In the Know: Evaluating fee structures as costs rise

In the Know is a monthly partnership between LP Gas and Propane Resources. This month, managing partner Marty Lerum discusses how propane retailers can evaluate or change fee structures in light of rising costs in 2022. 

QUESTION: How should propane retailers evaluate or change fee structures in light of rising costs?

ANSWER: For more than a year now, independent businesses across the U.S. have faced increasing costs to do business. It’s called inflation.

Independent business owners see it as real costs that erode their gross margins each time they pay a bill.

Propane retailers have been hit harder than many independent businesses due to the fact that we deal with more commodity variables. We have seen base business costs escalate significantly this past year.

Operating expenses

The information below is from retail companies in the Midwest and Southeast U.S.

Propane and transport costs, and the costs of goods sold, went up $0.558 per gallon. Truck fuel expense increased by $0.021 per gallon. Average payroll expense rose $0.066 per gallon. The overall total of these expenses reflects an upsurge of $0.645 per gallon.

If propane retailers didn’t increase their average sales price by $0.645 per gallon, they lost it off their bottom line. If providers delivered propane to 50 percent of their customers on a fixed price, like a pre-buy – as the above retailers did – they reclaimed most of the increase in their cost of goods sold. That’s if they hedged these gallons correctly.

There was a loss of about $0.01 to $0.02 per gallon in transport rate hikes due to increased fuel surcharges, which couldn’t be hedged.

The increased cost in payroll and truck fuel, for a total of $0.087 per gallon, is a loss unless retailers increase the prices to their remaining market-based customers, which in this case is 50 percent of their customer base. The retailer must increase the price by two times the $0.087 per gallon, or $0.174 per gallon, to recoup those costs since they can’t increase the price to their fixed-price customers.

Material costs

Propane retailers have also seen huge cost increases in propane tanks, cylinders, fittings, regulators and piping, which need to be addressed as well.

Buy a new 500-gallon tank today and a retailer needs $300 in gross margin to go through that tank just to get a reasonable rate of return on the tank investment. That doesn’t cover any operating costs. Further, a retailer needs to calculate the actual delivery expense to that tank on a variable- or  fixed-cost basis. Each retailer is different. If 1,000 gallons goes through that 500-gallon tank, the operating expenses needed to cover those deliveries are anywhere from $200 to $700 to break even.

Retailers may want to consider the following to offset the increased cost of doing business:

• Adding or increasing hazmat, compliance, delivery and fuel surcharge fees.
• Selling regulators and fittings to customers.
• Increasing tank rent.
• Picking up tanks from low-use customers and redeploying assets.
• Adding a minimum use fee on top of the tank rent fee if you don’t want to pick up a low-use tank.
• Selling tanks to customers when retailers’ banks won’t lend $70,000 for a load of tanks.

Marty Lerum is managing partner of Propane Resources. He can be reached at marty@propaneresources.com or 913-262-8531.