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    Hess Sued by Florida

    Allegations of below-cost violations spur retailer complaints, legal action.

    The bitter acrimony between convenience store and petroleum marketing rivals in Florida took a dramatic turn last month after the Amerada Hess Corp. was sued by the Florida Department of Agriculture for allegedly selling fuel below cost.

    The suit against Hess, operator of some 400 convenience stores in Florida, was precipitated by numerous complaints filed with the state agency by The Pantry Inc., operator of 1,800 convenience stores in the southeast, including 510 stores in Florida.

    After examining the complaints, Florida's Department of Agriculture, the agency assigned to enforce the state's Motor Fuel Marketing Practices Act (MFMPA) since 1999, filed a 13-page lawsuit in Circuit Court in Clay County July 16, accusing three company-operated Hess locations of violating the state statute for 300 days over a 20-month stretch ending March 2002. The state seeks unspecified compensatory damages for retailers hurt by the company's pricing practices, a permanent injunction against future breaches and penalties of $750,000, according to the legal action.

    Rick Lawlor, Hess' vice president of sales and marketing, confirmed the company had received the lawsuit and that three locations specified in the suit are company-operated. He declined further comment.

    The Pantry, which has recently voiced its frustration with major oil companies and big-box retailers that are suppressing retail margins, has actively lobbied on behalf of below-cost sales laws. The company said it is vital that Hess and other marketers in Florida operate within the parameters of the Motor Fuels Act to ensure fair competition.

    "We were one of the companies to file complaints with the Department of Agriculture that pointed out what we believed to be below-cost violations over a sustained period of time," confirmed Pete Sodini, president and CEO of The Pantry. "The Florida statute is well defined, with little room for objectivity. We determined our cost and looked at their street price and the difference was substantial."

    Sodini declined to comment on actual fuel prices, which according to the Lundberg Survey averaged $1.30 in Florida in July.

    Florida retailers were quick to admonish Hess's pricing strategy. "We compete with Hess in virtually every market and they are routinely five cents to eight cents cheaper," said Steve DeLuca, president of DeLand, Fla.-based Delco Oil Inc. "They have been a flagrant abuser of the Motor Fuel Marketing Practices Act and now a judge will decide what penalty they will have to pay."

    DeLuca, who operates 80 Delco Express Marts, was a pioneer in developing the initial Florida statute in 1985 after he successfully challenged Racetrac's pricing strategy and won a court-ordered injunction against the chain ordering it to price fuel based on a formula determined by the courts. The bill was amended four times since then.

    "In my experience, chains that sell fuel below cost think they are bullet proof," DeLuca said. "Eventually the system catches up with them."

    Cost Concerns

    The cost of fuel in Florida is based on a formula that takes into account wholesale cost plus transportation. According to the suit, "Hess sold motor fuel to the public at Hess retail outlets in Clay and Duval Counties at retail prices that were below refiner cost."

    Hess is among a number of price-aggressive gasoline retailers in the southeast that include Atlanta-based Racetrac Petroleum Inc. and Bentonville, Ala.-based Wal-Mart Stores Inc., that have been accused of pushing the limits of the law. The suit contends that as a vertically integrated oil company, "Hess can absorb and endure lost profits on fuel at the retail levels by selling at prices which are below refiner cost, because Hess can recoup them at other levels of petroleum marketing such as the wholesale level and the refining level where Hess' retail competitors have no profit centers."

    The Pantry earlier this year became the biggest company to withdraw from the National Association of Convenience Stores (NACS) after the organization declined to endorse a proposed federal below-cost initiative pushed by the Petroleum Marketers Association of America (PMAA).

    "There is a systemic problem in the way the cost of fuel is determined in many markets across the United States and that is to the detriment of many smaller retailers," Sodini said. "While the customer may see a good deal at the pumps in the short term, retailers that sell below cost will eventually put their competitors out of business and control an entire market. Then they will have power to dictate fuel prices at a handsome margin."

    Hess is not the only company The Pantry is accusing of selling fuel below cost. Sodini is in the early sages of filing a complaint against Wal-Mart for selling below cost in the Orlando, Fla. market, he said. A Wal-Mart spokesman declined to comment on its Florida fuel operations or pricing strategy

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