Written on: March 1, 2013 by Phillip J. Baratz
I recently reviewed an analyst’s scathing report on the financial affairs of a large, vertically integrated energy business, and started to wonder about the woes of this particular company, and how losses could stack up so quickly in such a widely known entity. In conversations with one of our clients, a sizable convenience store operator, it was pointed out to me that even large branded gasoline distributors—regularly the bane of existence for “independents”—often make large tactical mistakes. The mistakes our client were referring to were those where street prices are set to attract more business, while at the same time devastating the margins from the business that would be coming that way (mostly), regardless of price. In other words, if you can get business by being the same or a penny cheaper than the gas station across the street, what is gained—other than losses—by being four cents per gallon cheaper?
Inevitably, this conversation morphed into one about heating oil dealers, and their incessant worry over being more expensive than “the other guy”. Companies do phone surveys to other dealers, focus on the rumor mill from their sales reps, and seem to search out every excuse to NOT maximize margins. Most frustratingly, during the winter—the time of the year where, for homeowners, staying warm and avoiding surprises trumps the cost of oil—dealers don’t seem to focus enough on grabbing the margins when they are there. If the typical residential customer gets between four and five deliveries at the time of the year that customers are the most “sticky”, how much would it benefit your bottom line to get one or two deliveries (averaging 175 gallons “per drop”) if you could grab that extra dime per gallon, instead of discounting a dime out of fear that someone would call you on not being cheaper than “the other guy”?
How much would an additional $15 or $30 net per customer per year help you out? And all it would take would be to charge a fair margin in the middle of the winter. Yes, I do know that increasing margins are easier said than done, but from what we have seen from some of our clients this winter, it may not be nearly as hard as you might think. Playing things too closely may be akin to trying to run out the clock right after halftime of a football game. Conservative does have its time and place, but not when you are conserving yourself out of the profits that you both need and deserve.
As more and more customers move to pricing programs, you will also need to manage how many customers are on fixed-price programs, as those are the customers from whom you will not be able (without unnecessary and risky speculation) to increase margins. However, the capped customers, and the remaining variably priced customers will allow for the greatest likelihood of strategic increases in margins. Historically, the cap customers are the most likely to stay with you, and therefore are most likely to not mind—or not notice— strong retail margins in the middle of the winter.
None of this is meant to say, or imply, that you should rip your customers off or even to push prices to the point where you are treating them unfairly. However, the window for profitability in most heating oil companies is restricted to just a few months of the year. Generally speaking, the first quarter of the (calendar, not fiscal) year is where all of the profits are made, with the rest of the year being either at breakeven or at a loss.
Given that the window of true profitability is limited to just a few months, the other part of maximizing margins and selling to the most profitable and predictable (capped) customers must focus on the timing and realization of what else is going on in the business. Are you hitting your targets—volume, margins, customers additions, customers retention (staving off losses), service billing, payroll, etc.? The biggest variable in your business is definitely the gross margin on the delivered gallons, but NOT managing the other aspects—or not being able to know what is going on with the other aspects— can be just as scary. Imagine hitting your per gallon margin number, just to find out, sometimes two months later, that you were way over-budget on overtime costs, or way under-budget on service department billings. It would be too late to manage those variables, but also too late to push margins to try to close that gap.
Maximizing margins, and “gettin’ while the gettin’s good”, will go a long way towards strengthening profits. Focusing on capped/reliable customers will make the company even stronger. Getting to the point where you can plan, execute, assess and modify your actions will put you at ease!