Imagine if all of your customers were new customers.
We all love new customers. They are excited about us and we are about them. We have no receivables or service issues with them, and they have never complained to us about anything. Most importantly, they are bringing us revenue that we didn’t have before. There is only one real challenge about a new heating customer – we don’t really know how much they fuel they will need.
Sure, we have hundreds or thousands of customers that have similar sized houses, and we know that a 2,200 square foot might burn 700 gallons per year, but it also might burn 1,100 gallons per year. So, what do we do? How do we determine the K-factor of the house and when to plan deliveries? Well, the first thing we do is start off very conservatively. Better to make small deliveries than let a customer run out – especially a new customer. Small deliveries are okay, as our BOS tracks the deliveries and the HDD’s and, over time (say, two winters), the K likely rises a bit and definitely becomes more accurate. Making small and inefficient deliveries to new customers is a small price to pay for the benefit of a new customer that, again, over time, will add $150 to $200 to the bottom line every year!
But what if all your customers were new customers.
In a Wall Street Journal article this past weekend, the author was trying to predict consumer behavior in a post-pandemic world. Starting with the premise that 80% of people would “return to normal” – restaurants, ball games, theme parks, and the like – the author focused on two things: The first was the timing and the behavioral changes. The second was the basic point that “most businesses can’t operate on 80% of demand. They will need a major overhaul”. As I pondered those two points, I realized that our industry is well aware the 80% of normal volume is a bad thing that all-but precludes profits. However, our volumes are more dictated by HDD’s than they are by consumer purchasing behavior. And, since we don’t control the weather, there is only so much that we can do about that.
However, the other question – the timing and behavioral changes – hit home with me. Our industry’s demographics are enviable. Homeowners are older and more financially stable than renters. So, while sales of many discretionary items might drop, the sale of heating fuels to people who own homes, and are even more likely to be home, is not a bad way to earn a living – as it has been for decades for many companies and families. But with more customers working from home and more students learning from home, we are going to see an overall increase in demand (good news), but no clue as to which individual homes will be increasing their usage (bad news).
How do you plan for usage that you can’t predict? Likely, the same way as you would plan for a new customer – very conservatively. How many additional trucks and drivers would you need if you didn’t know how much your customers would use? How much more money would you spend making those extra (smaller) deliveries? Would it surprise you if your cost to deliver fuel to your average customer jumped by between $40 and $50 per customer per year – simply because you didn’t know which customers were burning more fuel?
The average delivery into a 275-gallon heating oil tank is about 150 gallons. If you wanted to keep with the same low risk of runouts that you currently enjoy, you would likely need to lower the average delivery size by about 10%, to 135 gallons. That might not sound too terrible, until you consider that you would now have to make an extra delivery every year to most of your customers. In a world that is using data and processing to make things more efficient, this certainly sounds like a step backwards – a step that might reduce your net profits by as much as 25%.
In the past, there were some realistic objections to monitoring tank levels. The two main ones were that they were expensive to buy and maintain, and the second was that “things are okay without them. So why do I need the hassle?” Better put – if it isn’t broken, why fix it? The consensus is that monitors will continue to grow in usage by fuel distributors, but just like many other types of operational improvements, it was supposed to happen over time – unless there was a reason to hurry it up.
Over the past two months the reason to “hurry it up” has arrived. On the cost side of things, perhaps the conversation needs to start with the benefits, as opposed to simply, “what will it cost?”. If cost were the only issue in making buying decisions, who would upgrade a BOS, who would buy on-board computers, and who would upgrade their websites? We need to look at the cost of NOT having monitors. Some of our programs include monthly monitoring at no cost to the dealer – that is how strongly we believe in the value of monitors.
You might think that you have a lot on your plate and a lot to figure out before next year. Will drivers be as reliable, considering that many of them are in a high-risk group? When will you be able to get into basements to do cleaning? Will your banks be a little stingier with receivable lines of credit? These are all good questions, but now that most of us have gotten through the PPP process and are focusing on the future, let’s realize that the single biggest expense you have is the cost to deliver fuel, and the single biggest uncertainly relating to the delivery of fuel is that you have just lost the ability to successfully predict consumption. It’s May, but before we turn around it will be October – the planning needs to start now, and the time for monitors has arrived.
We invite you to see and hear thoughts from our CEO – Phil Baratz, on this video series: angusenergy.com/worldchanges