Gas Station Franchisees Feeling Squeeze

Petroleum franchisors are shifting strategies in how they distribute gas and the new plan is likely to hurt franchisees. Franchisors like BP are beginning to sell gas stations …

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Petroleum franchisors are shifting strategies in how they distribute gas and the new plan is likely to hurt franchisees. Franchisors like BP are beginning to sell gas stations with restrictive covenants that stipulate that the purchaser must buy the franchisor’s product for a particular term, which eliminates a franchisees rights to convert the property to more profitable use if need be. What’s more, franchisors are relying more on the “jobber” model, which involves selling the rights to sell gas to a middleman (jobber) who then marks up the price for the franchisee. The double whammy is expected to impact interest in the industry. For more on this continue reading the following article from Blue MauMau.

A shift in franchisor strategy coupled with margin pressure has led to difficult times for gas station franchisees.

Speaking at the ABA Petroleum Marketing Attorneys’ Meeting in Washington DC, an industry panel noted the recent decisions by petroleum franchisors to sell off properties with deed restrictions, and how that trend combined with narrowing franchisee margins to cause franchisee property owners to seek to avoid distribution contracts.

Even in a depressed real estate market, land may have more value as a development site than as a petroleum retail operation. However, oil companies selling their property portfolio customarily attach restrictions making it impossible to sell the property to the highest bidder.

As one example, the property in the photo is being sold by Sunoco for $775,000 with a requirement for a long-term (10 or 15 year) contract to purchase the franchisor’s branded petroleum product. Other properties are for sale which have a 40 year deed restriction against petroleum or convenience store use.

Exacerbating the difficulty for some franchisee-owners is the move toward a "jobber" distribution system.

The jobber model is one in which the franchisor does not sell petroleum directly to the franchisee. Instead, a middleman purchases the rights to distribute petroleum to all of the franchisees within a particular territory.

Because the middleman purchases at wholesale from the franchisor and adds a mark-up to the franchisee, there can be a complaint when the jobber is also a franchisee-dealer: in such a case, the jobber can underprice fellow franchisees.

This has prompted franchisees to seek to buy from a different jobber of the same franchisor; the argument is that the franchisor (who is the beneficiary of the restrictive covenant) is making the same amount of money and therefore is getting the benefit of their covenant. An example of this is Double Diamond Properties v. BP [487 F.Supp.2d 737 (E.D.Va. 2007)].

Double Diamond illustrates the value of a supply contract to the franchisor: the station was offered for sale at $835K with no restrictive covenant, but $642K with a 10-year restrictive covenant. Of course, the franchisor got the benefit of supplying the retailer regardless of which jobber delivered the gas, and hence the franchisee’s desire to obtain product from the cheapest jobber which carried BP gas.

For the most part, courts have not had much sympathy for franchisees in such circumstances.

One exception was BP Products North America v. Stanley [669 F.3d 184 (4th Cir. 2012)], where the franchisee argued that the restrictive covenant should be analyzed in accord with the standard for a restrictive employment covenant. The trial judge held for the franchisee–but the trial court was subsequently overturned by the 4th Circuit.

This article was republished with permission from Blue MauMau.

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