Everybody talks about the weather…

Written on: May 14, 2012 by Phillip J. Baratz

Article Everybody talks about the weatherThe dead horse has been beaten about how awful this season was, when it comes to (missing) heating degree days. Coupled with the highest winter prices ever, this season was NOT the one that would be focused on in an effort to attract people to the residential heating oil industry. Given the financial results achieved by most dealers, it is hard to clearly pinpoint what should have been done differently, and what might just be “the way that things go.”
We can’t return to last summer to make some of the decisions that, arguably and with the benefit of hindsight, should have been made then, or at some point during the past six months. However, we can start to look at some things that should have been done differently, and—while we hope that we don’t have a winter like this for the NEXT 30 years—be prepared for whatever is thrown our way.
HDD protection. Regardless of prices, and in some ways regardless of the operational moves that you make, if the HDDs don’t show up, it will be hard to hit your numbers. There are and have been healthy discussions as to whether it is the HDDs per month, or if all that matters is the cumulative number for the year, but either way, when temps are well above normal over the winter, volumes consumed (and delivered) will fall. To combat lost HDDs, there are a number of hedges that are used by dealers. As with any type of hedge, there are those that are more appropriate than others, there are those that cut down on risk, and there are those that pretty much eliminate HDD risk. There is a clear need to assess whether an HDD in October carries the same weight as an HDD in January, but a review of your monthly financials, compared with your budgeted financials, should paint that picture fairly easily.
Pricing. Despite customer proclivity to conserve energy when prices increase, this past winter resulted in heating oil bills that were not really that high—even if ONLY because the consumption drop helped to offset the high prices. On the dealer level, you cannot simply look at the margin per gallon as a determinant of how you are doing. By delving into the numbers, you can actually have a much better idea of how to “tweak” the prices—short term, or spread over a longer term—to get back to the margins “Hedging, managing risk, insurance for your business— however you want to refer to it—cannot be done only when you KNOW it will be warm. You NEVER know.” that you need. Everyone is nervous over setting prices too high, but you really need to be even more nervous about not setting them high enough and ending up with losses during the few months a year that you actually are profitable. In addition, the likelihood of a customer switching to another dealer in the middle of the winter seems to be far lower than the likelihood of a “switch” in the summer or fall (when everyone else is lowering their prices just to bring on—unprofitable?—new customers).
Staffing. When does it pay to lay off seasonal employees? When does it pay to lay off full-time employees (or offer either group a flex-schedule)? The answer cannot be that you will wait until the season is over, and then realize what you SHOULD HAVE done! We have covered the value of data in prior columns, but simply stated, if your drivers are making as many stops as usual, but the average delivery size is 40 gallons less than it should be, something is wrong. AND something must change. Waiting for “the weather to turn” is usually not the right way to address this problem. Along with smaller deliveries and less usage, generally, are fewer service calls, fewer billing issues, etc.
The notion that there are some good years and there are some bad years, and that “everything comes out in the wash” is only good if that approach is the best that you have available. If you have the ability to monitor daily performance/production, and you can actually control the prices that you are charging customers, a lot of what happened to companies this winter doesn’t have to happen to you. If you adopt the attitude that, just the same as any other form of insurance and protection, you are very exposed to warm weather, you should seriously consider protecting against that inevitability.
Inevitability? Absolutely. Next winter might be extremely cold—how nice that would be!—but the winter after, or the one after that may again be very warm. Hedging, managing risk, insurance for your business—however you want to refer to it— cannot be done only when you KNOW it will be warm. You NEVER know. It has to simply become part of what you do. As with everything else, there is risk and reward in protecting against warm weather. However, before dismissing it as just too expensive, think of the expense this past winter by NOT hedging.