Continued failure of gallons measurement

Driven by requests for this topic and my interest to discuss only issues that will add value to retail propane businesses, I address the continued, flawed thinking in many companies that say if their gallons are up year over year, then they have had a good year.

Carl Hughes

To a lot of us, this seems overly simplistic. But it is a real observation that many in this industry continue to maintain a culture that links success with the amount of gallons sold.

Don’t assume that your company’s culture does not have this flaw. It is a proven fact that whatever the leader/owner worships in his measurement, so will the employees. If you want gallons, your employees will go get them. If you want something else, they will follow.

Unquestionably, the operating environment for retail propane distribution companies will continue to be more challenging and complex than in the past. Successful companies have adapted to new management tools, systems and techniques to deal with the realities of the market place. It is a time of optimism for those who view the future environment as opportunity, but an equally pessimistic view for those who don’t adapt to change and continue to repeat the same old methods.

A critical component of the successful strategy in the retail industry is measurement of the right things. In the end, profitability measurements will be a part of the culture of all successful companies.

Certainly, customer counts and utilizing gallons as a denominator in measurement is important. However, in the absence of any other metric, retail propane gallon sales is a totally valueless measurement.

All gallons are not equal

It may sound laughable that we would need to address this point. But let’s review the chart so this point is nailed home.

Customer type A is a customer segment of 500,000 gallons, while customer type B is half that size, at 250,000 gallons. Gross margins drive the bulk of the distinction in this chart. EBITDA stands for earnings before interest, income taxes, depreciation and amortization. Purchase multiple is the theoretical value that buyers would be willing to pay for a business.

The point is that those who value the 500,000 gallons over the 250,000 gallons are saying – ludicrous as it sounds-that $50,000 of income is better than $75,000 of income and that $200,000 in value is better than $450,000.

This flawed economic thinking remains active in our industry, and is not just limited to small operators. In a way all of us can be overly focused on how much we have grown. Gallons are an easily grabbed measurement with attached bragging rights.

This easy-to-grab public measurement often dominates our discussions. My main point is that it has created an over dominance in the internal drivers of our individual businesses.

Somehow we justify that because everyone is talking about gallons that we intentionally or subconsciously agree that this is the most important metric of our individual businesses.

Successful companies will resist the temptation to celebrate when gallons reach a certain point. Weak companies will celebrate with an absence of an understanding that profitability is how successful companies succeed.

The industry trade associations have done a wonderful job of providing measurement ideas through seminars and study groups like the NPGA Marketers Management Forum. These are great avenues for you to participate, learn and incorporate improved measurement techniques into your company’s culture.

By the way, I can’t wait to see the new rankings of the annual LP Gas Magazine Top 50 Retailers list.

Carl Hughes is vice president of business development for Inergy LP. He can be reached at Chughes@InergyServices.com or 816-842-8181.