중앙데일리

Why are discount stores operating gas stations?

The government hopes that the move will help lower fuel prices.

Jan 06,2009
A customer fills up his car at the gas station at E-Mart’s Guseong branch in the city of Yongin, south of Seoul, on Dec. 22, the day that the station opened. The gas station is Korea’s first to be operated by a discount store. [NEWSIS]

Self-service gas stations attached to large discount stores are a common sight in the United States and many European countries.

But have you ever wondered why discount stores in Korea don’t also sell gas?

E-Mart, the country’s biggest discount store chain, opened a gas station at its Guseong-dong branch in Yongin City, Gyeonggi, late last month, a national first.

Until September, the government had not allowed discount stores to operate gas stations. This regulation was changed to boost competition among gas stations and, accordingly, to bring about fuel price drops through the competition.

The move came after consumers suffered greatly from oil price hikes in the first half of 2008.

At E-Mart’s Guseong-dong gas station, gasoline prices are about 100 won (8 cents) less per liter than other stations in the area.

How is this possible?

First, the gas station does not provide extra services or complimentary gifts like tissues or water, which most individual-owned gas stations offer in order to gain goodwill among customers. The E-Mart name already has strong brand recognition.

In addition, the gas station does not have to pay high rent, as it uses land owned by the discount store branch.

The gas station appears to be doing well thanks to its low prices. Shin Heon-cheol, chief executive officer and vice chairman of SK Energy, which supplies gasoline to the E-Mart gas station, said in an interview last week that the Guseong-dong gas station sells 300 drums per day.

It is a surprising figure, given that an average local gas station sells 1,022 drums per month, according to data compiled by the Korea Oil Station Association.

Does this mean that the gas station will be a cash cow for the discount store? Not actually, most analysts say.

As the discount store’s gas station offers fuel at lower prices than its rivals, it does not see high margins.

This leads to the question of why discount stores want to operate gas stations.

It is because gas stations can be a good advertising tool, attracting more consumers to the discount stores.

E-Mart plans to open three or four more gas stations this year. Another big discount store, Tesco Homeplus, plans to open a gas station in
Gyeonggi this summer, supplied with fuel from GS Caltex, the nation’s No. 2 oil refiner.

In many other countries, including the United States, the United Kingdom and France, gas stations operated by discount stores are common.

In particular, U.K.-based Tesco, the parent company of Korea’s Tesco Homeplus, is the biggest distributor in Britain and a major gasoline retailer. More than half of its branches have gas stations.

But it is uncertain whether Korea will see the same trends. Lee Kyung-sang, CEO of Shinsegae E-Mart, said at the opening ceremony of the Guseong-dong branch’s gas station on Dec. 22, “It is difficult to say that this discounter/gas station system will have any effect on stabilizing overall consumer prices because there are only 20 or so E-Mart branches that have enough nearby land to build gas stations.”

In addition, gas stations operated by discount stores are facing harsh opposition from 9,000 privately owned gas stations.

The Korea Oil Station Association, whose members are the owners of such gas stations, has held several demonstrations in protest at the government’s decision to allow discount stores to operate gas stations. They said they are even considering a boycott against the discount stores that enter the gas station business.

“If big discount stores sell oil products for 100 won less per liter than the neighboring gas stations, it will be as good as killing small gas stations operated by individuals,” Ham Jae-duck, president of the association, said in a press meeting in August.

“Each gas station’s monthly sales have fallen by half in the past 15 years due to tight competition.”

The government has taken another move to lower fuel prices. Beginning in September 2008, local gas stations have been allowed to sell fuel from more than one refiner, even if the sign above the shop implies otherwise.

The Fair Trade Commission has abolished the so-called pole sign system, which bans such sales.

There are two main types of gas stations in Korea. About 3,000 are operated by the nation’s four refiners, including SK Energy and GS Caltex. Each of these stations deals exclusively in the refiner’s products.

The other 9,000 stations are operated by individuals, most of which deal in the products of a single refiner and use that refiner’s sign.

Before September 2008, the gas stations had been allowed to sell fuel from multiple refiners. But they had to either put up the signs of all the refiners that they dealt with, or no sign at all.

According to the FTC, most gas stations didn’t want to do business without a refiner’s sign because it is difficult to gain consumers’ trust this way.

But they were also reluctant to do business with multiple signs, because refiners did not allow such stations to participate in their consumer mileage programs, which rewarded customer loyalty.

Accordingly, the antitrust watchdog agency has allowed gas stations to sell more than one refiner’s products under the sign of a single refiner.

But such stations have to clearly indicate that they are selling products from multiple companies, the antitrust agency added.

“The sign system was introduced initially to encourage refiners to focus on improving their product quality, but actually it has been used as a tool to convince gas stations to make exclusive deals [with the refiners],” the FTC said in a statement at that time.

The Korea Oil Station Association welcomed the decision, saying in a statement, “Our hope of 16 years has finally come true.”

The association had demanded that the system be abolished as it keeps refiners in a dominant position over gas stations.

But many analysts doubt that the move will cause a significant change in the fuel distribution structure, as refiners still have much more power than gas stations operated by individuals in supply price negotiations.

Last month, the FTC ordered the four refiners to abolish the practice of forcing gas stations to make exclusive deals with them.

On the other hand, oil refiners say that the new system will have no effect, because their margins are already low.

They argue that they have been getting only 15 won of operating profit on average from the sale of one liter of gasoline or diesel.



By Moon So-young Staff Reporter [symoon@joongang.co.kr]







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