Page 35 - Oil and Energy-February 2013

Market Stance
For Dealers, a Year Really Only Lasts 100 Days
By Mark Stillman, Hedge Solutions
THIS JUST IN: A YEAR IS NOT 365 DAYS
long for oil and propane marketers.
Seasoned dealers know this by instinct and
probably will tell you it is 120 days in terms
of compressed seasonal demand. In truth, a
year has now been shortened to a mere 100
days or so by the degree-day gods and the
impacts of global warming.
For those of you who spend time staring
at your heat curve, it doesn’t take long to
realize that you essentially have less than
four months to drive 90% of your annual
fuel profits. And thanks to warmer tempera-
tures and shorter winters, this window of
opportunity appears to be shrinking before
our eyes.
Before you go running off to call a
broker to sell your business, remember that
this miniature year has been a part of our
industry for generations. It’s probably why
we have more in common with ski resorts
than we do with grocery stores.
A CHALLENGE WE KNOW
First, let’s give this some
perspective. Imagine that you
are the president of a large
regional bank. You are sitting at
Thanksgiving dinner in the warm
embrace of kith and kin with the
smell of turkey in the air. Life is good.
That is until a courier comes to the door
and delivers a message from your board of
directors. The note says that you only have
until St Patrick’s Day to deliver the entire
year. What? How can I do that? If you’re
smart, you will call your heating oil dealer
because this is the world he or she lives in
and knows how to conquer.
One thing all seasonal businesses have
to embrace is that “every day counts”.
Write that down on a sticky note and put
it on your computer or your car dashboard.
It sounds obvious, but trust that many fuel
dealers lose sight of this concept and put
themselves at risk. With only 100 days to
ring the register, you literally cannot afford
to spend one day below your target gross
margin.
A quick reminder: This is a margin busi-
ness. We seemed to collectively forget that
during the program era when nearly 80%
of sales were made to cap or fixed-price
customers. With a good hedging advisor and
some discipline, margins were essentially
in the bank before the first frost. Now that
trend has reversed and 80% or more of sales
are rack to retail. Due to volatility, margins
expand and contract daily like some defective
accordion. “Margins, margins, margins”…
write that on the sticky note too.
DATED THINKING
The solution is simple. Make sure you
adjust your price every day to reflect the
changes in the cashmarket to safeguard your
margin. OK, that was sarcasm. In the real
world, that rarely if ever happens. Dealers
are programmed to lag on the way up and
then lag on the way down. Basic arithmetic
promises that we willingly erode margin on
the way up because we can make up for it
on the way down. Caution: that is extremely
dated thinking rooted in a long-ago time
when prices were largely stable, we were
not afraid to buy wet barrels months ahead
of the season, and we changed our retail
price five times in a year.
If you look at daily margins in today’s
world you will see them dip below target on
up market days and then go above target on
down days. It would be easy to assume that
it all comes out in the wash, but that is abso-
lutely untrue. Volatility is not about up and
down price, it is about the magnitude and
speed of those price moves, both of which
are entirely unpredictable. The net impact
is that no dealer can accurately measure the
effects of their lag to the market; hence the
industry has seen organic margin erosion
that has nothing to do with competition,
consumers, or natural gas.
MANAGE TO THE TARGET
Here is the game plan: Establish
a target margin that is realistic and
achievable. Manage to that target
every day. Use buying and retail
pricing techniques to ensure you
are above target daily. There are
great business intelligence applica-
tions that help you do this. Learn to
make volatility a friend by capitalizing
on dips in the market to expand margin.
Buy wet prompts or bulks using the “425
Rule”: If you can sell the product in 4 to
5 days, there probably isn’t a reason to
hedge it because you can hold your price.
But if you cannot move it in that time
period or you buy into a nice big price dip
for 10 days, then by all means protect it
with options.
Above all, stop assuming you can
make up for lost margin “later.” As we
saw in 2011, that price drop may never
come. It is also sobering to recognize
that due to the pesky degree-day gods,
one day below your margin target in
January equates to four days above target
in April. The moral of the story is that
if you trend below target during the
100-day year, there literally isn’t enough
time to make up for it.
Did I mention that every day counts?
February 2013 • 35