Propane retailers feeling heat from challenging economic conditions

December 1, 2008 By    

Yep, things are a mess. Looking back, retailing sure was easy before overwhelming regulation and sky-high insurance took the fun out of the business. Sure, you worried about what weather Mother Nature would be throwing at you any given year. Sure, you spent a sleepless night or two, wondering whether you’d made the right decision about adding a bobtail despite a new retailer invading your territory. But global economic crisis? Where did this come from? Yep, things are a mess.

Even beyond the great data that retailers provide us for the State of the Industry study each year, the comments they take time to write comprise the best indicator of “how it’s going out there.” And this year, unfortunately, it’s obvious that things are a mess in the retailing business. “Going up in flames” is how many see it.


If an economic meltdown can be a surprise happening to professional forecasters, you probably wonder how we can expect propane retailers to know the future. But every year we ask retailers to do a bit of prognosticating about what their businesses will look like a year from now. Customers? Volumes? Revenues? Margins? Threats? Opportunities?

Of course, how retailers envision the future is colored by their current situation. And in 2008, a rosy outlook is hard to find among them.

Retailers expecting more customers or higher profits in coming year
Retailers expecting more customers or higher profits in coming year

Nonetheless, in addition to revealing their feelings about it all, the annual data they have once again provided allows you to put your retail business situation in perspective.

So … when combining retailers’ comments with their prognostications, what’s the big, bad revelation? For the first time in the last six years, less than 50 percent of retailers expect to have more customers, and less than 30 percent see higher profits for the year ahead!

So what happened?

It is nearly impossible to sum up the entire year of 2008 in propane retailing in one concise statement, because the business landscape at the end of 2008 has become far bleaker than it was at the beginning of the year.

On one hand, regardless of the ongoing volatility of propane prices, some consistencies remain, as retailers made little change to the structure and operation of their businesses during the year. On the other hand, the financial environment in which propane retailing does business has changed dramatically, and it’s far too soon to even guess when conditions may stabilize.

If our State of the Industry survey this year had been conducted in October rather than early September – after we all became aware of the economic crisis America faces – we have no doubt that retailers’ attitudes and forecasts for 2009 would have reflected even broader financial angst.

In nearly every direction a retailer turns these days, a headache will be lurking. Complying with regulations. Finding qualified drivers. Affording insurance. Maintaining bobtails. Dealing with ballooning receivables. It’s always something.

But the one issue that consistently seems to be the leading cause of every retailer’s headaches is propane pricing – retailer’s price paid and consumer’s price charged. And somewhere, stuck in the middle, is the resulting issue of margin.

Obviously, the sale of propane is the largest contributor of yearly gross revenue.

72.2 percent of propane retailers responding to this year’s survey considered propane retailing as their “primary business.” That number, however, is distorted by the inclusion of farm co-ops selling propane to their members. (Member-owned farm co-ops operate by a different business model than typical retail propane operations – having broader financial objectives and operational strategies. As a result, it is not uncommon for a farm co-op to identify its purpose more specifically as an “agriculture supply provider,” rather than as a “propane retailer.”) When farm co-ops are excluded from the question of “primary business,” the percentage of survey respondents considering their business to be retail sales of propane was 96.3 percent.

Retailers reported sales by source (in the chart below) for 2008 compared with previous years. Most of the propane was sold on a retail basis – 94.8 percent versus 5.2 percent wholesale – a relationship that has been stable over the years of our survey.

Average % of retailer sales by source
Average % of retailer sales by source

“Propane-related” sales and services actually comprise only 6 percent of retailers’ total revenue. Not surprisingly, tanks account for most of those sales.

To effectively market propane-related products and services, 40.1 percent of this year’s survey respondents have a dedicated showroom, and 1.8 percent have staff dedicated to selling propane-related products and services. 32.6 percent have staff selling both propane and propane-related products and services, and another 32.6 percent have staff dedicated solely to the sale of propane.

Other propane-related products & services offered by propane retailers
Other propane-related products & services offered by propane retailers

When adding together the number of states in which all our survey respondents reportedly sell propane, the average of the aggregate is 1.23 states per retailer. That is an indication of how few retailers have a significant percentage of their customers in more than one state. What’s more, retailers who report operations in multiple states have most of their sales come from one state. So, in general, a retailer’s market area is localized.

Make-up of a retailer’s customer base, naturally, reflects the operation’s market area and, perhaps, marketing effort. The chart to the left depicts retailer averages by customer type, number and gallons sold.

Average retail propane sales by customer type
Average retail propane sales by customer type

Despite inherent threats to their businesses – whether from competitors or other forms of energy – retailers have told us that they do see growth potential within the varied segments of customers.

A commodity product at a premium price

This year’s State of the Industry survey data shows that the average retailer (across all sizes of operations) sold 1,579,805 gallons of propane during the last 12 months – an increase, survey respondents say, of only 3.3 percent from the previous 12 months.

5-year escalation of September average retail price per gallon
5-year escalation of September average retail price per gallon
  • The annual average national price per gallon charged consumers between September 2007 and September 2008, as reported to us by retailers, was $2.08 per gallon – an increase of 13.7 percent from our survey report last year.
  • The average national price charged consumers in September 2008 ballooned to $2.537 per gallon, 30.1 percent over September 2007, reflecting the 29 percent increase in cost to retailers.


Losing customers to other energy
Losing customers to other energy


“The cost of propane … is killing the propane market!”

Charting the average September price charged to customers over the last six years not only illustrates the continuing and increasing severity of the price escalation, but also provides reason for the significant negative business impact retailers are citing.

Comparative household energy costs
Comparative household energy costs

The answers to questions and particularly comments from retailers we received from this year’s survey make us think the increase in the price they paid for propane from September 2007 to September 2008 – with the resulting 30 percent they had to pass on to their customers – may have been the “final straw.” Retailers told us that propane had become unaffordable to many of their customers. We wouldn’t be surprised if the rising rate of unemployment – headlined after our survey was conducted – is now making propane unaffordable to even more consumers.

Consequently, retailers say they have been experiencing significant defection of customers to other types of energy or lower-price retailers.

Current retailer business dynamics
Current retailer business dynamics

Looking at energy costs cited by the Energy Information Administration (EIA) of the Department of Energy, it’s understandable that propane retailers are losing customers to natural gas and electricity.

Pressure from within

In addition to dealing with competition from less-costly energy sources, propane retailers are feeling the impact of competitive ploys from other retailers, as well as the consequences of customers trying to adjust to their diminishing personal finances and need to economize.

Local competitive marketing practices being experienced by retailers
Local competitive marketing practices being experienced by retailers

Losing customers to cheaper retailers

Obviously, “cheaper retailers” had a significant impact on the industry this year. Retailers are feeling that – of other energy sources – only electricity had lured away customers more noticeably than “discounters.”

Every year, retailers complain about “cost-cutters,” “low-ballers” and other colorfully-named discounters continually depressing margins. This year, comments were particularly numerous about such competitive business strategies and practices. The low-price/low-margin, volume-driven strategy. The entice/recoup strategy (new customer discount, free first fill or free tank use, followed by price hike and fees). The anything-goes practice (operating outside the rules of the industry, ignoring safety, security and insurance regulations) to prop up the margin with artificially-low operating costs.

Retailer rating of technology effectiveness
Retailer rating of technology effectiveness

You can read here what retailers are saying about losing business to competitive ploys:

  • “[Competitor is] saying that we’re going out of business in the territory and that they are taking over.”
  • “Price-cutting per gallon, then charging high service charges, tank rent and delivery fees.”
  • “We have experienced new retailers getting into the market with a ‘get-rich-quick’ attitude … They do questionable deals …”
  • “New customer discounting, price gouging existing customers.”
  • “Large propane companies are forcing small operations out, and then doubling prices for low-volume users.”
  • “New [competitor] does not follow rules … undercutting … to steal customers. Caters to WalMart shopper mentality.”
  • “Competitor is saying his gas is better than anyone else’s.”
  • “It becomes more difficult when you have multi-state marketers undercutting your price.”
  • “Suppliers need to be more prudent on supplying retailers who are not concerned about safety of their customers and our industry.”

If retailers’ claims are true, not only could some of the mentioned practices lack basic business intelligence, they could also be unethical, illegal or both. At a minimum, they seem to be on the edge of accepted industry practices.

Average fixed assets & vehicles per retailer
Average fixed assets & vehicles per retailer

Many retailers listed multiple competitive marketing practices they are seeing within their individual market area.

It should be noted that, although it appears there truly are some unscrupulous contenders who are giving propane retailing “a black eye” and seriously impacting the business of good, honorable retailers, some “practices” being frowned upon – like free tank checks or custom billing incentives – could in reality be good marketing tactics. All in all, off-the-wall price discounting of competitors appears to be the primary frustration of retailers.

Ad/promotion media choices
Ad/promotion media choices

Customers changing to “will call”

Putting off purchases until the bank account balance is a little heftier is something that most consumers have done at one point or another.

“Putting off” is what retailers are experiencing from their customers – changing from “keep full” to “will call.” While we didn’t specifically ask retailers whether “tank empty” calls are on the increase, that wouldn’t be surprising.

Retailers making changes in operating practices
Retailers making changes in operating practices

Falling profit margins

Impact on the price side of the sales formula is evident … but the demand side has also been impacted on several fronts:

  • Facing higher prices, customers are naturally motivated to cut back on energy usage – to conserve – decreasing sales.
  • Retailers operating in areas with large concentrations of senior citizens are faced with an emotional choice of ensuring their customers can maintain basic life needs or ensuring the survivability of their businesses.
  • Regardless of the propane industry’s pointed efforts to promote propane energy among new homebuilders, some retailers commented specifically in the survey about contractors more frequently recommending electric. Other retailers have seen mobile home manufacturers moving toward all-electric and away from propane.


Retailers' messages regarding value
Retailers’ messages regarding value


  • “We are seeing fewer contractors recommend propane to homeowners/buyers as heating source.”
  • “Percent of all-gas homes has fallen 75 percent over the last three years.”


Comparative household energy costs
Comparative household energy costs

So, in addition to the price side of revenue, maintaining a level of demand is also a challenge for retailers.

Cash flow: increasing receivables and debt

Regardless of accounting principles, essential to any business operation – especially small businesses – is cash flow. How much comes in, how much goes out, and how much is left. But equally critical to “how much” is “when.”

Consumer price increase/decrease between 2008, 2009 heating seasons
Consumer price increase/decrease between 2008, 2009 heating seasons
  • For retailers who typically make small sales to a relatively large number of customers to whom they grant credit or bill after delivery, accounts receivable comprise a particularly critical element in that cash-flow timing. As a growing number of consumers have cash-flow problems – balancing ongoing living needs with available funds, delaying bill payments – accounts receivable become a major challenge to retailing cash flow. More and more retailers are thus becoming unwitting creditors, suffering ramifications of increasing accounts receivable.

67.7 percent of those retailers providing comments for the survey about the condition of propane retailing in their market area noted increasing accounts receivable – evidence of the magnitude of the problem!

  • But cash flow is also determined by outgoing dollars. And this year we likewise heard from retailers about increased expenses – many over which retailers have little control. The cost of complying with regulations, delivery costs due to horrendous diesel prices, more-costly hazmat-qualified drivers and high steel prices.


  • “Why are we the ones who have to bear all the risks?”


  • “I think the propane industry is our own worst enemy. We talk a good game about how efficient propane is and then price ourselves out of business with wholesale costs, insurance, regulatory expenses …”
  • One way of balancing cash flow as a retailer is to look to suppliers to carry the cost of purchases for some period of time – accounts payable – the flip side of accounts receivable. Unfortunately, that practice has begun to change for retailers. Slightly over one-third – 33.7 percent – told us that suppliers have imposed new conditions this year.

While a few comments regarded supply and delivery issues, the majority pointed to payment terms as the change in conditions – some suppliers requiring electronic bank funds transfer for payment, some within five days of delivery. Some smaller retailers are now even on COD terms.

  • Finally, as cash flow going out outpaces cash flow coming in, it becomes necessary to look outside the business for “tide-me-over” cash – lines of credit or secured loans. In the case of propane retailers, 29.0 percent of those who responded said their business debt has increased. This not only affects operational issues, but also the ability for retailers to advance and grow. Some retailers tell us they can’t get financing for new vehicles, tanks or other equipment.

These are a few of the many retailer comments regarding the impact of the economy on business:

  • “Receivables are impossible to manage. CODs are escalating beyond belief.”
  • “The banks are not as willing to make loans on LP tanks and equipment.”
  • “It’s harder to manage the business now than it was …”
  • “Overhead costs more than the business brings in.”

Retailers respond

As we mentioned earlier, much of what is happening in the market is out of the control of retailers. However, there are some things that are controllable, and they typically fall into three categories: fixed assets and vehicles, operating practices and procedures and financial management.

Fixed assets and vehicles

In this year’s State of the Industry survey, retailers reported minor increases and decreases in storage capacity, bobtails and service vehicles – indicating that retailers are continuing to replace vehicles. But nearly a quarter of retailers decided not to increase their fleets with additional vehicles.

Over the last few years, several types of technology have begun to permeate propane retailing – an established industry in which operational changes aren’t adopted quickly. Nevertheless, at least 9.0 percent of retailers had plans to add technology to their businesses in the coming months, but canceled those plans as the market situation began to deteriorate.

We further took the opportunity in the survey to ask about current usage of technology and satisfaction with it. Specifically, we asked retailers about their experience with GPS equipment in bobtails, fleet routing software and remote tank monitoring.

  • It was not unexpected that effectiveness for GPS systems and fleet routing software was no greater than reported, considering that many propane retailers have been delivering in their market areas for decades. Therefore, the benefit to them may be less than would be expected in a business having numerous new customers or customers with whom physical visits are rare, like cable TV servicing.
  • But, frankly, we expected a higher rating on effectiveness of remote tank monitoring. While its level of “very” is the highest among the technologies at 60.7 percent, it is still below “thrilling.” Perhaps this is due to most retailers who have begun using the technology simply having too few installations of monitors to make a visibly, positive impact on their business. Or perhaps those retailers, when rating effectiveness, were bearing in mind the cost of installation.

One reporting retailer had 2,000 customers monitored. Another had 1,500. But then monitored customers per retailer fell precipitously. More extensive use of remote monitoring by the industry is needed to say how effective this technology may be in improving efficiency – and ultimately cutting the cost of delivery – for propane retailers.

Operating practices and procedures

There were three ways in which retailers made some changes in how they do business or with whom they do business – supply procurement, advertising and promotion and labor.

When retailers look for immediate financial relief, cutting labor or marketing expense generally provides the quickest remedy for balancing cash flow. Whether or not either is the right decision past a short-term cash fix can only be determined over time.

  • Retailers reported in the survey that how they advertise and promote their business hasn’t changed much over the last year. However, since we added several media types to this year’s survey, 2008 results are not entirely comparable to 2007.


  • “… buying less equipment, cutting staff, shopping different wholesalers, less advertising – trying to keep the customers we have!”

It is indicative of market conditions to look at the messages retailers are trying to get out to customers and prospects.

Finances are at the forefront for retailers

Understandably – as evidenced by all the retailer responses we received from the survey – the combined industry dynamics within today’s economic landscape are continually keeping finances on the front of retailers’ minds.

  • On the supply side, 23.9 percent of retailers tell us they are using hedging to attempt to decrease some of the price volatility they have been experiencing this year.
  • On the customer side, how they deal with overdue receivables can have an impact in both the short term and the long term. Over 60 percent of responding retailers told us that they have tightened customer payment options. And nearly half – 46.1 percent – are using collections to deal with overdue accounts.

For propane retailers – many of whom pride themselves in their long history of customer service – deciding between doing all they can to retain customer loyalty or doing what they need to do to retain business viability is very difficult.

In so doing, retailers are now dealing with risking their customer relationships not only by trying to protect margins, but also by trying to collect on receivables. Tightening payment options. Sending overdue receivables to collections. That, of course, begs the question: Although seemingly imperative at this time, what will be the lasting effect on those loyal relationships that retailers have worked so hard to nurture?

It’s a difficult decision in a difficult time.

What’s next?

A year of turbulence for the industry is ending with further turbulence … and uncertainty.

You’ve been watching the cost of propane climbing many, many months longer – make that years longer – than consumers have been reeling from record gasoline prices. While there seemed to be no end in sight for the barrel price of oil for a time, this was the year that energy became the every-evening news headline – some political campaigns calling for expanded drilling, others for energy conservation and more investment in alternative energy solutions …

Then the economy began showing signs of slowing – a welcomed decline in over-the-road fuel prices, but an unwelcomed slide in housing demand …

Finally – a surprise for all America – with accumulated pressure of imprudent lending for the last 15 years, the financial structure of the country began crumbling. Almost immediately, money for loans dried up, in turn causing the economy to further slow. Consumer confidence plummeted. Un-employment began rising. The federal government began infusing trillions of dollars to keep our economy afloat …

And now, a new president elect will soon take office, having made campaign promises that speak of huge new tax-supported programs as remedies. News and business media are interviewing economists who invariably give conflicting predictions of when we can expect to see “light on the horizon.”

So … there is hardly a worse environment in which to predict what further will happen in the propane retailing industry. The energy situation continues to be so volatile, the Energy Information Administration (EIA) of the Department of Energy issued a revised energy outlook in November, superceding its October outlook. Its basic conclusion was:

“The current U.S. and global economic downturn has led to a decrease in global energy demand and a rapid and substantial reduction in crude oil and other energy prices. As a result, projections for both energy demand and prices are considerably lower than last month’s outlook.”

Looking at the EIA’s predictions for the 2009 season, the prices of natural gas and electricity are both expected to increase, while heating oil and propane prices decline. However, the average household expenditure still makes natural gas or electricity an attractive alternative to propane.

One caveat from the EIA:

“However, with current low inventories, propane markets are likely to remain relatively tight this winter, with the potential for upward pressure on residential propane prices if colder-than-expected weather occurs.”

The state of the industry?

Well … there’s bad news, worse news, good news, and somewhere in the midst of it all, there’s bound to be even better news. Perhaps your retailing business is doing better than the averages as reported by retailers responding to our 2008 survey. If it is, that’s great news. Then, let’s keep our fingers crossed and listen only to those economists who have rosy predictions, so that we can at least minimize our nightmares. And, perhaps, in the 2009 State of the Industry report, we’ll be able to report on retailers’ positive prognostications.

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