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:
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.”
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:
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.
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