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Service Station Dealers Support AB 2305

The Service Station Franchisee Association (SSFA) supports California's Assembly Bill 2305, "The Level Playing Field for Small Businesses Act of 2012." According to the association, more than 700 of its members live and own/operate service stations in California.Based on taxable sales revenue generated at a average BP ARCO AMPM store, two stations Taxable Sales generated can be compared to one Wal-Mart Store. Its members employ more than 50,000 workers and generate over $ 17.5 billion taxable sales dollars annually in our local community, according to the group. Of note is that more than half of all AMPM ARCO THRIFTY franchisees are currently in pending litigation against BP (franchisor), either in a class action lawsuit or mass action suit in Californian and federal courts across the nation. This is their letter to assembly members of the Business, Professions and Consumer Protection Committee.

The committee will hear public testimony on AB 2305 this coming Tuesday at 9 a.m. in room 437 on the Rotunda side of the Capital Building, Sacramento .(Editor's introduction.)

Dear Honorable Assembly member Mary Hayashi and the Business, Professions and Consumer Affairs Committee members, this letter is to ask for your much needed support in voting 'YES' on AB 2305, 'The Level Playing Field for Small Business Act of 2012.' I am not only a franchisee but also the current President on the board of the Service Station Franchise Association, (SSFA) representing franchisees who make up BP / ARCO / AMPM / Thrifty sites. There are more than 1,600+ BP ARCO AMPM Thrifty Franchises across the country.

A franchise model is only successful when and only when both Franchisor and Franchisee benefit. AB 2305 is designed to address problems in the franchisor-franchisee relationship. As it stands today, most current laws are protecting big business not the small business owner or franchisees.

  • Franchisees are responsible for 760,000 businesses in United States.
  • Franchisees are responsible for creating 18 million jobs in United States.
  • Franchisees are responsible for 14% of all private sector employment in United States.
  • Franchisees are responsible for $ 500 billion in payroll annually in United States.

AB 2305 seeks to level the playing field - not to make it easier for franchisees to escape their contractual obligations to the franchisor. It will benefit all franchise systems and ensure that franchisees can continue to offer excellent services to their customers, employ their workers, and give back to their communities.

We have experienced numerous problems with our corporate franchisor. These issues include, for example:

1) First and foremost, our Franchisor refuses to talk to our independent franchisee association (SSFA, INC.) let alone deal with us in good faith. To date, the SSFA, Inc., which was established in 2008, has not been able to sit down or communicate with BP representatives to discuss any franchisee issues or concerns.

2) Our franchisor requires us to buy products/services at high prices and receives payments from the suppliers. BP mandates the use of only an approved list of vendors. These vendors are chosen based on which Vendors agree to pay BP a kickback for the privilege of appearing on the list. BP has failed to allow franchisees to select alternative vendors, even though the franchise agreements provide for such a right. Significantly, the kickback procedure creates a situation where vendors must sell products to ARCO franchisees at a rate higher than they sell to other customers in order to re-coup the cost of the kickback. In many circumstances, this added cost results in the franchisees paying more for products from the "approved vendors" than they would pay for the same product at another retail store. For example, due to kickbacks paid on certain soft drink products, franchisees could obtain a cheaper per bottom cost from Costco than they receive from the only approved vendor. In addition to the kickbacks, BP makes an additional profit on the sales of the franchisees by charging a royalty on all goods sold. These actions not only harm the franchisee but force me to raise prices for the consumer as well. Once again, customers lose because they pay higher prices caused by vendors artificially raising prices to recoup the kickback. The best evidence of harm is that the same vendor will charge lower prices for the identical item to non-BP customers and that BP does not approve alternative vendors.

Further example is the current Chase ATM deal. Chase was forced upon franchisees but franchisees no longer see 40% of revenue because Chase customers are exempt from any ATM fees. BP received a high kickback for the "exclusive" right to put in its ATM machines.

3) Our franchisor grants and approves additional new sites so close to current franchisee locations that it reduces both the gross revenue and the net profit of existing franchised locations. We are already in a very competitive business working on pennies and now due to their actions we have to not only compete with other service station brands-our business partner, the franchisor-more and more often.

4.) Our franchisor's business model in regards to Fuel Zone Pricing is an arbitrary standard that is often applied to one franchisee and not another for the same fuel product from the same terminal.

BP pre-determines what it wants retail pricing to be on the street so that franchisees make 8-10 cents a gallon. However, if the franchisee raises prices beyond what BP wants, BP will just raise the wholesale price it sells to the franchisee so the franchisee continues to make 8-10 cents. This creates a disincentive to raise or lower prices because BP manages retail pricing despite prohibitions/laws doing so.

BP also manipulates fuel pricing by deliberating changing delivery times based on wholesale gas prices. BP announces daily price changes at 1 pm effective at 3 pm that same day. If pricing is higher, BP will delay deliveries after 3pm. Conversely, if pricing is dropping, BP will pick up gas before 3 pm to charge the higher prices. Additionally, if pricing is dropping, BP tends to drop excess fuel to franchisees and conversely, if pricing is higher, BP delays fuel deliveries to maximize revenue for itself, even though this practice has no rational relationship to market forces.

5) Recently, our franchisor forced its franchisees to use a Retalix point of sale and back-office system to electronically run the entire business. Through beta testing and thereafter, BP had actual knowledge that the system was defective. The system shuts down, sometime for hours at a time, during which no transactions can be processed at the AM/PM stores and no gasoline can be sold. The system fails to track and on occasion mischarges for transactions, resulting in product being received but not incoming money in exchange. In addition, promised features such as an inventory tracking system and station reports and metrics are absent. Despite these failures, BP has charged franchisee owners the full price for the system they mandated at $30-40 thousand dollars per site. BP has also failed to remunerate franchisees for the losses suffered due to the defective system. BP knew the system was defective when they forced franchisees to install the system because they participated with test stations during a beta test process where the system displayed the same symptoms suffered after the full rollout of the system. As recently as March 30th, now known as the historical record breaking date for California Lotto Mega Tickets Sales with the jackpot of $640 million dollars, my site Retalix POS crashed more than 5 times. How can I continue in business like this?

6) 'A Duty of Competence' because that is what it is called in AB 2305. A duty of competency would help our system immensely. As stated above, our franchisor's recently mandated POS Retalix Purchase not only hurts the consumer but also damages our business equity. Every year since I opened my business, I have lost equity and business value. In 2008 I started with 75 employees, but as of today I can only operate and cash flow that supports 32 employees. My transaction count has gone down on an average of 20,000 transactions per month since installation of the Retalix POS System.

7) Our Franchisor routinely changes the financial and material terms of our operation contracts. I don't know today what my contract will look like, or what new equipment, I will be forced to purchase in the future. How am I to plan my business operations, manage employees, and/or my family's future?

8) As the year 2005 drew to a close, BP faced an ugly reality. It has a number of company owned/company operated ("COCO") gas stations with attached BP Connect and AMPM convenience stores in the Chicago area and in west of the Rockies, and it was losing lots of money operating them. BP pegged its loss at over $100 million per year. It had tried unsuccessfully to stem the tide of red ink, and its projections were that things would likely get worse not better, as all three of the main financial components of the stations (Fuel Profits, C-Store Profits and Real Estate appreciation) were trending in the wrong direction.

BP's solution to its problem was to find a way to foist these money-losing stations on unsuspecting franchisees. There were, however, two big problems with this plan. First, it had to find a way to disguise the stations' poor financial performance. Second it had to come up with a viable franchise concept to offer prospective franchisees (or hide the fact that it did not have one). It achieved these objectives only by weaving a web of misstatements, half-truths and omissions that concealed the truth from its prospective franchisees.

BP knew quite well that sales data alone would not be enough to convince prospective franchisees to buy, because a business' success in not measured by its gross sales but by the profit it makes on those sales. Anyone willing to lose money on sales can out-sell its competitors. BP knew that it had to

give prospective franchisees more than just sales data; it had to give them a way to project the profit they could expect to make on that level of sales. BP and its sales agents, NRC, did this by telling prospective franchisees to look at NACS industry average profit margins. BP's Statements to prospective franchisees on the subject of potential were false in two related ways. The historical sales data was a misleading half-truth because BP did not admit to prospective franchisees that it had to generate large sales volume only by pricing its fuel at well below industry average margins, at times so low that is was losing money on the sales. And by giving prospective franchisees its historical volumes and telling them to look at the NACS averages BP wanted them to believe that they should expect to achieve industry profit margins on similar or growing sales volumes.

In conclusion, franchising as a marketing method can create jobs for many people and their communities. As stated above franchisee are 14% of all private business sector creating over 18 million jobs in United States. We need to protect the small business owners that have spent, in many times, their life saving and out their livelihood on the line not just for themselves but their employees as well.

AB2305 is good for small business because it gives franchisees the opportunity to expand. AB 2305 is good for franchisor because the more their franchisees numbers and businesses grow, the more franchisors and our local economics benefit. Franchisor franchisee relationship only works when both sides benefit.

So, I ask you again to please vote 'YES' on AB 2305, the 'Level Playing Field for Small Business Act of 2012'.

Sam Hariz (Los Angeles)
Service Station Franchise Association, Inc.

Ali Mazarei (Riverside, CA)
Vice President
Service Station Franchise Association, Inc.

Cc: (California Assembly Members)

Bill Berryhill, Vice Chair — San Joaquin, Stanislaus Counties
Phone: 916‐319‐2026 Fax: 916‐319‐2126

Michael Allen – Napa, Solano, Sonoma Counties
Phone: 916‐319‐2007 Fax: 916‐319‐2107

Betsy Butler – Western LA County
Phone: 916‐319‐2053 Fax: 916‐319‐2153

Mike Eng – East LA County
Phone: 916‐319‐2049
Fax: 916‐319‐2149

Curt Hagman – LA, Orange, San Bernardino Counties
Phone: 916‐319‐2060
Fax: 916‐319‐2160

Jerry Hill – San Mateo
Phone: 916‐319‐2019
Fax: 916‐319‐2119

Fiona Ma – San Francisco, San Mateo Counties
Phone: 916‐319‐2012
Fax: 916‐319‐2112

Cameron Smyth – North LA, Ventura Counties
Phone: 916‐319‐2038
Fax: 916‐319‐2138

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