A 10-year history and outlook

June 1, 2006 By    

A historical perspective on anything of importance is a good thing. It gives one a sense of where they are and where they’ve been, plus it helps prepare for the future.

 Randall R. Doyle
Randall R. Doyle

Also, history repeats itself many times. So, some of what we’ve seen the past 10 years could very well happen again.

If you are reading this article you probably either make your living in or have most of your family fortune invested in the propane industry. Therefore, a historical look at the industry will be of great interest to you.

Here is a 10-year history of the propane industry based on the data collected from LP Gas Magazine’s Top 50 list, public filings from companies, PERC’s Marketing Metrics Initiative (MMI) and the Energy Information Administration (EIA).

Obviously, weather affects the numbers. The degree days in 1996 were about 1.5 percent colder than normal while 2005 was about 7 percent warmer than normal. The numbers adjusted for weather are so noted.

The history is told by answering the questions below. Also included are questions for the next 10 years, based on the trends in the propane industry.

Has the retail propane industry become more efficient?

No, according to the two most telling measures of operational efficiency: gallons per bobtail and gallons per outlet. This data is presented in Table No. 1 below. The numbers were not degree-day adjusted.

Temperature-adjusting the numbers would make the industry performance look better in 2005, but when you consider industry consolidations and information technology designed to make bobtails and office administrators more efficient, the numbers suggest the industry is less efficient today than 10 years ago. These numbers were surprising.

Has the industry consolidated further?

Yes. In 2005, the 10 largest propane marketers had 36.4 percent of the odorized propane market compared to 31 percent in 1996, a 17 percent increase.

This was no surprise considering the strong market for buying propane businesses, and that only 30 percent of family owned businesses (as most independents are) are transferred to a second generation and 13 percent to a third generation.

Table No. 1
Table No. 1

Do the major marketers retain all of their base business and acquired gallons?

Not really. All four of the surviving majors of the past 10 years (Amerigas, Ferrellgas, Suburban and Heritage) either held steady or lost gallons when the weather-adjusted 2005 gallons are compared to the total of the acquired gallons the past 10 years and the weather-adjusted 1996 gallons.

The best performing major held steady while the bottom performer saw a 20 percent loss in gallons. This suggests that most of the majors are either losing base business, losing acquisition gallons or else do not have the organic growth to offset conservation losses.

What effect has the rise of cooperatives (Farmer and REC) had on the market?

Significant. Co-op gallons as reported in the LP Gas Top 50 more than tripled from 310 million to 980 million gallons in 2005. Also, the number of co-op companies that reported to LP Gas has doubled during the past 10 years.

This is not surprising when you consider the co-op’s strategic interest to diversify into the propane industry and the lengthy legal battles to limit REC expansion.

Table No. 2
Table No. 2

Has the average propane margin per gallon increased faster than heating oil margins and electricity price?

Yes. The national average of propane margin per gallon increased at a much higher rate than the margin on heating oil and the electricity price per kwh as shown in Table No. 2 below.

During this 10 year period, the prices of propane and heating oil doubled while electricity price increased about 17 percent. The bad news is propane lost much of its traditional price advantage over electricity on a Btu basis in recent years.

Did the propane industry gain residential market share?

No. According to the MMI report, propane lost market share in all regions of the country except for New England, the Mid Atlantic and the Pacific Northwest. Most of the market share loss has been to electricity during a period when propane enjoyed a significant Btu price advantage.

Which company spent the most on acquisitions?

Ferrellgas, which spent over $1 billion the past 10 years mainly from its acquisitions of Blue Rhino and Thermogas.

Traditional names gone; new names emerge.

The industry’s traditional major players that are gone include Thermogas, Empire Gas, National Propane, Star Gas and Agway. Other well-known names that have been acquired include Dowdle Gas, Jenkins Gas and V-1. New names that have come onto the propane scene include Inergy, GROWMARK, Titan and Liberty.

These changes tell us that the owners and senior management of parent companies change their business unit interest, that companies in financial crisis must be liquidated, and that long time owners of businesses eventually sell their interests to others. It also tells us that people who know the industry with the wherewithal to raise capital will enter the market.

What companies died from an overly aggressive ‘Growth Through Acquisitions’ strategy?

Cornerstone and Independent Propane. We are reminded that acquisitions can create a toxic euphoric optimism that can cause one to abandon sound financial principles for the sake of strategic growth, and that actually integrating an acquired company is difficult work.

What is the effect of conservation?

The effects are significant. The average gallons per residential customer declined 13 percent during the past 10 years, or 1.3 percent annually. The built-in market erosion from conservation places a premium on getting new customers to offset conservation losses.

Have we seen the industry’s new operating model?

Ferrellgas changed its traditional business model by spending $63.9 million the past five years building its technology platform and training employees. As a result, they reported 133 “customer service centers” to LP Gas in 2005, down from the 593 “outlets” in 2004.

Ferrellgas estimates that these changes will improve the bottom line by $30 million a year. Has Ferrellgas found the ‘economies of scale’ competitive advantage that the major marketers seek and is this the beginning of the industry’s migration to a new operating model?

Great Questions About the Propane Industry’s Future:

Based on the industry and retail energy market trends, here are the questions to keep your eye on.

Will the propane industry significantly improve its operating efficiency?

Yes, it has to, in order to compete with other fuel sources, mainly electricity. By 2015, I predict that the average bobtail gallons per year will increase to 550,000 from today’s 373,000 because of four factors:

  • Technology designed to improve bobtail efficiency will become as common as the use of scanners at the grocery checkout. Only 15 percent of marketers use on board computers today. Competitive pressure and the next generation of propane marketers who grew up using technology will lead this change.
  • Marketers will become more focused and more vigilant about achieving bobtail efficiency. More marketers will apply business improvement practices in their daily operations.
  • Technology and better customer management practices will significantly reduce the incidence of the highly inefficient will call delivery and out-of-gas calls.
  • Gallons per outlet will also significantly improve as branches will be consolidated to reduce management and administrative costs while keeping the front line aspect that the rural marketplace requires. By 2015, I predict that the average gallons per outlet will increase from 1.3 million to 3 million.

This change will be technology enabled that will either automate or outsource most of the accounting and administrative tasks currently done in the branch office. Also, the role of the manager will be upgraded because of the availability of better information making it possible to oversee a larger scale of activity.

Will the industry consolidate at a significant rate?

Yes, the rate of consolidation will be faster the next 10 years. By 2015, I predict that the top 10 marketers will have at least 50 percent of the market share, up from 37 percent in 2005.

The factors that will drive consolidations will be the need for efficiency, a significant number of CEOs and owners of family businesses now in their 50s that will retire and the increased cost and complexities of a start up will reduce new entry by independents into the market.

Will the influence of co-ops in the market continue to increase?

Admittedly, I do not know enough about the legal issues with the REC expansion into the propane industry to know if their presence will increase. The same is true for the continuing tax-free status of farmer’s co-ops.

If the federal government does not change the tax status of farmer’s co-ops and if the courts do not further limit the REC’s expansion into the propane market, then the co-op market share will increase significantly because of their cost advantage and the natural fit with their customer base.

Will propane effectively compete against electricity?

No. The industry must learn how to more effectively market itself to the residential consumer and this will take time. Propane lost market share to electricity during the 1990s in many markets even with a significant Btu price advantage.

The propane marketer should be thankful that it has PERC to promote propane’s brand awareness, and to perform the research necessary to develop new markets and to penetrate target markets. PERC will improve how the propane industry markets itself. But, change takes time and electricity’s link to coal, which is a lower cost Btu producer, will keep the significant Btu price advantage once enjoyed by propane from returning.

Will gallons lost to consumer conservation continue at the same rate?

Consumer conservation will continue to increase because of high energy prices and the replacement of inefficient appliances. Conservation gains in agriculture will reduce the rate of corn drying. While I expect the conservation losses to continue throughout the next 10 years, I expect the rate of loss to not be as high as the past 10 years.

Will there be a change in the players?

The past 10 years told us that some of the well recognized companies were either sold because of the owner’s changed strategy or were liquidated because of financial crisis. The past 10 years also saw new major players enter the market.

The same will hold true for the next 10 years. Some parent companies may decide to exit the propane business. Major marketers that either abandon sound financial principles to achieve their aggressive growth strategy or cannot integrate new companies into their culture will pay the piper someday. This is a part of history that will likely repeat itself.

What will happen to those that do not change?

Companies unable to make wide scale changes towards a more efficient and market oriented business model made possible by technology will die a slow death. Independents that are poorly capitalized and that refuse to change will suffer as well. The old adage “Change or Die” fits the market of the next 10 years.

Doyle is a propane industry consultant based in Houston. He can be reached at
doylerr@aol.com or through his Web site: www.Rdoyleconsulting.com.

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