Combatting propane’s decline

March 13, 2015 By and    

The industry is in a slump, and collaboration is the key to overcome it.

The long-term downward gallon trend is the most significant issue facing our industry’s leaders.

Fewer gallons sold means higher propane margins must be earned to offset the gross margin being lost from the decline. This makes propane less competitive to electricity. Then, the higher cost of doing business because of inflation and other factors dictates expense cuts. And that generally translates to poorer customer service and fewer resources for business development and marketing.

As an industry, we are in a funk. Our industry leadership is tasked with getting us back on a growth path. This means the problems causing the gallon decline must be identified and solved. Any problem-solving activity requires that one begin an accurate identification of the problem.

The adage “a problem well defined is half solved” fits. Yet, our industry’s problem-solving effort has been focused on factors beyond our control. For example, some of the noted contributors to the industry’s falling sales trend are a slower economy and housing market, customer conservation, energy competition and increased appliance efficiency.

While these factors are valid, merely taking a scapegoat approach to understand our industry’s decline will only keep us mired in lackluster performance because the factors within our control will not be addressed.

If propane industry leaders want to take a proactive approach to gallon-growth turnaround, we should focus on these key factors, listed in order of importance:

1. Propane marketer growth priority. The propane marketer is the industry’s growth machine. Nothing happens until a propane marketer converts a customer to propane or adds a burner tip or spark plug.

By most estimates, less than 20 percent of marketers grow gallons organically by adding burner tips and spark plugs. Instead, the industry has renounced its growth strategy to the plumber, HVAC contractor and big box stores, none of which are generally favorable to propane.

We’ve become an industry largely of gas haulers. The result is that propane marketers rely on taking their competitor’s customer to grow. As one industry leader put it, “We’re cannibalizing ourselves.”

2. The Propane Education & Research Council’s (PERC) effectiveness. PERC serves a vital role in our industry’s growth because it does for us what we, as individual companies, would have great difficulty doing. PERC’s market research, product development and propane market awareness are essential for growth and market development.

The problem is that PERC’s main customers, propane marketers, do not use PERC resources to help grow their business, as evidenced by recent Benchmark Council research. PERC’s effectiveness is totally dependent on the propane marketer who is engaged in growth activities using its resources.

3. Propane autogas. These gallons have been flat since 2004 and represented 1.3 percent of the industry’s gallons in 2013. This is surprising, considering the press attention and investment to grow this market over the past decade.

Many pin their hopes for industry growth on the autogas market. But as evidenced by the trend, this is a difficult market to break into and serve. Part of the problem is that propane awareness among the clean energy activists remains low.

The industry’s growth turnaround appears to be difficult and slow. For the three largest master limited partnerships (MLPs), which represent 31 percent of our industry, total capitalization per gallon creates residential margin pressure and cost-cutting to earn the cash flow to pay interest and dividends.

The independent marketers, who represent a major share of the industry, generally lack the marketing and business development resources to organically grow customers, burner tips and spark plugs.

Industry growth requires the collaborative effort of the propane marketer, the National Propane Gas Association, PERC, distributors, manufacturers and state associations. Effective collaborations may be difficult, but not impossible to create.

There might be a bright future for the propane marketer who effectively uses the industry’s resources, has a culture that delivers customer service, prices competitively and is resourced to organically grow new customers.

The question of whether we, as an industry, can capitalize on our growth opportunities to reverse our industry’s decline has yet to be seen.

Randy Doyle is CFO for Blossman Gas in Ocean Springs, Miss. He can be reached at rdoyle@blossmangas.com.

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