A new approach – from an independent business owner’s perspective

December 5, 2012 By    

Much has been made about the status of the industry. We have fully acknowledged and absorbed the gallon trends driven by conservation, economic downturn and the nonexistent housing market.

NPGA and PERC have shifted the bulk of their focus toward helping the industry turn around the overall demand trend. And propane autogas is getting about as much push as ever.

However, in this column – my last for LP Gas – I want to look to the future from an individual business perspective. More specifically, I thought it might be appropriate to approach the subject as if I were an independent propane business owner thinking about the next five to 10 years.

Assuming that selling your business is not in the cards, consider the following advice from an industry veteran who, by the way, has never actually run a retail operation but who enjoys giving advice.

An honest assessment
Your business was created in an entirely different environment than today. Therefore, given the changes you’ve surely experienced, your business model should also change.

Consider bringing in an outside adviser and listening closely to that person. It can be very refreshing. You might reject much of what you hear, but there is likely to be a single gem that helps you proceed in a new direction.

Also consider joining NPGA’s Benchmarking Council. This is the best of the best when it comes to a group of industry leaders attempting to improve their individual models.

Finally, recognize that most independent propane marketers do not have enough financial skills. I’m not just talking about good accounting. I’m talking about the need for solid financial analytics for good decision making. You will likely need to make an addition to your leadership team.

ROI measurements
This is a core fundamental aspect of retail propane and relates to the financial weakness that I believe exists.

Can you answer the question: What is the exact return on a customer tank set burning X annual gallons?

Example: a 250-gallon tank set has a total investment cost of $850 and uses 600 gallons annually at a $1 gross margin. If operating costs are $.55 per gallon, gross margins are $.45 per gallon and your total return is $270 (600 gallons times $.45) per year. This equates to a 31.8 percent annual return on invested capital ($270 divided by the $850 investment).

Know this answer for all of your tank investments. Have all of your senior people talk in these terms. This step will revolutionize your business.

Don’t miss the future
Pursue opportunities instead of solving problems: This is a Peter Drucker axiom that fits our industry well.

This is not saying you shouldn’t solve problems. Instead, it’s a question of senior management focus. For example, I see great effort in this industry to reduce operating costs in order to improve efficiency, and I see creative efforts to add other types of business to smooth out seasonal downturns. Both are worthwhile projects. However, if this is your entire focus, you have done nothing to seek growth opportunities that may exist.

Take risks to grow
Drucker, a writer and consultant, said, “People who don’t take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year.”

For many in this industry, the greatest risk was launching the business. For the current industry survivors, perhaps we have gone into preservation and conservation mode. This quote advises that we should start taking more calculated risks.

One final radical question about the industry: Why do you suppose 99 percent of all acquisitions are done by large companies? Perhaps it’s time to take a risk and have coffee with another good retailer in your proximity to talk about a business combination.

Drucker said you get about two mistakes per year – so use them wisely.

Carl Hughes was a founding partner in Inergy L.P. and spearheaded the company’s business development efforts for more than 15 years. He can be reached at chughes@inergyservices.com.

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