Retailers say growing number of low-income customers makes business difficult

March 1, 2008 By    

The rising cost of propane, coupled with limited federal home-heating assistance for low-income families, is not only putting the squeeze on customers but retailers as well.

As more customers ask for longer time frames in which to pay their bills, suppliers are tightening their billing cycles and threatening to cut off those who don’t meet their deadlines.

It makes for a daunting business position as retailers – many of whom live and work in small communities where they know their customers well – are forced to make grim decisions.

In a year in which the price of propane has increased about 100 percent, the national subprime mortgage crisis has led to a sharp rise in foreclosures and new homebuilding has virtually ground to a halt. All of those economic pressures converge to paint a less-than-rosy business forecast for propane marketers.

Ken Atchley, chief executive officer and president of Legacy Propane in Battle Ground, Wash., says dealing with low-income customers is the No. 1 concern among retailers.

“We faced record write-offs this year with folks who just couldn’t pay their bills, and that’s after extending our credit limits and credit terms to work with these folks,” Atchley says. “If they don’t have the money, they don’t have the money, and there’s not a whole lot you can do about it.

“It’s very tough when you’re dealing with senior citizens (and) families with children at home. It’s just heartbreaking and very difficult to listen to, and you try to do everything you can to help.”

Atchley says he tries to keep write-offs to about 1 percent of total sales – which he described as the industry standard – but admitted to exceeding that amount this year. It’s something he factors into the budget each year for his company, which sold 7 million gallons to about 11,000 customers in 2006.

John A. Hamilton, president of Griffith Energy in Rochester, N.Y., says that while he is willing to write off a certain amount of debt each year – he declined to say how much – he believes propane companies have a responsibility to be straight-up with customers about what they owe.

“Be up front with what you can and can’t do so you’re not misleading them and it’s clear from the get-go what you’re able to do,” Hamilton says. “I don’t think we’re doing people any favors by not being clear what you can and can’t do.

“You try to balance compassion with business realities, I guess. We’ve got a little bit of latitude, but you really have to balance those two.”

That balance is key, because retailers have their own bills to pay. Propane suppliers are demanding payment as soon as 10 days after delivery, says Holly Linden, co-owner of Linden’s Propane in LaGrange, Ohio. Atchley says his suppliers are reducing payment windows from 30 days to 15 days, or 15 days to 10 days.

“You have to keep the cash coming in and pay your bills or you won’t get your propane; they’ll cut that off,” Linden says of her suppliers. “We don’t have that much extra margin worked into the price, so if someone doesn’t pay or takes 30, 60, 90 days to pay me, where do I come up with the money to pay my employees?”

And it doesn’t stop there. Prices have escalated for the diesel that fuels the vehicles, steel for tanks and medical insurance for employees. Not all of that cost can be passed along to customers, especially when they are asking for extensions.

“It used to be where if someone took a long time to pay, for every gallon of that, you would take a gallon and a half of someone else to cover it. Now with the prices and the margin, for every (unpaid) gallon it takes five gallons,” Linden says. “It’s due to tighter margins and higher prices. You want to keep the price low for the customers, but at the same time, if they don’t pay you, you create a serious cash flow problem.”

Linden says she tries to work with customers who confess they don’t have the cash to pay their bill. She will refer them first to the Low-Income Home Energy Assistance Program, then to social service charities and churches that might help. If the customer is working with her and trying to make it work, she usually will keep the propane flowing.

“It’s when I try and try to reach them to get some type of response and they’re 90 days out and I can’t get them to answer a statement or call or anything; that’s when I don’t have a choice at that point,” she says. “They’ll run out of gas before I can shut them off. I really hate doing that.”

Boyd H. McGathey, chief operating officer of Liberty Propane in Overland Park, Kan., says low-income customers with risky credit should pay first.

“As a general rule, most marketers with those types of customers require getting payment before the delivery, rather than making a delivery and hoping they’ll get paid,” he says.

Like most retailers, Griffith Energy and Legacy Propane both offer budget payment plans in which the estimated cost of a year’s propane is divided evenly each month. Atchley and Anderson say they require customers to pay off their bills before the start of the next heating season. That “settlement month” in which the account is to be “zeroed out” can be very challenging, Atchley says.

“People want to roll that forward, and it just exacerbates the overall accounts receivable challenge,” he says. “It can really get a customer behind pretty quickly if you’re not on top of it. In high-price times, it’s imperative to monitor those and make sure people are going to pay a high-enough monthly premium to make sure they get to a zero balance at the end of the year.”

Unfortunately, some energy companies – including competing propane retailers – are so desperate for new customers that they will pounce on customers who are denied fills for lack of payment. Sometimes those companies don’t even take credit applications – solving a customer’s short-term problem and temporarily boosting their own numbers, but it only exacerbates the customers’ debts and ultimately will be an accounts receivable issue for that company as well, Atchley says.

“It’s unfortunate, but that’s competition,” he says.

It’s a situation McGathey hopes his customer service representatives at Liberty Propane will not get into. In an update last fall to his general managers, McGathey’s first reminders to his 30 locations were to secure signed credit applications from customers and to follow the company’s established credit-approval guidelines.

He also urged “reasonable” credit terms for commercial and large agricultural customers; and limiting residential credit to one delivery only. He says finance charges should be assessed to all accounts, and recommended that hand-written notes be included with all delinquent statements. General managers are expected to be involved in all accounts that are 60 days past due.

The company’s chief financial officer, Larry Weinstein, told employees in an October newsletter that Liberty Propane’s many acquisitions last year, while a mark of its success, had also accelerated problems with accounts receivable delinquency and collection.

“These high propane prices have made it difficult for some customers to pay their bill to us on time or at all. As a result, our accounts receivable delinquency has increased significantly, and our bad debt expense has also grown to record levels,” he wrote. “There is an old business principle that says ‘a sale is not a sale until the money has been collected,’ and, if you think about that, it’s true. There is no benefit to selling product or providing services you never get paid for.”

But even though retailers understand the cold reality of business, they swallow hard when they’re forced to tell customers they can’t help them any longer. Atchley, who has been in the propane industry 23 years, says you can’t help but get emotional.

“That’s one of the toughest days at work on our jobs when you have to say we can’t extend these terms any further. And you know they need fuel,” he says. “So you do offer some of the programs out there that have been known to assist people and you try to extend terms and make payments that are workable for the customer and us.”

If a shut-off is necessary, Hamilton says, his representatives will counsel people on where they can find a Red Cross shelter to stay warm. They also will contact a third party (such as a relative or neighbor) to be sure that customer is cared for.

“You can’t help but feel compassion for folks who are in dire straits, and we do what we can by educating them on HEAP or pointing them to any kind of assistance out there,” he says. “At the end of the day, we can’t give product away for free here either. We do what we can to help them.”

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