal the markup laws. One of the first targets was Florida, where Wal-Mart hired its first full-time statehouse lobbyist anywhere and recruited the local AARP chapter, the state automobile club and others to form the Coalition for Lower Gas Prices. But they were outnumbered by a better-connected group of gas retailers, and a bill to repeal the markup law died in a Senate committee in April. A month later, Wal-Mart had another setback when Minnesota Gov. Jesse Ventura signed that state's markup law.

'Great Opportunity'

It looked like Wal-Mart had a chance in Wisconsin, where the Senate majority leader, Chuck Chvala, had quietly tacked a repeal of the markup law onto the state budget bill. (The impetus, Mr. Chvala says was a personal experience: a convenience-store chain sued an independent gas station where his wife fills up her car.)

It seemed "a great opportunity," recalls Bob McAdam, Wal-Mart's director of state and local government relations. So Wal-Mart quickly hired two lobbyists to line up other support. The company then formed a Wisconsin version of its Coalition for Lower Gas Prices, urged shoppers in its stores to sign repeal petitions and circulated a study that said Wisconsin gas prices were two to three cents a gallon higher than in Minnesota. Radio commercials asked listeners to help "get rid of this maximum rip-off by repealing the minimum markup."

The gas-station lobby-including state associations representing petroleum marketers, convenience stores and grocers-responded in kind. Its coalition, Mainstreet Businesses for Fair Competition, circulated fliers urging lawmakers to stop "national superstores" that want to "muscle out the competition." The coalition hand-delivered to legislators its own study; its conclusion: States with markup laws have lower gas prices on average.

Wal-Mart grabbed the early momentum, but the petroleum marketers and grocers-whose small-town members often operate a couple of gas pumps-were better known in Madison, the state capital. In 1999 and 2000, the two business groups spent a combined $286,745 on lobbying; Wal-Mart and Murphy spent nothing.

In the end, Wal Mart got what it paid for. Sen. Chvala and other statehouse leaders ultimately backed down on the repeal, saying they needed to get other aspects of the state budget done.

Wal-Mart vows to keep fighting next year-and to reverse a perception that it was a David-and-Goliath battle-the small gas-station owner against giant Wal-Mart. "It's exactly the opposite," says Mr. McAdam. "They are the big guys in Madison and we're the little guys."