State of the Industry 2010: How much does location impact a propane retailer’s business?

December 9, 2010 By    

Naturally, when our country is in the worst situation since the Great Depression, we can expect that nearly all business, including propane retailing, will suffer.

But propane retailing is one industry directly impacted on many fronts – most uncontrollable. Banking. Petroleum markets. Unemployment. Consumer finances. Housing. Regulation. Government spending. Inflation. Taxation.

Admittedly, we were a bit shocked when nearly 33% of retailers responding to our survey said they would consider selling out … perhaps we should not have been shocked. It undoubtedly is an honest response to the pervasive sense of uncertainty that has spread over our country.

In our 2008 State of the Industry report, written at the time of the presidential election, we commented: “… a new president-elect will soon take office, having made campaign promises that speak of huge new tax-supported programs as remedies. News and business media are interviewing economists who invariably give conflicting predictions of when we can expect to see ‘light on the horizon.’” Now we know. Retailers’ view of the horizon declined in the past 12 months, the percent of those reporting better margins falling in half – from 36.1% in 2009 to 18.5% in 2010.

The evolution of uncertainty
A number of years ago, our LP Gas State of the Industry report focused on what controllable factors a propane retailer had in hand to manage business most effectively and efficiently.

Since then we’ve asked retailers in our surveys whether they felt their business was being driven more from outside their territory than the market within it – particularly from Washington, D.C., where so many “gotta-do-it-because-they-said-so” business costs originate. It’s no wonder retailers continue to grumble, still dealing with the deluge of regulatory compliance requirements and insurance costs that ballooned in the wake of 9-11 – more than nine years ago.

Since then we certainly haven’t had our heads buried in the sand, but when the new administration swept into Washington – amid cheers for change – we missed understanding that the election-touted change would be a massive, nearly overwhelming regulatory culture. We never imagined change would create a new charter for micromanaging even small businesses, like many in propane retailing.

Two years ago, as we stuffed our choices into ballot boxes, we felt hope-filled uncertainty. Now hope has escaped us, leaving only pervasive uncertainty.

The year that was
In this year’s SOI survey of retailers, we asked them to rate a number of important business issues to get a general idea of the condition of the propane retailing industry at this time compared to the same time last year.

The majority (75.8%) believes there will be little change in the availability of propane supply in coming months, although a current pipeline awaiting repairs could cause temporary shortages in New England and the need for propane to be transported by alternative means, each potentially causing a price spike there.

While retailers trust 2011 propane supply availability as well as terms of supply from wholesalers, 76.4% lack faith in propane’s price stabilizing, believing it will cost more. Of course, it’s difficult to dismiss the potential long-term effect on fuels from BP’s Gulf leak – the regulatory shutdown of deep-water drilling having spilled over (no pun intended) into shallow water oil production as well, in the short term threatening potential price increases and in the long term discouraging exploration.

It’s a sad state of uncertain affairs … a further example of Washington managing by regulation … when 74.8% of retailers responding to our survey believe the regulatory environment will further impact their businesses.

Unethical business practices or merely aggressive marketing?
Inside their territories, yet still an uncontrollable factor, retailers deal daily with competitors trying to “steal away” their customers.

Each year we hear from survey respondents – many having been retailers with loyal customers for many years – about the growing pervasiveness of competitor marketing tactics that not only unfairly steal business, but also destroy respect from propane users for the whole industry. More than three-quarters (76.7%) of retailers believe competitive ploys will continue or worsen in the year ahead.

Low-margin pricing is by far the most often mentioned aggravation, but serious, if not illegal, business practices of competitors are among their complaints as well, like ignoring required safety training, lacking permits or operating without insurance.

We must say, however, that while all competitor marketing tactics are undoubtedly an aggravation to long-established retailers, not all are necessarily bad ideas … like concerted ad campaigns, pre-pay discounts, volume or long-term contract discounts, or keep-full versus will-call pricing. It is when competitors offer deals like below-cost pricing that honest retailers cannot match without risking their businesses.

Strangely, there is an ongoing battle of minds over competitors leasing tanks rather than selling them, when, in fact, leased tanks ensure a consumer’s ongoing propane business for the leasing retailer, unlike tanks owned by customers who can then fill them with any retailer’s propane.

The results of retailers’ territory expansion during this past year were heartening … more than 80 new propane customers per expansion, averaging more than 37,000 gallons. That level of growth is not something that happens by chance. It requires concerted planning, including a marketing effort and a pricing strategy – expanding despite any competitor’s retailing efforts to take market share through discounted prices or promotional offers, expanding beyond replacing lost customers, or even successfully expanding where customers have gas or electricity as attractive options.

Looking at regionalized averages of sales and gallons sold, increases in 2010 over 2009 include, of course, the results of that territory expansion, as well as increased demand due to additional heating degree days and/or higher price per gallon charged.

The one anomaly between these charts is in New England, where 50% of retailers reported territory expansion, yet New England retailing anticipates a significant drop in sales and gallons in 2011.

Any territory expansion strategy also requires an investment strategy – a way to get those additional gallons delivered. More than 10% of retailers responding to our SOI survey added or replaced bobtails or storage during 2010.

Yet investment was conservative – not surprising amid current economic uncertainty. Our survey shows 27% of retailers chose to put their available cash into savings, and another 22% paid off debts.

While only 8.4% of retailers reported investing in technology, we couldn’t help thinking how few retailers at the beginning of the last decade even used computerized accounting systems – and now online applications are commonplace across the industry! Improving operational efficiency with fleet routing software and remote tank monitoring is well under way across the retailing industry – with many more operations considering the efficiency they provide to both cost and time savings.

Growing in place
Whatever state in which you deliver retail propane, you have unique opportunities, as well as unique challenges apart from all the uncontrollables affecting retailers across the nation.

The West North Central region, stretching from North Dakota down through Missouri, is America’s heartland with more than 262 million acres in farms. Supplying both farm homes and the farming industry with propane for processes like grain drying, propane retailers there have the highest propane market share among regions.

The New England and Middle Atlantic regions – with their densely populated cities – have large percentages of homes heated by fuel oil, opportunities for conversion to less-costly propane.  New England retailers reported 50% territory expansion, the highest of all regions.

The Mountain and Pacific regions together have 278 million acres of farms, as well as an abundance of outlying mountain residences to switch from electric heat.

In the South Atlantic, East South Central and West Couth Central regions, the home heating market is equally dominated by natural gas and electricity, although propane in Mississippi has a notable 21% share. These regions also benefit from the southerly migration of the retired population to pursue as customers. The South Atlantic region’s anticipated household growth of 6.1% in the next two years is the largest in the country.

Manufactured homes still are a significant segment of residential fuel sales for propane dealers, despite the fact that fewer are being placed each year. In 2000, more than 280,000 were placed around the country, but only 34,000 have been placed this year through August. Being that it’s a popular warm-climate move for the burgeoning ranks of the “Boomer” generation, it’s not surprising that the South still stands tall in manufactured homes compared to any other U.S. region, with more than 24,000 of this year’s 34,000 placements.

The price of propane, both wholesale and retail, is perhaps the business factor that varies most considerably from region to region – yet a factor that you see in industry and financial reporting most often as a nationwide average. We, too, in previous SOI reports have reported averages when meaningful – like analysis of price, specifically by retailer size nationwide.

In residential pricing, the variance among regions has been as high as $.993 per gallon in July.

Uncontrollables versus expectations
The big current story about weather is that much of the United States will have less wintry chill than last heating season – only the northeastern and western seaboards expecting to turn up the heat more often than last winter. Milder weather from Texas northeastward through Kentucky, in particular, will dampen energy sales.

Aside from the impact of weather and consumer energy conservation, varied regional pricing of propane is apparent in home heating season expenditure. Regionally during this heating season, Northeast consumers will pay a six-month average of $2.80 per gallon; the Midwest, $1.96; the South, $2.51; and the West, $2.45.

Particularly in light of NOAA’s forecast calling for a warmer winter this year than last year, propane supply for the heating season is not expected to be a concern. Wholesale prices during last year’s heating season averaged $1.09 at the end of 2009 to $1.23 at the beginning of 2010. This season’s forecast is for an average of $1.23 at the end of 2010, $1.20 at the beginning of 2011.

End-of-period inventory forecasts are slightly higher than last year: 52.3 million barrels at the end of December, dropping to 28.3 by the end of March.

Survivors
Newspaper headlines and evening news anchors remind us daily of America’s overwhelming economic troubles … and those troubles are naturally felt by propane retailers who have worked for years to keep homes warm and farms humming.

Of course, retailers watch not only newspaper headlines and the evening news to get a feel for the coming heating season – they watch the skies. For now, it looks like most of the country will have a warmer-than-usual winter, when consumers won’t need to see a bobtail coming down the road quite as often.

Forecasters and retailers agree that propane will cost more this heating season than last – more for your supply and more for your customers’ fill-up. The good news is that 75% of retailers tell us that they expect their margins to be the same or better in 2011, despite America’s gloomy economy.

Retailers’ expectations for overhead cost of doing business rose notably over last year. According to our survey, 65% had expected worse overhead in 2010, and now more than 71% are expecting even worse in 2011. Regulatory compliance, insurance and training have been driving up overhead costs over the past decade, but this year’s 15% increase on average employee benefit costs hit retailers especially hard. Of course, retailers, like small business operators in all industries, are wondering how much the administration’s new health care legislation will impact their staffing, and ultimately their bottom line.

With the number of propane-powered households declining steadily, maintaining sales is a challenge for many retailers … the forecast for this heating season being a further 3.1% loss of residential propane customers. And manufactured homes, traditionally the mainstay of propane energy, have taken a massive cut in the past decade.

With electric and hybrid vehicles attaining prime news coverage, this year we asked retailers how much they anticipated benefiting from propane as a motor fuel. Unfortunately, only between 3% and 6% of respondents felt there was potential in motor fuel for their operations.

Despite our having stated up front in this SOI report that nearly a third of retailers responding to our survey said they would be willing to sell out at a fair price, it’s only fair to comment on the remarkable industry longevity of the average propane retailer – about 25 years! That’s a quarter-century of ups and downs, and they’ve survived them all. We expect they’ll survive these troubling days, too.

After all, there still is something special to be said about being “The Gas Man.”

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