Dealing with propane retailer’s issues

Each year, retail propane marketers face a whole new set of issues. In 2005, wholesale propane prices seemed to cause the most headaches, pushing retailers to look at new ways to become more profitable. Below are a few of the issues and possible ways to deal with them.

Daniel Dixon Propane Resources

Acquisition Trends — What was up in 2005 with acquisitions? Not a lot. About half the number of transactions closed in 2005 as did in 2004. While the market was wrought with buyers, acquisitions were down for a couple of reasons: a warm winter caused decreased profits and therefore different strategies for some buyers, while others slowed down on acquisitions or changed their acquisitions staff.

Two of the largest independents in the country were acquired as two buyers dipped into new geographies, but many buyers focused on areas where they already had market presence.

Delivery Fees and Other Ideas — More and more companies are beginning to charge some type of delivery fee. While $2 or $3 per delivery may seem negligible, it adds up when you apply it to the number of deliveries you make per year.

Another idea? Several retailers are charging $1.759 per gallon of propane. Just like gasoline stations, retailers are adding the extra .009 at the end of the price. In effect, they are adding 1 cent per gallon (cpg) to the price and their margin.

Higher Steel Prices – The cost of a 500-gallon tank has increased about $250 over the last few years. For companies adding 100 customers annually, that’s $25,000 and a difficult pill to swallow. The increased cost has caused an increased payback time. Assuming 15 cpg EBITDA, it can now take 7.5 years to reach payback. The increased price of tanks is also likely causing your company’s interest costs to be higher.

Asset Use — As a reaction to higher steel prices, many companies have looked at how their assets are being used. If an account has a 330-gallon tank but only uses 50 gallons annually, they are starting to see a tank usage fee, higher rent or have gotten a smaller tank. Many accounts that used little to no volume have probably been purged from the customer base.

Wholesale Supply — During the past few years, retailers have had to deal with a trend of more price volatility and much higher prices altogether. Retailers are more aware of the tools available to hedge their wholesale costs, but are still not using the tools, other than looking into physical hedges.

Today, Mt. Belvieu is over a dollar per gallon. The low in the past 12 months was January 2005 at 73.56 cpg. The trend this year has been that retailers who purchased fixed-price contracts in the spring and summer locked in less propane than in years past. And they have been using product in the fall rather than the typical January through March time frame, praying that the market goes down before the first quarter.

Employee Incentives — Do you see this as an expense or something you wish you would have done sooner? More and more companies are offering incentives. While some offer incentives to the bobtail drivers based on gallons delivered, others give subjective bonuses based on the year’s profits. There are new ideas coming out of the woodwork.

Some are tying incentives directly to company profits, but others are basing them on goals that are tied to profitability. These goals also keep all employees involved in the process. Examples:

• Net growth in tank sets of 10 percent
• Percent of will-call customers reduced from 25 to 15 percent
• Percent of level pay customers increased from 10 to 20 percent
• Percent of bad debt reduced
• Drop size increased by 25 gallons
• Gallons per bobtail increased by 50,000 gallons

Retailers are getting more creative when it comes to bonus and incentives.

Benchmarking and Networking — A no-brainer in my book. While more companies have joined the NPGA’s Marketers Management Forum, there are still thousands of companies who do not participate in benchmarking activities. Those we have spoken to are impressed and more profitable because of their involvement in the management forum or similar events.

People are taking old ideas and putting new spins on them. The management forum allows retailers to talk about the successes and failures of marketing plans, operational changes, software implementations and others. It can save you headaches later when you hear what other companies dealt with in their processes – successful and not so successful.

Software — Probably the biggest trend during the past five years is the investment made by retailers into better software packages for routing, accounting and general management of the business. Newer systems allow you to analyze management and other operating reports on a daily, weekly or monthly basis versus annually or never. Where there used to be just a few software companies at the Southeastern Convention, now they’re on about every aisle — most having incorporated ideas suggested by you.

Better software has saved retailers thousands of dollars by increasing drop sizes and improving customer service. Many have been able to reduce personnel while becoming more efficient. We have heard companies paying for their software package just by using it to locate their unused steel.

Billing — High prices and new software have made retailers re-think their billing. While many still bill at the first of the month no matter when a delivery was made, others are billing weekly or daily.

Imagine you make a delivery to Mr. Bailey on the 5th of the month, but do not send a statement until the 1st of the following month. If Mr. Bailey pays in 30 days, you still have not gotten paid for 55 days! With propane costing more than a dollar a gallon, can you afford to do this?

Retailers leaving the ticket in a door hanger envelope have seen customers paying from the delivery ticket, which is a huge bonus to cash flow since you normally pay your supplier in 10 days but get paid by your customers in 30+ days.

Consolidation — Positive. Wall Street driven, multi-state marketers will continue to consolidate and get larger. The small marketer will always have a niche and the growing company will always have a buyer — likely several.

Electricity — Negative. Electricity, usually double the cost of propane, has won market share on reliability and less price volatility. PERC should help change this to a positive.

Gross Margins — Positive. Gross margins have been up 1 to 2 cpg per year. As larger companies continue to grow and drive market prices up, this is likely to continue.

Infrastructure — Negative. The primary propane distribution system from production to first retail distribution hasn’t kept up with industry growth. Cold weather has and will damage propane credibility as reliability is questioned.

Natural Gas — Positive. Deregulation of natural gas has slowed economic expansion to the benefit of propane. Tightening natural gas supplies has further slowed the expansion.

PERC — Positive. With half of PERC’s $50 million budget going to consumer education efforts, awareness of propane will continue to grow.

Supply — Neutral. Retail propane consumes two-thirds of the supply; it can buy the other third of its needs from the petrochemical industry. The world is going back to being supply driven.

Technology — Neutral. Software and hardware technology is improving the distribution costs of the industry but too few use it. Technology is also making appliances more efficient – reducing a customer’s demand.

Globalization — Neutral. The global economy is making its impact – most notably China. The U.S. remains a balancing demand point and can usually draw supply when needed.

Dixon is a financial and business consultant for Propane Resources, which provides financial and operational consulting, merger and acquisition services, supply, transportation and marketing communications services for the propane industry.