Retail/mike1st/mark2nd
By EDVARD PETTERSSON
Staff Reporter
Atlantic Richfield Co. used a simple marketing strategy to become the dominant gasoline retailer in the Western United States: It charged less than the competition.
BP Amoco, which is taking over the L.A.-based oil company, uses a full-service, premium-price approach.
One of these strategies will survive after the merger of the two companies. But which one?
At a press conference last week, Doug Ford, BP Amoco’s executive in charge of downstream operations, said it was too early to tell what will happen with Arco’s retail operations. And Arco spokesman Paul Langland said, “It could be up to at least a year before any decisions will be made.”
But various industry observers are already predicting everything from no change, to gradual change, to radical change.
“There is no question that the Arco name will not be used and that BP Amoco will abandon the low-price, no-frills strategy,” said Ben Brockwell, editor of Oil Price Information Service, an industry trade publication. “And this will happen quicker than you think. BP and Amoco are pricey brands, and you will see the credit card back. The merger is welcome news for Chevron and other West Coast retailers because BP Amoco will not use price to retain market share, but they will market themselves as a premium brand and raise their prices.”
Other analysts were more cautious, pointing out that Arco’s retail approach has been an unqualified success. Besides, BP Amoco, which is acquiring Arco, has little experience selling gasoline on the West Coast, which is a unique market.
Because gasoline prices are substantially higher than elsewhere and, on the whole, people drive more, consumers here tend to be more price conscious.
“BP will be delighted to leave it exactly as it is,” said Joel Fischer, an analyst with Burnham Securities. “They will be pleased that Arco’s retail strategy has worked so well. They capitalized on the low cost of crude oil from Alaska, and they’ve marketed themselves exceptionally well. I suspect that the only people in management at Arco who may survive the merger are the ones in marketing.”
Fischer, for one, expects BP Amoco to start competing on price. “Amoco used to be this old-fashioned, full-service operation, which stressed customer loyalty,” he said. “But on the West Coast, price will be what matters.”
Another possibility is a go-slow approach. “You can’t change brand recognition overnight,” said Paul Chen, an analyst with Lehman Brothers. “Not much will change at first, but over time they very well may.”
Gradual change is also the prognosis of George Babikian, the retired Arco executive who originated the then-revolutionary approach to gasoline retailing.
“BP would be less than prudent not to continue with Arco’s marketing strategy,” said Babikian. “They might keep the Arco name for three years, and gradually introduce changes.”
It was Babikian who, as president of Arco Products Co., eliminated Arco’s credit card and introduced the company’s cash-only policy. In addition, all stations were converted to self-service, and service bays were replaced with AM/PM mini-markets.
“We eliminated the credit cards to cut our costs and lower the prices,” said Babikian. “By introducing the AM/PM mini-markets, we gave dealers another source of income than gasoline sales. The low margins on gasoline sales were compensated for by high margins on the mini-markets’ sales, which in turn enabled us to charge leasing rates that were more compatible than before with the value of the properties.”
Babikian’s no-frills approach enabled Arco to sell gasoline at considerably lower prices than the competition, eventually making it the largest gasoline retailer on the West Coast. Currently, Arco has roughly 20 percent of the West Coast market and operates more than 1,700 gasoline stations in six Western states.
“The strategy worked,” said Babikian. “In 1994-95, after I had retired, there was a brief glitch when the company brought in some consultants who said they should raise their prices. But when they saw their market share go down, they soon changed back.”
Arco’s pricing strategy has been helped by the company’s access to huge quantities of crude oil from its Alaskan fields, making it less dependent on imported foreign oil. For example, Arco was able to keep its gasoline prices down during the Gulf War in 1990, when many of its competitors had to raise their prices in response to an increase of the price of crude oil on the world market. Arco’s decision not to raise prices at that time further boosted its market share, as customers switched from other, more-expensive brands.
