State of the Industry report: Can we rise up?

December 11, 2012 By    

View a reader friendly version of the SOI report from our digital edition.

 A year ago, responses to LP Gas Magazine’s annual State of the Industry survey revealed not only concerns of propane retailers regarding their businesses and the economic climate, but also their lack of trust in the federal government helping the situation.

 This year, responding to our survey just as presidential election campaigning was wrapping up, retailer misgivings about the business environment created by Washington were still apparent. Undoubtedly, following the election, many retailers are among those in the business community feeling that conditions are too far out of their control for them to make a difference by voting.

Propane retailers responding to our 2012 State of the Industry survey rated among their highest concerns both national-level issues (the economy and health care costs), and industry-level issues (supply pricing and regulation).

Sadly, their misgivings are being substantiated by respected voices saying the business environment, particularly for fossil fuels energy, could be worsened very soon. Expect more taxation and employee health care costs and – hitting particularly “close to home” for fuels – a torrent of waiting regulations, as well as more of the Obama administration’s ill-spent dollars and “green-energy” coddling.

Still in all, despite a tough year for their business prosperity and political outcomes, you’ll see that seasoned propane retailers are “hanging tough.”

Are you better off today than you were four years ago?

It’s widely thought these words may have made a huge difference in the Ronald Reagan-Jimmy Carter presidential election. That sentiment apparently didn’t have a similar impact on voters in this year’s election. But, regardless of how the general population viewed the past four years, propane retailers certainly felt a decline in business prosperity for each of the last four years.

Our State of the Industry report is not just a collection of numbers. Instead, it describes the industry results, conditions, attitudes and expectations that underlie the numbers. For this glimpse of retailer feelings, an average of all retailers is meaningful. We know, however, that because the propane retailing industry is not just a collection of identical businesses, a lot of the data we collect from the State of the Industry survey – in order to be especially meaningful – must be analyzed  by retailer size, region of the country and type of operation.

Each retailer who answers our survey questions helps paint a composite picture of the retailing business at a point in time – how they remember past years, how this year has been different, how they see their business next year. From the picture they paint with the details of their businesses, we can quite accurately put together a general breakdown for the propane industry.

Adding to our survey this year was a request for retailers to rate how they felt about their business prosperity in the last five years. This gave us a new dimension for the report. It turned out to be especially significant because it revealed an inconsistency we hadn’t seen before.  Repeatedly in each of those years’ surveys retailers had projected a positive outlook with plans for growing in customers and gallons, yet – in reality – their prosperity appears to have been declining along with the overall retailing industry that lost 24% in gallons sold over the last decade.

So when we asked surveyed retailers about their business expectations for the next four years, 54.3% still see their operation under current ownership, and 43.4% plan for their business to remain in their family. Perhaps that’s a reflection of the we-can-make-it-through-anything attitude that the iconic propane gas man has had through the decades. “Presidents come and go. Bad economies do, too. Somehow we’ll make next year better.”

Reflecting that sentiment, on average across the country, retailers are projecting an increase in their sales of a bit more than 11%. Setting tanks, too, is still in their plans: 96.9 on average per owner-operator, 49.5 per co-op and 217 per multi-state retailer.

To further the inconsistency between dwindling prosperity and growth plans, 25.7% of survey respondents say they would sell out today if offered a fair price, leaving us wondering why and how.

Looking at what comprises retailers’ sales composition, delivered retail propane still is about three-quarters of a retailer’s business, with wholesale propane and propane-related products and services filling out an operation’s revenue sources. Some are bringing in more sales this year, some less – probably driven by the economy and customers postponing what isn’t a necessity.

From today’s realities to tomorrow’s possibilities

In many ways, the state of the propane industry could be equated to the perfect storm. Natural gas lines extend into propane’s traditional geography. Electricity becomes an affordable home energy and legitimate competitor. A near-recessionary economy constrains business. New taxation looms. Credit availability is limited for business growth. A massively multiplying federal deficit exists. Growing customer receivables. A slow-to-recover housing market. A devastating drought that has dried up the nation’s agricultural energy needs. A freaky warm winter. And, to top it off, a re-elected administration that is trying to regulate and tax fossil fuels. That’s reality.

So, you aren’t better off than you were four years ago.

The plight of propane retailing – and your retailing business – has been front and center in the minds of the industry’s leaders. Recreating propane’s prosperous years is their goal, one that will require providing retailers a new vision of the possibilities, a vision for creating a vibrant new market by filling a contemporary need and thereby replacing shrinking traditional markets. Getting past dependence on the heating season. Taking advantage of the shale drilling boom. Shifting from the perfect storm to a timely sea of change.

As essential as this is to the return of prosperity to retailers, we included questions in this year’s State of the Industry survey to “test the waters” of retailer desire to see their businesses grow beyond what once was “tried and true.” The findings from our survey questions are included in this report in a section titled: “A new road to travel.”

What competitor is swiping the most from your business?

Propane has been and still is essential to home heating in much of the country. It’s the primary heating fuel for 36% of Midwest homes, 35% of the South, 14% of the Northeast and 16% of the West.

There is little surprise in the fact that competition abounds among propane retailers within any territory, because attracting new revenue from consumers already heating with propane is easier than converting them from another fuel. Over our years of surveys, we’ve heard repeatedly – and heatedly – of unfair short-term incentives being offered to steal away customers from one retailer by another.

While it’s also not uncommon for owner-operators to comment on multi-state marketers having a pricing advantage, it’s interesting to note that retailers generally considered the strength of competition from owner-operators within their territory to be greater than competition from other home heating fuels. On average, retailers across the country have 2.8 competitive retailers in their territory, the Mid-Atlantic having the most with 4.9.

Farm co-ops, owned by the farmers and ranchers they service, presumably have a more stable market and thus are not considered to be quite as competitive, although there certainly can be competition among overlapping co-ops and some owner-operators who have long supplied farms.

This year’s survey also found that a significant number of retailers in New England, the Mid-Atlantic and East North Central regions had new retailers move into their territories in the last 12 months: 77.8%, 61.9% and 50.8%, respectively.

Outside competitive threats

While the propane industry can cheer for shale gas that has the potential to lower the price of propane in coming years, the expansion of natural gas lines across the country is bringing with them a growing home heating threat to propane. Retailers nationwide reported new natural gas pipelines: 78.0% in South Atlantic; 66.7% in Mid-Atlantic; 60.9% in East South Central; 56.9% in East North Central; 55.6% in New England; 45.0% in Mountain; 34.0% in West North Central; 33.3% in Pacific; and 27.8% in West South Central – a national average of 50.5% of retailers reporting new gas lines. It’s no wonder retailers rated natural gas relatively high as a competitor, although electricity is making even stronger headways, particularly in the South.

The high price of heating oil and the fact that it’s being touted as a “less-than-clean” fuel have given propane retailers conversion opportunities in recent years, particularly in the Northeast, where fuel oil has been a standard home heating fuel for decades. While the situation creates another competitive situation among retailers, conversions bring real propane growth to a region, rather than merely moving propane dollars from one retailer to another.

Of course, our further question of retailers – beyond rating competition – was this: How were the results of that competition in gains or losses in the last 12 months? On average across the country, 67.9% of retailers responding to our survey report acquiring new customers after successfully making conversions from other fuels.

On the other hand, all competitive fuels and all retailer types considered together, 89.1% of survey responses indicate they’ve lost customers to another home heating fuel.

Gallons gained

Nationwide data compiled by retailer type showed owner-operators having gained 85 customers on average; co-ops, 34; and multi-state operations, 253, from all fuel types.

Conversions from electricity varied greatly across the country, with the South having the highest concentration of electric home heating – 62%. The three regions with most new customers on average per propane retailer – two of those regions being in the South – are West South Central with 18.4; Mid-Atlantic, 17.0; and South Atlantic with 16. Of retailer types, owner-operators gained the most electric conversions – an average of 12.3.

Not surprisingly, retailers made far fewer conversions to propane with consumers who have access to natural gas pipelines – an average of four each for the handful of retailers reporting conversions from natural gas.

Considering the higher cost of fuel oil heating, New England retailers, as expected, converted the most from fuel oil – an average of 34.6 new customers per retailer; Mid-Atlantic was close behind with an average of 27.8.

Gallons lost

More than six times as many retailers reported having lost customers to natural gas as those having gained – 45.1% of retailers responding to our survey. Of those, the average number of customers lost was about 22. Farm co-ops lost the most with nearly 27. By region, customers lost to natural gas were the greatest in New England, South Atlantic and West South Central, where those retailers reported losses averaging 32.3, 37.4 and 35.4, respectively.

The disparity between gaining and losing customers to electricity was not as great as with natural gas, yet 41.8% of survey responders reported losing 18.2 customers on average to electricity. The number of customers lost by those retailers to electricity was significantly greatest in the South Atlantic region – 39.5 per retailer.

Unlike the significant gains from fuel oil in some regions, there were few losses to fuel oil.

The election is over. Now what’s in store for fueling America?

Despite what your political leanings may have been in the recent election, you must shake your head at how Americans feel about their government. A recent Gallup poll regarding how much Americans trust each branch of federal government showed this: Those who either trusted Congress a great deal or at least a fair amount totaled 34%; those trusting the president, 56%; and judicial, 67%. The low trust in Congress is particularly poignant, given that, as the Gallop report said, “The Founding Fathers set up the legislative branch … to directly represent the people.” Americans, despite how they voted, apparently do not feel that their desires are being duly fought for.

From survey responses, retailers readily agree on that lack of trust, as they rated Congress and the president among the four greatest factors having a potentially negative impact on their businesses.

Federal regulations – and unprecedented presidential policymaking – keep growing from year to year as a worry for retailers. And retailers should worry, considering the scrutiny fuels get from a myriad of agencies. Plus, with the current administration, regulation and policy dictates for all businesses, like health care, credit, joblessness, and taxation, the potential for pushing small businesses “over a cliff” is real.

A recent op/ed piece in Forbes titled “The Coming Obama Recession of 2013” said the president’s re-election could put the country “perilously close to falling back into another [recession] if taxes are increased.” Brookings Institution recently wrote that what supposedly is an economic recovery is abysmally slow, with unemployment hurtfully high, making the country “fragile and vulnerable to risks,”including world economic problems.

The high level of concern retailers have regarding health care costs – in fact, their top-most concern about the national business environment – is well warranted. Quoting an American Action Forum article: “Obamacare will cost … nearly $30 billion just to implement the blizzard of new regulations and required paperwork … not talking about the increased costs you face.”

Retailers should become knowledgeable about how the new rules for employers might impact them. While the media is reporting that insurance companies will be raising premiums, some small companies that pay a percentage of their employees’ insurance costs may be eligible for a tax credit.

The full text of the Affordable Care Act, which has become known as Obamacare, is at www.healthcare.gov/full/index.html. For a non-governmental review and details, including health exchanges, the Kaiser Family Foundation has extensive coverage at http://healthreform.kff.org.

Specific to energy, one oil and gas consultant said in FuelFix in November that the president’s second term will be “onerous and difficult” for the industry, restricting fossil fuels and promoting green energy. Oil and gas exploration will continue – as we reported in last year’s report – battling not only with an administration that is focused on “green,” including a possible carbon tax (with the probability of ultimately raising consumer costs of energy). It will also be battling with environmental groups demanding limited drilling, like the plan to “close 1.6 million acres of federal land originally slated for oil shale development” to ensure safety of animal habitats, as reported in The Hill’s E2 Wire recently.

Beyond the impact of energy regulation is its cost. Just a few examples of what is already in the pipeline as tracked by the American Action Forum as of July: EPA fracking rules, $233.8 million; new refinery standards, $460 million; housing energy standards, $876 million; and Tier 3 fuel standards (light-duty vehicles), $8 billion.This level of spending is despite having no clear energy policy.

Of course, with 85.5% of propane now coming from North American resources, 69% from natural gas liquids (as reported by ICF International in its August research report to the National Propane Gas Association), and with abundant shale gas having the potential for benefiting propane, the drilling rig count is meaningful to the propane industry. The natural gas rig count was 811 in early 2012, but only 424 in November. The EIA says it expects, however, continued sufficient supply from “liquids-rich” areas to “offset decline in drilling activity.”

Altogether, it’s no wonder propane retailers tell us they have little confidence in government.

Is propane spelled O-P-P-O-R-T-U-N-I-T-Y?

We have no doubt that the word “opportunity” could take retailers on a number of divergent “paths through the woods,” depending on their type of retail operation, their size or their geography primarily. But whatever the path, the upshot of opportunity would assuredly be a chance to grow sales.

As we had written about earlier in this report, retailers perpetually indicate they will sell more gallons next year, despite also reporting declining prosperity. So, we asked retailers to rate opportunities to increase their sales – sales that add new gallons to the propane industry’s annual total by converting consumers from another energy or signing up homebuilders, as well as from converting existing propane dollars to their coffers from other retailers.

Looking at the national average, it’s obvious that retailers see more opportunity in attracting existing propane consumers to their operation’s service. Looking at regional response, however, the Northeast stands out as seeing considerable opportunity in converting consumers from other energy, presumably mostly fuel oil. Agricultural processes are rated by all retailer types as having the least conversion opportunity, possibly because of the feeling that most farms are dedicated, invested members of community co-ops.

Expanding in square miles

Nationally, on average, 30% of retailers – far more than the near-20% found by last year’s survey – added to their gallons sold in the last 12 months by expanding their marketing territory, yielding more than 100 new customers for each expanding retailer.

Building business

One market about which the majority of retailers responded positively in our survey was reaching out to homebuilders and remodelers to install propane as a household fuel.

Positive response was just about even across the types of retailers – owner-operators, farm co-ops and local operations of multi-state marketers – but New England, Mid-Atlantic and East North Central regions responded with the greatest percentages of “yes” – 77.8%, 71.4% and 72.3%, respectively.

A new road to travel

We don’t doubt for a moment that every retailer is painfully aware of the precipitous fall of 2.5 billion gallons in propane consumption in the last decade. Watching new natural gas pipelines reach out into what has traditionally been propane geography, facing the attractive pricing of both electricity and natural gas, and keeping their customers in hand has become a continuing challenge and worry for propane retailers. ICF International projected this downward trend through 2012, with modest growth in propane demand only after 2013. It has become very obvious that the propane industry cannot depend on existing geography or traditional markets to survive, much less to grow.

While Washington’s clean energy focus has a mountain of faults, it is leading states and cities to encourage or require clean-air remedies – alternative vehicle fuels being one. And propane’s autogas is on a roll in some states. Recognized by government as a clean alternative fuel with an advantageous price per gallon, autogas could be the new market that the propane industry needs for sustainability – a market that could even bring your retailing operation back to prosperity.

It seems like the timing of propane’s market need and government’s clean fuels focus may be a very opportune convergence. The direction that the propane industry’s leadership is taking is not a pie-in-the-sky dream of building a nationwide infrastructure to fill cars at street corner stations with autogas. Instead, the focus has been on the local fleet market – fleets that “come home” every night to where a fueling station is installed. These fleets include school buses, police departments, shuttle buses, local delivery trucks, taxis and trash trucks.

We asked retailers in this year’s survey for their impression of propane as an alternative vehicle fuel and as an opportunity for their retail business growth within the next five years. Regarding the types of fleets those with interest would pursue, the perceived potential was highest with school buses.

It appears the industry has work to do to make autogas a plausible opportunity to retailers who have long been the bobtail-delivery gas man to rural communities. Or, perhaps most retailers are still unaware of the considerable inroads some retailers have already been making in setting up fleet conversions to autogas.

Fleet conversion opportunities for retailers are being made possible with support from the Propane Education & Research Council and partnering with organizations like Roush CleanTech, an alternative fuel systems provider. If you want to begin researching the opportunity, visit www.autogasusa.org.

To specifically search out school bus fleets, visit www.nasdpts.org/SNAC/index.html for a member list of the National Association of State Directors of Pupil Transportation Services.

And when the 2013 State of the Industry survey comes your way next autumn, tell us about the new road you’re traveling with autogas.

Are you trying to replace “drought” nightmares with “cold winter” dreams?

In 2000, we published our first State of the Industry report. The first page of that very first report says this: “Everywhere you go, the mantra for propane retailers is the same: ‘Give us cold weather.’” But that first page also says record-setting warm winter weather had “melted profits, crimped cash flows and pushed many veteran marketers to the brink in the business that sustained fathers and grandfathers before them.”

Sounds like we just wrote that today, doesn’t it?

The 2011-12 heating season was the fourth warmest on record. If you impatiently wait for summer to pass and for tank-fill orders to pile in, you felt last winter’s warmth in your bones and in your receivables. It was a hurtful convergence of weather and economy, as consumers tried to minimize their fuel needs. The Northeast reportedly had propane volume down 25-30% in January alone.

Now, looking at this heating season’s prospects, we can’t help but lift an eyebrow when comparing the U.S. Energy Information Administration’s (EIA) outlook that says the heating season “primarily reflects a return to roughly normal winter temperatures,” with the two weather maps of the National Oceanic and Atmospheric Administration (NOAA). The NOAA weather map shows mostly “warmer” and “equal chances” of warmer or cooler temperatures in the depths of winter. Sounds like another winter to wear a light sweater but keep your long johns handy.

Admittedly, if the EIA’s projections come to fruition, the increase in heating degree days is considerable for most regions. Have you made pre-buys, or is the memory of that “boatload” of unsold propane last winter making you risk a late buy?

There are concerns about the logistics of supply for heating season months. While winter supply generally is part of late-year industry chatter, this year a convergence of potential roadblocks – tight availability of pipelines, railcars and transports – could delay deliveries.

Of course, price risk is always at play. It happened that last year’s glut of propane sitting unsold on warm winter days saw wholesale prices trend downward. Take New York, for example: October’s opening price was $1.695; by mid-February, the price sank to $1.362. The previous 2010-11 heating season, however, had opened at $1.371 and climbed to $1.852 in February after a couple months of above-normal temperatures. North Dakota experienced the same trends: 2011-12, a drop from $1.509 to $.995 in January; 2010-11, a rise from $1.190 to $1.488 in February.

If Mother Nature complies with near-normal temperatures this winter, EIA’s outlook is for average household expenditures to rise above last winter for all heating fuels: natural gas, +15%; electricity, +5%; heating oil, +19%; propane, +13% – in the cases of electricity and propane, the higher expenditures being only from increased heating needs, not price.

Average U.S. residential propane gallon price, as forecasted by EIA, is expected to be -4% from last winter. Interestingly, the October 2012 opening price was $2.362 per gallon – a 14.7% drop from the October 2011 opening price of $2.769.

The price of warmth

Propane winter supply and pricing is always a major source of concern voiced by retailers in our annual survey, led this year only by health care costs and the economy. Thus we think that providing you a sampling of heating season prices per gallon tracked by EIA from last winter to compare to the start of the current heating season is at least a bit informative.

From what our survey respondents report, the average nationwide high price charged customers was $2.640; the low was $1.629. The average nationwide high wholesale price paid by retailers was $1.715; the average low was $0.834.

And then there is drought

According to the U.S. Department of Agriculture’s Drought Monitor, in just one month over summer – mid-June to mid-July – the percentage of farms experiencing severe drought rose from 16% to 22%, and acres of affected cropland rose from 17% to 39%. Hardest hit were the East North Central, West North Central and Mountain regions.

Farm co-op sales could be expected to suffer greatly from drought conditions, whether serving primarily crop farmers or livestock ranchers, particularly in hardest-hit regions. Nationwide, more than 738,000 farmers and ranchers are members of co-ops. The highest numbers are in: Iowa, 69,000; Tennessee, 66,000; Nebraska, 60,000; Wisconsin, 58,000; and Illinois, 52,000.

Fuels comprise an important segment of products to farm and ranch management – propane among them. Our survey found that, nationwide, 47.2% of co-ops lost propane sales for agricultural processes (grain drying, tractor fuel, space heating, weed burning, irrigation) because of drought – their average propane loss being 37.8%.

But owner-operators and operations of multi-state retailers also supply farms with propane for agricultural purposes. Though far less than farm co-ops, 25.2% of owner-operators nationwide responding to our survey reported having lost propane sales to drought; and 28.9% of local operations of multi-state retailers likewise lost sales.

An article on AgFax.com in October, “Ongoing Drought Conditions Possible for 2013 Crop Year,” reported that 75% of Iowa and 97% of Nebraska were in “extreme” or “exceptional” drought conditions, the likes of which had never been seen that time of year. One climatology expert told AgFax that a drought year historically is followed by another dry year. Another climatologist doesn’t anticipate 2013 to be another year as severe as the last. However, the damage from that severity will be felt into next year, even once ample rainfall returns.

Despite warm winters and Washington woes, 100 years of dedicated propane retailers

“Time-tested veterans” describes the character of most propane retailers. “Award-deserving” fits many, too. Those who participated in this year’s State of the Industry survey average 24.8 years in propane retailing, and 97.4% say their bobtail-delivery business has been around for 34.8 years on average.

It’s not surprising then that despite feeling that their business prosperity has been dwindling in the last few years, they remain optimistic about their operation’s sales increasing next year. So, when asked to prognosticate for the next four years, it’s also not surprising that a keep-and-add sentiment prevails.

It’s also obvious that propane retailing still has a “family soul,” with many operations passed from generation to generation – bobtail-delivery businesses that kept the home fires of their communities burning over the years. That’s not to say that years of fighting Mother Nature and Washington haven’t left some tired and wishing to be acquired.

■ When the LP Gas Magazine retailer recognition award program was announced in conjunction with the 2012 propane industry centennial, we were flooded with nomination-filled mail. Some included pride-filled letters from wives and grandchildren of longtime owner-operators, asking that their kin be included in the Blue Ribbon Gas Man awards and their retailing operations be put on the Propane Retailing Honor Roll. We must admit to getting lumps in our throats when reading the loving notes they wrote, telling how their husbands and grandfathers trudged through snowstorms to keep farm homes warm and overlooked bills to help seniors survive when money was in short supply.

■ So, as another year ends and the usual angst about needing a cold winter ripples through the industry, it’s with swelled hearts that we know there will again be the gas man out there – you – pulling your customers through not-the-best-of-times. You’re keeping alive retailing’s enduring reputation of care and commitment. You’re the best.

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