Brown’s Oil has suffered what the heating oil, and to a lesser degree the propane gas business has experienced in recent years. The heating oil market in certain regions has been suffering an accelerating loss of gallons, and customers. Brown’s Oil is typical of the Northeast urban and suburban heating oil marketer. This decline is due to high commodity prices, poor weather, customer conservation, natural gas distribution pipeline expansion, structurally constrained low natural gas prices, and tough bank lending restrictions. These factors have nothing to do with the excellent talent and tenacity of the heating oil marketer. For marketers outside of the natural gas marketing regions, keep an eye on the family businesses who compete there. These companies will feel the impact first and worst.
A Changing Energy Market in the Northeast:The decline in market share is evident in the U.S. census data. I've attached some charts on household change in energy sourcing for the last 5 year ending in 2011. Even without seeing 2012 numbers, these changes are illustrative.
According to the New Year's Day, 2013 Boston Globe article, "decade ago more than 40% of homes where heated by oil, that number has dropped to 31.8%." This translates to a loss of 1/4 of the entire Massachusetts market in 10 years. Consumer conservation has dragged fuel sales even further. Massachusetts has lost 350 million gallons in sales. Despite these losses, there still exists roughly the same number of retailers in this market. The market capacity demand just for Massachusetts would suggest there should be several hundred fewer marketers operating there.
STRATEGIES FOR SUCCESS BY CHANGING YOUR BUSINESS:Here are just some of the strategies you MUST implement to succeed over the long run. Many of these strategies will take the next three to ten years for the payback to justify their effort. If you are not willing to go all out, then get out.
• Increase Margins! As product prices increase, and sales decline, both for reasons out of your control, you must increase your margins to help make up for the total lost gross profit.
• Markup on a Percentage! Heating oil marketers are one of the very few industries who don't. In the late 1940's my Grandfather bought number 2 heating oil for 8¢ per gallon and sold it at 12¢! Using that same percentage markup today, you would be selling heating oil around $4.80 a gallon. Look into your past for your appropriate margin. Look at 2004, which was in general a good year for the industry, and determine your margin as a percentage. Apply that number to today's costs. As surprising as it will be, it's where you need to be today. Don't fight your competition to the bottom. I've seen many companies who have reduced their margins to increase sales, and the total gross profit declined!
• Sell More Stuff! Increase total gross profit by focusing on the value added sales with the least increase in costs. Here are some ideas. This list is just a start, and remember that all markets have a slightly different need and perception.
-> Service Contracts. If it needs to be fixed in the home, offer a service contract to do it. Always link the program to other purchases the customer can get from you. Introductory rates are okay, but you must link them into long term agreements, as most of the expensive deferred maintenance is done at the beginning of a service contract. Service contracts also have the cost advantage of smoothing out your labor costs by decoupling the service time from the time it is billed. It's a lot easier to get a customer to allow you to service their heating equipment during your slow period in the spring, when you tell them that they've already paid for it in their service contract.
-> Sub-contracted work that relates to your business. Instead of giving away work that you don't do, you bill the customer for sub-contracted work (and Mark it up!). If you don't do plumbing on a boiler, and your customer needs that work done, you are the general contractor who controls the relationship. Likely your staff will have to coordinate the plumber and your service technician anyway. Make money while doing it. Other similar items are: chimney cleanings, chimney linings, air conditioning services, heating system installations, bath and kitchen remodeling. etc. If these sub-contracted services build into larger businesses you would increase margins and reduce costs.
• Increase your cash-flow without reducing margin.
-> Sell budgets to all your accounts and start them in June. You know what the consumer is going to burn more than they do. Take the time in this slow time of the year to calculate what their needs will be and auto enroll them into a budget where they have to opt-out to not be on it. People take the path of least resistance. Remove them from the budget by fall if they've never made a payment.
-> Avoid fixed price pre-buys. Although these programs advance your cash-flow, if these are fixed price programs, they are dangerous speculative instruments. First, they reduce the valued added components of your business to a single dollar per gallon number. Consumers become price conscious. They will chase that one number forgetting all the other great stuff that you do. Second, the consumer has too many government and legal protections in a volatile market where they can bail on their agreements if the market turns against their position. This happens, and it happens a lot. The risk is then borne by you. Option based capped price programs are fine, but make sure the consumer pays for the option cost with a markup.
-> Make it easier to pay. There are many vendors who provide on line payments. Many utilize smart phone applications for billing and easy payments from ACH debiting of your customer checking or savings accounts. You get paid electronically without credit card companies like Amex getting a 3% ($.10/gallon +) vig. It's easier for the consumer, and easier for your staff.
-> Don't just give away cash discounts. Turn this electronic prompt payment into a customer points system to sell them some of your new services they have not yet used at a reduced rate.
• Act on business expansion. For increased gross profits and top line growth, be prepared to deploy and leverage your capital to expand your business.
-> Acquire competitors. With volumetric declines, there are too many competitors. Customers if handled properly tend to stay with the business they have been with. These companies are worth buying, and in general it is far cheaper and takes less effort than to plan elaborate and expensive marketing campaigns to get customers.
-> Add capital intensive business lines with higher margin. Things like propane gas, LNG, CNG, and natural gas retailing. These are big dollar items that will drive you out of business even faster if they are pursued under capitalized. These expansions need a plan that includes a return on the capital investment in addition to an increased gross margin over the items that you currently sell.
• Get rid of assets you don't need. Sell off unrelated businesses if they are not adding to your total gross profit. Sell the extra trucks, but sell them out of the region or convert them to a different use before you sell them as they may reemerge as a new competitor. Sell your unproductive real estate. Sell parts of the business that are under performing and you don't have the resources to fix. I'd say sell the boat or the vacation house too, but you are all likely so stressed out, that you'll need to get away.
MODEST CHANGE STRATEGIES END IN FAILURE:
I've seen many companies fail or destroy years of their retained earnings by half-hearted attempts at change. This reminds me of the Pearl Jam song, Elderly Woman Behind the Counter in a Small Town: "So I changed by not changing at all, small town predicts my fate." A lack of significant effort in making a hard turn in your business direction when the world is changing around you, leaves your business in the worst position.
I've seen many examples of halfhearted efforts that leave you worse off. Here are a few:
-> Entering into the propane business with only a truck and making the customers buy the tanks, only depletes your resources while not producing long term margin improvement.
-> Bait and switch marketing techniques like offering the first delivery sold under cost. This leaves the customer with the expectation that they should always get a special deal or they will change. (Oddly enough electric heat's recent growth is from the customer perceptions that they were getting the same rate as everyone else and hadn't missed out on a deal that they neighbor had received.)
-> Cutting customer service. The customer is with you because you know the details of their home. If they are just a number, then they might as well be with a utility.
-> Converting your service department into sub or independent contractors. Yes, service techs require hand-holding, but they sell you to the customer. If they are working for themselves, they'll sell utility programs to your customers in order to get the conversion kickbacks.
-> Laying off long term employees with the hope you will get them back seasonally. You will likely not get them back. If you do, your business is no longer their focus. If they don't return you'll spend an entire season training their replacements.
-> Increasing cash discounts to advance cash-flow. You undermine your overall profits. Your customers will perceive your company like a discount oil company only you charge a lot more.
-> Selling unhedged prebuys for cash-flow today, hoping the market will decline enough to lock in your position later. This is like playing the lotto. There are a lot more losers than winners, and heaven forbid your bank finds out.
-> Cutting membership in the trade associations and not going to their meetings. This is where you will find either the new ideas that will save and grow your business, or the competitor who may later be a potential buyer.
GO BIG OR GO HOME.
The energy market is changing, and for most heating oil companies, not in a good way. Each day without a new business model means a day that your business is worth less. A value you placed on the business 5 years ago is discounted today. There are few buyers, and they need to be cultivated to have an interest in your exit. The family business cycle was described well by Babson College's Ed Marram, as Wonder, Blunder, Thunder, Plunder, Asunder. If you are not willing to double down now for a longer term payout, then you must seriously consider selling your business, and utilize that capital to do something else. Plundering your asset to get the value out now, may avoid the final stage of going Asunder.
Scott MacFarlane in his business has done most of these strategic changes, and more. They are set for great success in a difficult market. Are you and your business ready for this change??
For the full article please click here, "Fuel Oil Industry Feeling the Heat"
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Industry champion… Chief, cook, bottle washer! Sean has more than 34 years of experience in the retail fuels industry, serving as President of his family businesses in VT and NH until 2011. Sean is resident in our Washington, DC and Bellows Falls, VT Offices.
Conductor…Mediator…and Referee! Bill has over 15 years of corporate financial experience ranging from venture backed start-ups. Bill is resident in our Providence, RI office.