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The Energy Squeeze

By Adam Piore
Portfolio.com
June 5, 2008


energy

 

Some contractors argue with their clients over design specifications or the size of the bill. But Anthony Rawls has an entirely different sticking point with his best customer—the route he takes to work.

With the price of gasoline at $4 a gallon, Rawls, the president San-Marin Construction in South San Francisco, is trying to save money. His work can take him as far as Ukiah, more than 100 miles north of San Francisco. For this job, he carefully maps out the routes needed to visit 26 bank branches in the most fuel-efficient manner.

But his client, a major bank he declined to identify, often has a different schedule in mind.

"It's really difficult because they're not even thinking about gas prices," he says. "But it comes out of my overhead, and the price has almost doubled." 

For managers of businesses both big and small across the nation, the rising cost of fuel and energy is very much on their minds. It's not just airlines and trucking companies that are struggling with the recent sharp increases in energy prices. Businesses that use cars, vans, or trucks for distribution or services are feeling the pinch, as are manufacturers that use oil-based products from detergent to plastics. Gasoline prices are up nearly 28 percent from a year ago, and crude oil futures are up 85 percent from a year ago.

When oil prices began climbing several years ago, companies were able to absorb the hit, for the most part, as the costs of other goods fell thanks to global competition. Now, however, the prices of other commodities are also rising, adding to the pressure. 

The quandary is whether to pass along at least some of the higher costs in the form of price increases. That's easier done when the economy is booming. In a slowing economy, raising prices could drive away customers. Still, there comes a breaking point for a business to stay profitable. The recent surge in fuel prices may be it.

"It either cuts into their profit, or they pass that on to consumers," says Mark Pingle, a professor of economics at the University of Nevada in Reno. "The trouble is when prices go up, people will tend to buy less of their product."

Rob Adler and his colleagues at Birchwood Best, which produces hardwood and plywood in Birchwood, Wisconsin, for builders and cabinetmakers, have been postponing a decision on prices for months.
   
"We're looking at raising prices," says Adler, Birchwood's general manager. "We've always been proud of the fact that we've been able to control raw-material costs and manufacturer costs just by continuous improvement. But we may have no choice."

Birchwood has the responsibility of fueling the eight to 10 trucks that leave the main factory every day. The company also has to wrestle with more expensive oil-based resins that are used to make particleboard. The cost of resins has increased by 25 to 40 percent over the last six months, Adler says.
   
To cut their own costs, the company began designating regular "milk runs" between plants where raw materials are stored, ensuring each run carries the maximum load.


More efficient use of the trucks—making sure nothing leaves half or three-quarters full—has saved thousands of dollars, Adler says. The company has considered more reliance on freight, but it's not practical because they need the "agility" of their own fleet to meet immediate needs of customers.

The only option left is for the company to initiate a "fuel surcharge" for customers taking delivery. "We plan to break it out separately to make sure people know it's a fuel surcharge and can understand it's not just Birchwood," Adler says.
   
Dennis Beatty, owner of Tiger Paws Carpet Cleaning in Memphis, says competition is too fierce to raise prices on his customers-even though the cost to run his nine-employee, three-van business has risen about $200 to $250 a week, equivalent to one and a half jobs.
    
To deal with the situation, Beatty has instituted a strict routing schedule for the 50 carpets his vans drop off and pick up weekly.
   
"Mostly we go by the zip code," he says. "I might be in one area in Tuesday and a different area on Wednesday. We send them to the furthest stop, and then they work their way back to the office. It takes more time, but it saves money."
   
Some of Beatty's fellow small-business owners in Memphis have elected to close shop on certain days of the week, Beatty says, grouping stops together and operating only on Mondays, Wednesdays, and Fridays or Tuesdays and Thursdays.   
   
Despite these dire measures, Beatty considers himself lucky. A few weeks ago, when TV and radio stations first started talking about a recession, his business plummeted 50 percent until the panic subsided. 
   
"I was calling around, and the same thing happened to other carpet cleaners," he says. "Our business was really steady, and it was just like somebody had turned off a faucet, then after two and a half weeks, it was just like it came around. Gas is a chunk of my expenses, but if revenue stops, we're really in trouble." 
   
Indeed, the squeeze is felt especially hard by owners of small businesses because many operate with smaller profit margins and tougher competition, forcing difficult choices, says Lloyd Chapman, president of the American Small Business League.
   
"It's having a noticeable negative impact-and on small business in the transportation industry, it's a devastating impact," says Chapman, whose organization serves Chambers of Commerce nationwide. "Truckers in Southern California are going into Mexico to buy diesel fuel. It's putting a big strain on employers: They're having problems with employees getting to work on time because they have to ride public transportation. And if U.P.S. starts charging more, that will hurt everyone."
Pingle of the University of Nevada agrees that small business is particularly vulnerable. "Smaller businesses tend to have less ability to fall back on capital retained from previous earnings or the ability to borrow their way through, so small businesses don't have as many options," he says.

In Woodstock, New York, Susan Roth and Jane Fine, co-owners of Petwatch Plus, are contemplating their third price increase in a little over a year. They have no choice-with 35 stops a day to care for animals ranging from horses to dogs to birds, the price of gas is the cost of doing business. Roth fears many customers will simply cut back on the service. "My fear right now is that people are not going to be able to afford to do this, and not only will it affect me and my co-workers, but I feel bad for the animals," she says. "We have to raise prices to operate."
   
In California, meanwhile, Rawls has no such option. His costs were built into his bids, and even were he able to submit a new one, he's doubtful he would raise it. Competition is too fierce, and most of his competitors are simply eating the extra gas costs.
     
"At this point, short of haggling with OPEC and the oil companies, there's nothing to do but pay it," Rawls says.
   
When he bids on jobs, he usually banks on transportation costs making up 1 percent of the contract. But with gas prices as high as they are, they now account for 1.5 percent, he says.    
   
"That might not sound like a lot," he says. "But if you have a $3 million project, one-and-a-half percent is bad. That's $45,000. That can pay for my daughter's education at Santa Clara for a year."
   

 

 Source:  http://www.portfolio.com

 
 

 
 

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