Falling sales, evolving market dynamics pose hurdles, opportunities

Editor’s note: This is the third in a three-part series analyzing the decline in propane sales over the last decade.

Palpable concern over the propane industry’s long-range viability is driving strategic changes to reverse last decade’s decline in domestic sales.

U.S. propane sales for combined residential, commercial, engine, farm and industrial uses fell 2.5 billion gallons since 2000, according to the American Petroleum Institute. Preliminary 2010 data indicates they will fall another 300 million gallons.

Circumstances surrounding the slide were dramatic: Alternative energy incentives aimed at weaning America from foreign oil drastically changed the competitive dynamics among energy providers. The worst economic recession since the Great Depression strangled consumer spending and gutted the home construction market. Record-setting crude prices spilled over to push propane prices beyond consumer reach.

Those hurdles served as the last straw for some struggling propane marketers, greasing the skid of consolidation among independent retail companies. But they also created new, evolving opportunities that seem to favor progressive-thinking marketers who are willing to change in order to survive.

Michael Sloan is senior project manager for ICF International, which analyzes the consumption trends for the Propane Education & Research Council. He says the next few years will be a time of rapid change in energy markets and will have a profound impact on the future of the propane industry.

“The propane industry should expect major challenges in existing markets from electricity, natural gas, and renewable fuels. But it will also have unprecedented chances at new markets,” he says. “Taking advantage of the opportunities and minimizing the challenges will require concerted action by the industry as a whole, including investments in new technologies and significant participation in the national energy policy debate.”

Sloan sees those demands fostering consolidation among traditional independent retailers who cannot adapt.

“My message to all propane marketers is that you have to adapt or die. The markets are there; it will still be a profitable business for companies that adapt to changing conditions,” Sloan says.

“I think that is what will separate who is here now and who is around five years from now. What current business model will sell out to those that are willing to adapt? Adapting to all of the changing conditions will require marketers to become more sophisticated over time. That will drive much of the consolidation.”

On the rebound
The API numbers speak volumes to an industry relatively unchanged in 100 years of operation. Many of the major drivers of the decline are beyond its control (economy, price, efficiency gains, winter-heating demand) and will impact propane sales for the foreseeable future. But ICF also foresees overall economic growth, a rebound in the housing market and sizable growth in new engine fuel markets to offset future declines.

Starting this year, ICF projects a slow overall demand build through 2020. But the firm notes that achieving even moderate growth depends on concerted action by the propane industry to take advantage of market opportunities and to mitigate threats.

National Propane Gas Association President and CEO Richard Roldan agrees: “I think we need to focus on reversing that trend, and to me the path forward seems uncomplicated,” he says.

The challenge to industry leaders is to prioritize manageable market goals within practical time frames.

“I think that we do a lot of things well, but the temptation is to try to be all things to all people,” Roldan says. “When you have a pressing goal like this – to rebuild 2.5 billion gallons – you have to exert some discipline. As an industry we need to set goals and settle on time frames for market growth that will get us there.”

Roldan offered reasons for three goals that he thinks have the potential to reverse – and even grow beyond – the 2.5-billion falloff over the last decade:

Develop the commercial mowing market – “We have a great story to tell being at 70 percent cleaner emissions with cheaper fuel costs. And the technology exists right now with a dozen manufacturers offering propane models. The market penetration could be half of the forklift market – we’re talking a billion gallons [annually].”

Maximize autogas opportunities – “We have never achieved our potential in this market, but I really think the wind is blowing in the right direction now. There is a growing perception out there that CNG tends to be the alternative fuel of choice – for those people who don’t have to live with that decision. But others are making decisions in favor of propane. It’s a phenomenal market for us. I can see it gaining us 600-700 million gallons.”

Capitalize on the decision to use a full-fuel-cycle measure of energy consumption for assessment of national and environmental impacts – “Green building is really gaining steam. I believe that all laws and regulations tend to be built upon a mound of empirical data that informs policymakers what way to go. The data supporting full-fuel cycle touches on all aspects – emissions, energy efficiency and cost. You start to change policy infrastructure at the grass-roots level with the government’s announcement that it will adopt that standard. That’s big for us. It touches and tickles whatever government does at any level. I think we are talking about changing basic government infrastructure five years hence, although it’s hard to quantify the impact at this point.”

Eye of the storm
Perhaps nobody feels the crush of API’s numbers more than PERC President and CEO Roy Willis. Under his direction, the council has built a $250 million investment portfolio that has produced mixed results in a complex energy environment. Its most recent forecast calls for market growth of about 500 million gallons between 2010 and 2015 to offset declines in existing markets.

“The bottom line of all the API numbers simply is that we live in a very dynamic and challenging energy market. The host of challenges confronting our industry is no different than what the other industries in the energy sector are experiencing. Efficiency gains are shrinking per-customer use in all markets because the drive for efficiency cuts across all uses of propane,” Willis says.

“If we’re not actively doing these three things, we will be losing ground: Protect existing markets, try to expand current markets where possible and create new market opportunities for the industry.”

To meet those goals, PERC over the last two years has substantially retooled itself and the way it decides to invest the industry’s dollars. The new strategic focus is to enhance technology development and product commercialization that targets market growth opportunities. PERC has hired a chief commercial officer and implemented a data-heavy system to evaluate projects, set funding priorities and evaluate performance.

Meanwhile, it has been targeting markets in new areas such as commercial lawn mowers, outboard engines, and combined heat and power applications.

“The way we compete is if we have competitive technology. So that is our focus,” Willis notes.

New frontier vistas
Based on weighted gallon growth projections, PERC has designated priority research projects in the commercial, agricultural, autogas, and off-road areas. Top priority in the commercial application is the combined heat and power system; high efficiency grain dryers for the agriculture market; a new utility vehicle platform for the golf, resort, turf, commerci
al, and industrial markets; and a mix of on- and off-road uses for an 8-liter propane engine that could include bobtails, school buses, off-road equipment, and irrigation pumps.

“The good news is that our commercialization efforts have been able to attract key world-class manufacturers. It can’t be underscored enough how important it is to have top-tiered manufacturers involved in these projects,” Willis says.

“PERC does not manufacture anything. To have the ability to partner with the likes of Roush, Yanmar, Kohler, Briggs & Stratton, and Kawasaki is vitally important to our success in that area. Increasingly, they have become interested in how to use propane to solve their problems with diesel emissions because it’s a cost-effective solution.”

PERC recently launched Propane Challenge, a broad outreach to universities, national and private laboratories, engineering firms, and others to gather ideas that stimulate ideas for new technology and applications.
Like so many PERC projects, however, the introduction of new technology will have limited impact without effective marketing at the local level.

According to Willis, drooping sales trends underscore the need for all propane retailers to be more proactive and aggressive in promoting equipment sales that will create fuel demand.

“We are seeing some evidence that more and more companies are coming to that business strategy. It varies from company to company as to how well they understand their market circumstances. We’ve seen a great variance in market intelligence, investment strategy and market growth strategies from companies from coast to coast,” he observes.

Last July, PERC surveyed propane marketers about their expectations for business growth in the next two years. Responses from 1,053 company owners and managers were surprisingly positive.

About 22 percent of respondents said they expect business to grow more than 10 percent; 29 percent anticipate growth of up to 10 percent; 37 percent foresee a stable market; and 7 percent expect a falloff in sales.

The majority of retailers who predict growth said they expect it to come from within their existing service area rather than through geographic expansion. Most expect it within market sectors that they already are concentrated: residential (60%), commercial (37%), agriculture (19%), resellers (15%), industrial (14%) and engine fuel (10%).

Those same respondents also said winning customers from other propane marketers was the most likely way to achieve gallon growth in the residential sector.

That feedback concerns Willis. “That primary growth strategy can be good for consumers in providing competition, but it’s trying to re-slice a shrinking pie rather than grow a larger pie. Cannibalizing your competition is just a poor business plan that is not sustainable,” he says.

That’s one reason that PERC has expanded its Marketer Technology Training Program to enhance awareness about new propane-fueled products that can build load. The training covers basic installation, energy efficiency, environmental impact, consumer benefits and implementation obstacles. PERC is investing $700,000 in the program in 2011.

“There is a growing understanding about the need to promote these new technologies, whether tankless water heaters, CHP, generators or the latest new pickup, truck or van. Being able to actively engage consumers is crucial to building that market and increasingly important to the success of our industry,” Willis notes.

Another recent ICF study found a long-term opportunity to boost propane sales in the commercial sector that includes businesses and organizations such as retail and wholesales stores, hotels, restaurants, hospitals, schools, churches, parks and universities. The market accounts for 19 percent of overall propane sales despite no concerted national support programs to train propane marketers and customers on propane applications.

There also is early interest in potential sales in the food, marine, recreation, mining and forestry/paper industries.
“Overall, I’m optimistic about the future. The fate of propane is tied up with the overall economy. We’ve got big challenges in front of us, but I’m optimistic that propane is well positioned for growth if the national economy starts growing just a little stronger,” Willis says.

“I really believe that the culture of our industry is alive and well. Ultimately, it will be the fundamental values of those independent businesses that determine if we have a prosperous industry 5-10 years down the road.”

Propane market outlook at a glance (Courtesy of ICF International)
■ Total propane sales were projected to decline through 2010, then begin slow annual growth from 2011 to 2020 due to a rebound in the economy and introduction of new propane applications.
■ Propane has become a premium fuel in the largest and most expensive new homes that are not on the natural gas main.
■ Propane marketing strategies must be tailored to specific regional opportunities and challenges.
■ Fuel oil conversions in the Northeast may offer the highest growth potential in the residential and commercial sectors.
■ Targeting existing propane customers to maximize household propane applications may be the easiest way to offset continuing declines in fuel use per customer.
■ Propane is expected to become more competitive with diesel and distillate fuels.
■ Markets for internal combustion engines offer long-term potential for large growth in propane sales, especially as clean propane applications such as commercial lawn mowers, irrigation pumps, and propane vehicles become more widely available.
■ Greenhouse gas emission regulations may substantially increase electricity prices. Changes in cost relationship to propane should not be expected before 2016.
■ Energy tax credits and subsidies help propane applications while simultaneously promoting other technologies over propane, like geothermal heat pumps, which challenge propane’s market position.
■ Taking advantage of the opportunities and minimizing the challenges that lie ahead will require concerted action by the industry as a whole, including investments in new technologies and participation in the national energy conversation.