Q: As I recall, a Minnesota state regulation forbids gasoline to be sold for less than cost but there is no upper limit. When a station sells for 40¢ per gallon less than neighboring stations, they are no doubt still making a profit. Obviously, the other stations are making an additional 40¢ profit per gallon and competition is a good thing, but are they gouging the public?
These may be conservative numbers but as an example, if a station serves 25 fuel customers per hour and each customer purchases 15 gallons, then in a 12-hour period an additional $1,800 in profit is realized. Are we being gouged at the pump?
A: This question arrived last month shortly after The Free Press published a news item about the resumption of a gas war in St. Peter. The Clark station on Highway 169 was selling gas at $2.46 per gallon, and the Kwik Trip stations in St. Peter had dropped their price to $2.48, even as most Mankato-North Mankato stations were pricing regular gasoline at $2.89.
The situation has since changed. On Friday morning, Clark was at $2.97, other St. Peter stations were at $2.99 and Mankato had stations offering fuel for as little as $2.79.
As for how the sometimes huge disparities come to be, Ask Us Guy does not know. Going back decades, The Free Press has struck out nearly every time when attempting to get gas station owners or managers to talk about how they set prices. They won’t comment when there’s a gas war and the price is low. They won’t comment when Mankato-area prices are strangely higher than those in nearby towns.
For that reason, Ask Us Guy can’t say with certainty that the reader’s assumptions are correct. It seems logical, as the reader suggests, that a station would not selling fuel at a loss. But it’s not an impossibility.
The motivation might involve trying to change the buying habits of local drivers by offering, for a time, the cheapest gas in town. Or maybe the owner of one station believes a competitor is financially unstable and a short gas war would put the other guy out of business. Or maybe the owner was simply trying to establish informally who the big dog in town is — the one that decides the price of gas that other stations should match.
Or maybe a gas war involves simple stubbornness. Two station owners refuse to allow the other to offer the cheapest gas and each keeps adjusting his price to a penny or two below the other guy’s, ratcheting the price every lower even if it means losing money for a while.
One wouldn’t think that a business could remain solvent if it sold products at below cost for very long, but that isn’t necessarily true. For instance, what if the owner of a chain of stations decided to undercut a competitor in a single small town? The chain owner could presumably afford to lose money at one station as long as profits were continuing elsewhere.
The reader mentioned state regulations prohibiting the sale of gas at below cost, seeing that as evidence that the St. Peter stations were still making a profit when selling gas at $2.46 or $2.48 per gallon — and the Mankato stations were therefore making an excessive profit by selling at $2.89.
While the law has been eased a bit, it still exists. In the past, it was commonly called the “minimum markup” law because it required stations to sell gas at a price that was at least the cost of the gas, plus the gas taxes, “plus the lesser of 6 percent or 8 cents.” (Stations are allowed to sell below that level as a special promotion, but they can do it no more than three days each calendar quarter.)
The law was created to protect small operators from unfair, anti-competitive practices by large chains.
So, yes, Minnesota once mandated that stations must earn a 6% profit on each gallon sold. State law still has an “Unfair Gasoline Sales” provision, but it was amended in the last legislative session to drop the 6% markup requirement. So stations can now sell gas at cost under Minnesota law. And, under the changes signed into law in May, they can now sell below cost “through the use of coupons, loyalty programs, membership-based pricing programs, or promotions or programs of similar import … .”
The St. Peter gas war didn’t involve coupons or loyalty programs. Any driver could buy the cheap gas. So were Clark and Kwik Trip stations in St. Peter violating the law? Maybe. But the Minnesota Department of Commerce typically doesn’t investigate potential violations of the law unless a complaint is filed.
That happened in Mankato in 2015 when a smaller convenience store owner complained about local gas prices dropping about 25 cents below what was being charged in most other parts of the state. The Department of Commerce launched an investigation of pricing by the Sam’s Club and Fleet Farm fuel stations in the summer of that year, and the local gas war pretty much immediately ended as soon as the investigation began. Months later, both Sam’s Club and Fleet Farm were found to have violated the law and were each fined $40,000 — with each fine to be cut in half if they avoided further violations of the law.
Contact Ask Us at The Free Press, 418 S. Second St., Mankato, MN 56001. Call Mark Fischenich at 344-6321 or email your question to mfischenich@mankatofreepress.com; put Ask Us in the subject line.