LOW-COST VENDORS PUT SQUEEZE ON FUEL SELLERS.

Byline: John Seewer Associated Press 

It used to be that Dave Freitag's Sohio gas station had three pumps, a repair shop and a candy bar rack. Today his British Petroleum station sells fresh fruit, lottery tickets and Blimpie sandwiches, but doesn't offer oil changes.

``This is what the oil company wants you to have, these profit centers,'' he said. ``We put the lottery machine in to subsidize the gasoline.''

But even with these ``profit centers,'' independent gas station owners like Freitag fear they are being pushed out of business by megastores and grocers who can afford to sell fuel cheaper, sometimes below cost.

``They can undercut me by 8 cents a gallon and still make a penny,'' Freitag said. ``This is the worst it's been in 20 years.''

Discount superstores like Wal-Mart are opening gas stations in test markets around the country, adding to the one-stop shopping concept that has revolutionized the retail world. At Albertsons, the gas pumps advertise the weekly food specials and dispense store coupons.

``If you get a certain number of fill-ups, you can get a free dozen eggs,'' said Jenny Enochson, a spokeswoman for the supermarket chain. ``The response has been very positive.''

Costco, the warehouse-club giant with nearly 300 stores, often sells its gas below $1 a gallon - for discounts as great as 15 cents off other merchandise for each gallon. Most of its stations have no restrooms and no air pumps. And they don't take cash, only allowing members to use Costco credit or special gas cards.

Tim Hamilton, a spokesman for the Automotive United Trades Organization, which represents gas station owners in Washington state, says Costco's motives are obvious.

``If you could figure out a way to increase membership cards, you're going to increase sales,'' he said. ``One of the ways to do that is to offer cheap gas.''

The megastores can strike better deals with wholesalers than independents, who don't carry much negotiating clout and are often collared by long-term contracts with the oil companies.

Hamilton believes that the megastores will drive out the smaller gas stations and eventually increase prices. Independent dealers fear that, too.

``You sympathize with these guys, but the fact is the economy is changing,'' said petroleum economist Philip K. Verleger Jr. of Concord, Mass. ``It's a trend that's occurring across the country.''

But he said there is no evidence that prices eventually will go up. He said the same argument was made and disproved when supermarkets invaded the territory of mom-and-pop groceries.

``For consumers who can plan ahead and buy their gasoline at these stations, the price will be lower,'' Verleger said. ``On balance, I think the consumer will be a lot better off.''

Meijer Inc., with superstores across the Midwest, has gas stations at 100 of its 117 locations - giving customers a chance to pick up a loaf of bread, T-shirts and fuel in one stop.

``It's where I buy all my gas,'' said James Mitchell of Toledo, Ohio. ``It seems to be good gas and it makes it convenient because you get everything at one spot.''

Even with the same number of pumps, Freitag said, his BP station sells less gas today than it did 10 years ago. He understands that the future is uncertain.

``I don't think the oil companies are trying to put us out of business,'' Freitag said. ``I just don't think this is an issue with them. This isn't just a BP thing, it's going on with Sunoco dealers, Shell dealers. It's industrywide.''

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PHOTO A signs shows prices at a gas station at a Meijer store in Toledo, Ohio. The entry of store chains into the market could hurt mom-and-pop operations.

David H. Weaver/Associated Press