Hess's pricing has rival gas stations fuming

Fast-growing Hess Inc. offers nearly everything a consumer could want in a gasoline station: low fuel prices, cheap milk and soda, and even free air for your tires.

But competitors say consumers flocking to Hess gas pumps are being shortsighted. They say New York City-based Hess is selling gasoline below cost at many of its locations in an attempt to drive its rivals out of business.

``Low prices are good until such time that competition is eliminated," said Paul O'Connell , executive director of the New England Service Station and Automotive Repair Association, which has more than 400 members.

O'Connell said Hess is often able to sell gasoline at its pumps below the wholesale price his members have to pay for their fuel. O'Connell said he is trying to persuade district attorneys to prosecute Hess for violating a state law barring below-cost gasoline sales, so far to no avail.

Richard Lawlor , vice president of retail marketing for Hess, said the company is taking a much smaller profit margin on gasoline to drive people into its convenience stores, where profit margins are higher.

``We're in the retail business," Lawlor said. ``We need to drive people into the store. We're relying on the stores to carry the profit."

Hess is a rarity in the oil business. While most other companies have scaled back their direct involvement in the low-margin service station business, Hess is expanding rapidly, building company-owned and -operated gas stations and convenience stores up and down the East Coast.

Oil exploration and refining still account for 96 percent of Hess's operating profit, but the company is investing heavily in its service station business. It operates more than 1,400 stations from New Hampshire to Florida.

In Massachusetts, Hess is growing fast even as the overall number of gas stations is declining -- from about 4,800 a decade ago to 2,800 today. Hess owned six stations here in 2000, but has 108 today, through new construction and acquisition of the Merit and Gibbs chains.

Lawlor says Hess still has a lot of room to grow here. He said that there is no target for the number of Massachusetts stores, but that the state could one day have as many Hess Express stations stores as Florida, which has more than 370.

Last week, on the very day that newspapers were reporting that gasoline prices in Massachusetts were cracking $3 a gallon for the first time since Hurricane Katrina, the Hess Express on Gallivan Boulevard in Dorchester was charging $2.95 a gallon for regular unleaded. Chainwide in Massachusetts, prices ranged from $2.94 to $2.99 a gallon, Lawlor said.

Customers pulled in and out of the Gallivan Boulevard station at an incredible pace. Lawlor said a typical gas station pumps 90,000 gallons a month, but a Hess Express in Massachusetts pumps more than 225,000 gallons.

Hess ranks sixth in Massachusetts in terms of total stations, but it ranks third in gasoline sales volume, trailing only Cumberland Farms/Gulf Oil and Exxon Mobil, both of which operate far more stations.

P.J. Trapani of Dorchester says he comes to the Hess Express station all the time. ``They usually have cheaper prices here," he said as he pumped gas into his pickup truck. ``Gas is the main reason I come here."

But the Hess convenience store offered other enticements to customers. It was selling Coke 12-packs at two for $5, Coke 20-ounce bottles at two for $2, and Hood 1 percent milk for $1.99 a gallon.

All of those prices were well below the prices being charged by the CVS and Exxon stores across the street and the Stop & Shop Supermarket a quarter-mile away.

The Hess station also offered free air, something for which most other stations charge 50 cents or a dollar, if they offer it at all.

On other items, however, Hess's prices were higher than the competition. Pringles, Oreos, Energizer batteries, and Tylenol all cost more at the Hess Express. A 13-ounce can of Maxwell House coffee was $4.89 at Hess, compared to $3.79 at CVS, $3.99 at Exxon, and $3.49 at Stop & Shop.

O'Connell of the New England Service Station and Automotive Repair Association said Hess is able to undercut the gasoline prices of his members because it finds and refines the oil products it sells and doesn't have to pay middlemen .

``Because they're a refiner, they can pretty much say the cost is whatever they say it is," he said.

O'Connell said his members believe Hess is using its market power to drive them out of business. Once the competition is gone, O'Connell said, Hess will be able to raise prices at will.

Robert Marlowe , a retired firefighter from Dorchester who said he always buys his gas, newspaper, and Megabucks ticket at Hess because the company charges less for fuel than other stations, seemed surprised that Hess's long-term goal might be market domination.

``I never really thought about it," he said.

Bruce Mohl can be reached at mohl@globe.com.