The 2012 Valentines Day Massacre:  Winter Sales off 25-35%. How does this impact you? How do you react?    For many of our friends in the heating fuels business in the Northeast and in particular, New England, this Valentines Day probably seems more like a Al Capone moment rather than a romantic moment with a loved one. The good news is that the business problems you need to deal are not your fault. They are circumstances you cannot control.
The bad news is that much like a romantic time with your lover on the Italian cruise ship Costa Concordia, the unanticipated actions of Captain Schettino can leave you scrambling for the lifeboats.

Things we can’t control:
Commodity Speculation
Since 2005 the heating oil industry with NEFI and PMAA have been working hard to bring back the traditional market structure for hedging that we used to rely on. Remember when a 10¢ per gallon move in a day meant that we had gone to war? Wall Street commodity reform with new Dodd Frank rules for commodity trading limits are six months or more from starting.
The prices or wholesale petroleum are not set by supply and demand. It’s set by money flows. New large investculator players like U.S. Oil Fund, and OTC dark market speculative trading continue to dominate our markets with high leverage for many of the players.
The United States Federal Reserve has exacerbated the problem with allowing investment banking access to the Discount Window, allowing customer deposits to be leveraged, and free money police of QE2 (Quantitative Easing), Twist, etc., which has devalued our currency and drove currency hedge money further into commodities.    The Europeans via the ECB have started similar processes at the end of December. That not being enough for their likes, the Bank of England and ECB announced more Quantitative Easing equivalents this week.
When you are a mouse in a stampede of elephants, you best bet is to be vigilant to avoid being crushed.
  
Weather: Northeastern U.S. temperatures through January are off 15% v. 10-year average and 20% over last year.
You can’t control the weather, but it can still impact you. This winter’s weather versus last year is 20% warmer. There is an old axiom in the heating business, that you can’t get January back. Not only does it make up a quarter to a fifth of your sales, but in sustained temperatures below 20°F consumers forgo conservation for just trying to stay warm. To add insult to injury, our cold weather shifted to a significantly colder than normal temperature in the EU and Russia. This has aggravated price increases seen here.
  
Consumer’s are reacting to price:
Unfortunately consumers ARE price sensitive and they have reacted in predictable ways in this prolonged recession. The first response has been with conservation. They’re listening. The simple things that we have marketed to consumers for years, like turning down the thermostat, have worked. Further, they have also used substitution. Cordwood, wood pellets, and even electric room heaters have cut fossil fuel usage. The good new here is that if fuel prices become more reasonable, these lost gallons will return. Gallons do not return with conversion to other energy sources. Conversion rates this year are up 50%. This has increased customer conversions from already high 2% to 3%.


Gallonage volume decline this year is staggering.
In a recent filing, the largest heating oil retailer, Petro / Stargas for the calendar year of 2011 showed a 19% decrease in volume. In New England, heating oil volumes are down this heating season versus last by 25% to 35%!

So what should you as a heating fuel marketer do?


Things you should do:
Cut unnecessary expenses: 
Remember the big savings often take years to rebuild. Outside of your cost of goods sold, your biggest expense is your people. Layoffs and reduced hours may be necessary, but they are painful emotionally and also to morale.
Look at inventory reductions. This is a two edged sword. Your inventory, even old parts inventory are an asset. When you liquidate, make sure there is value to converting that asset into cash. If volumes are down due to weather look at your futures forward contracts of fuel. If you can’t move what hopefully is a lower cost of goods achieved by having hedges “in the money,” into a higher margin spot Street Price, then sell them back while you have time.
Remember this cautionary axiom: You can’t save your way into prosperity. You will need top line sales growth.


Achieving growth and productivity:
Increase customer sales in other areas. An example of this is to increase your service contracts with consumers. Increase the areas of service to you consumers. They need to buy more from you. Remember there is an important balance in targeting the service and products that do not consume all of your available capital.
Divest Non-performing Assets. Sell the boat, the extra vehicles you are not using, and things like the extra real estate you are not using.

Things you must do:
Increase Margins. An oilheat legend one told me, “Margin is sanity, gallonage is vanity.” Margin adds more quicker to the bottom line, thank increased gallons.
How bad are things? You must determine the rate of losses. This will tell you how much time you have to plan for changes.
Examine your geography and your particular financial limitations to acquire other companies.
Plan and implement top line growth in new product lines where you can increase gross profit.
Repackage your financials for the bank. They understand real estate. They do not understand intangible assets like automatic customer lists. Determine the some of the 8 various valuations methods for your company.
Lastly, you as an owner need to determine what is best for your family legacy. Is your legacy preserving your hard earned capital or is it in reworking your family’s business plan for company survival?

We at Lake Rudd & Company are here to help and here are some of the tools.
On behalf of the team, we are here to help you. Avoid the Valentines Day Massacre. Change can be turned to your advantage. I've always enjoyed the Charles Darwin quote: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

-Sean Cota

Here are but a few of our tools to help get the job done:
  1. Mergers and Acquisitions
  2. Succession Planning
  3. Growth Initiatives
  4. Restructuring, Turnaround, and Business Process Improvement

Call or email one of our team:
Sean Cota:
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.

Bill Overbay:
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.

 Click here for us to contact you.

http://www.lakerudd.com

Give a man a fish, feed him for a day.  Teach that man to fish feed him for life!
 
New York Times hidden warning to Oilheat and Propane Industry:

We have all heard that saying and most of us would choose to put it into practice if possible.  This past weekend there was a very interesting article in the New York Times, As Price of Oil Soars, Users Shiver and Cross Their Fingers, highlighting the plight of consumers who heat with oil facing soaring costs.  To meet this increase in price they are conserving oil by turning down the thermostat, substituting pellets, wood, natural gas or alternative energy sources to stay warm.  Perhaps you are dealing with customers who are conserving, substituting, or switching all together; at the same time banks are lending less, customers are taking longer to pay, and your fixed expenses continue to increase and you are seeing the 2008 heating season all over again and potentially much worse.  

Where is your value and how to do you measure it? (Your bank is…):

What you will find is there is no shortage of articles or seminars to sell your company and offers to buy your company.  Go to any association meeting or open up an industry trade journal and you will hear metrics are changing; it is no longer gallons or margin but EBITDA or cash flow that drives value, heck we are even learning that will call customers add to value calculations.  What trade show seminars and these articles leave out is how to achieve the results you need to drive value and produce stable, repeatable, quality EBITDA and a stable of core customers so that you are not playing a reactive game of catch up to buyer’s flavor of the week.  Many a coach has said the best offense is a good defense; what are you doing to defend your customers and your business?  At Lake Rudd & Co. we advocate clients build a business that is repeatable, has sustainable cash flows and creates substantial value for its owners or a prospective buyer regardless of those variables out of our control such as weather, conservation and commodity market volatility.  It is working on your business not simply in your business on a daily basis that will build the significant value you all deserve.  By changing the dynamic with your customers you will find that the banks are more willing to have substantive and productive discussions about being your partners and you will be able to stem the loss of accounts and believe it or not add clients.  Perhaps this example will help to clarify what we mean.

Value in a declining and highly competitive markets:

We have a very large international client who just the other day walked away from a sizable transaction because at the end of the day the target was simply a retail heating company.  Many in the industry would think that the target was a great company doing many of the right things but in the end they simply only supplied commodity products to a customer base who could substitute oil and propane for pellets, solar energy, natural gas, or wood.  Let’s face it each year the majority of companies in our industry loose customers and gallons for the most part you can only raise or lower prices so much.  You are playing a losing game of catch up; it is as if you have sprung a leak in your boat and as quickly as you can bailout the water more comes in.

One of the central concerns that kept coming up with this potential acquisition was what do you do with a customer base that is shrinking each year be it in gallons or numbers of customers, how do you protect that customer and change the dynamic in your business to be more of a toll road model and not simply a supplier of a commodity?  How do you continue to create sticky loyal customers who are willing to hand over a larger portion of their wallet to you?  Hint; the answer is not related to your service department!

Decisions for your employees, your family, and for you:

This begs a fundamental question for marketers today; are you willing to invest in your business, look in the mirror and have a very frank and honest conversation with yourself and more importantly your family?  Are you willing to make the hard choices about employees and services to secure your place in the future for you, your family and those whose families depend on you?  The other side of the coin is to make the decision to get out of the industry and enjoy the fruits of your hard work while there is still value in the business you have built.  

Your business is unique and needs a special look to maximize value and income:

You need to realize how trusted you are in the customer’s eyes and where this trust can lead.  McDonald’s has made millions by asking the simple question would you like fries with that?  To put it another way the customer’s wallet is open and you are not taking their money.  There is no cookie cutter answer and some of the solutions are simple while others take time and investment but we firmly believe that together we can help transform your company from a marketer of a commodity product to a trusted supplier of essential services in the home.  

We look forward to learning more about your specific situation and sharing how we think we can add value.  Let us buy you a cup of coffee or lunch and begin that learning process today.  

Change is not coming tomorrow or even next year but the process to change needs to begin now!  Call us and lets get that cup of coffee and build your new future.  Click here for us to contact you.
 
Talk to you soon …
 
 
Your Lake Rudd team,
 
Bill Overbay & Sean Cota