In the Know: The biggest issues impacting propane retailers

In the Know is a monthly partnership between LP Gas magazine and Propane Resources. Our focus this month is on business operations, addressed by financial consultant and business valuations and sales expert Tamera Kovacs.

Q: Aside from the well-known developments on the propane supply and pricing side, what are the biggest issues impacting retailers today that aren’t getting much attention?

A. Under-the-radar issues impacting retailers are requiring business owners to do more than just deliver gas. For some, the issues are monumental, and if not addressed immediately these items could threaten the continuance of the business. Other issues are small, but if not addressed will slowly erode the company. You may not notice in year one or two, but over five to 10 years the company may not be recognized as its former self.

Different retailers will have different issues depending on their geography and company strengths. The issues discussed below can be looked at individually, but many of these dovetail with one another.

Loss of market share:

• Natural gas: Taxpayer dollars help natural gas make inroads into propane areas. When natural gas expands its lines into your service area, retaining the customer is virtually impossible. There are currently more than 50 pipeline projects in 25 states awaiting approval by the Federal Energy Regulatory Commission for 2015. Don’t be blindsided, do some research and get in front of the customer before the natural gas companies do. Invest in communicating with your state regulators or legislators. Utilize any incentives available for your clean energy.
• Electricity: Electricity is a slower and quieter threat. The majority of your customers already have electricity in their homes. The electric cooperative or company already has a relationship with your customer. There are two types of threats with electricity as the competitor: the relationship with builders for developing all-electric homes, which doesn’t give you a chance to communicate the benefits of propane, and the slow erosion of load. You may not lose the customer, but you may lose part of the propane load if the customer switches from a propane water heater to electric. It is a slower and quieter erosion of market share.

Stable pricing, unified programs and communications: Natural gas and electric companies have mastered stable pricing. Yes, their prices may rise, but they tend to be slow increases that do not shock the customer. The propane industry has always struggled to keep pricing stable for the customer base. The extreme price spike two years ago has caused many consumers to seek alternatives, as many retailers have lost customers to dramatic swings. Customers can usually tolerate higher prices; it is the severe price spikes and constant price fluctuations that cause them concern.

If retail propane marketers have a weakness, it is their inability to unify and build programs to combat a common competitor. The second piece to that is their inability to communicate those unified programs to their customers. The Propane Education & Research Council has worked to provide marketing assistance. However, the implementation phase is the weak link. Most retailers do not have a marketing department where marketing and communications is its only responsibility.

Banking communications: Most banks have one (perhaps two) retail propane businesses as clients. In rural areas, most banks work with farmers and manufacturers. Communicating with the bankers is critical to ensure they understand the propane business and its nuances. It is important to communicate with them on a regular basis so they understand your business, your goals and what is going on in the industry. You want them to be able to act quickly should your banking needs change.

Autogas: Autogas presents opportunities to the industry. However, most retailers do not have the capital or knowledge base to expand in the area. Government incentives are available in some areas to those who offer autogas dispensers, but that can also put smaller marketers at a disadvantage. Another concern is smaller retailers are worried they will build the business, only to lose it to larger players in the market.

People: People are a source of many issues. Finding good employees is a continuous struggle. Finding employees who can pass the drug test, get their hazmat certificate and their commercial driver’s license can be a challenge. And then the issues surrounding the transition of ownership and the transition of leadership can be challenging.

Propane retailers can consider these obstacles as insurmountable, or they can choose to see them as opportunities. However, to bring opportunity to fruition, retailers must communicate the services they offer, communicate their business to their lenders and communicate with their staff, leadership and ownership. Most importantly, retailers must work together to keep propane market share from non-propane marketers.

Tamera Kovacs is a financial consultant and industry expert in business valuations and sales with Propane Resources. She can be reached at tamera@propaneresources.com or call her at 913-262-0196.