August 8, 2005
The rising | As energy prices continue to increase, business owners search for ways to cut costs
By Josh Denkmire
When the owner of one of the state's most revered discount chains is talking about raising prices in his stores, people tend to take notice. After all, deep price cuts are what keep customers coming back to the 14 Renys stores across Maine. But after seeing his expenses skyrocket over the past year due to spiraling fuel and heating oil costs, John Reny is considering every option to maintain profit margins ˆ including passing costs on to consumers.
"Where you have to [consider it], you do," said Reny. He says that the cost of goods at his Newcastle-based company has increased at least 10% over this time last year, and he's faced with a difficult choice: "Either I make less margin," said Reny, "or I increase selling prices."
Reny is one of many Maine business owners contemplating the impact of a prolonged period of high fuel and heating oil prices on revenues. The reason? According to the most recent Maine State Planning Office survey of oil prices, conducted the week of June 29, the cost of heating oil currently averages $2.09 per gallon. That represents an increase of 31% over prices last September. (This is the first year the state has surveyed heating oil prices in the summer; data is not available from this time last year.) Gasoline currently averages $2.26 per gallon, a 19% increase over last August's average. Other fuel oils are currently averaging more than $2 per gallon, with diesel the highest at $2.44.
And the latest forecasts don't give any indication of short-term relief. According to the U.S. Energy Information Administration's July 2 projections, the price of oil will average more than $55 a barrel through the end of the year, with highs near $59. This is $6 a barrel higher than the previous projections released in June, and $11 a barrel higher than the same time last year.
So in addition to coping with their own heating and fuel needs, Maine business owners, like their counterparts nationwide, are feeling the energy price crunch in the cost of goods and shipping, and even in the amount of consumer traffic coming through their doors. Although there's not much Mainers can do to affect national energy prices, some of the state's business owners are turning to time-tested cost-cutting measures ˆ and a few new ideas ˆ to lower costs.
Still, Galen Rose, acting state economist in the State Planning Office, is not convinced that high gas and heating oil prices are causing major problems yet among the majority of consumers. However, he admits that energy costs are a serious concern for companies "for whom energy is a big cost of doing business ˆ trucking, bus services and manufacturing processes with high electricity content. For them, it has been significant."
Kelly Moore put it more succinctly. "It's really hurting us," said Moore, president of R.C. Moore, a Scarborough logistics company that carries goods for Barber Foods, Idexx Laboratories and the Poland Spring facility in Hollis, among others. His company has seen huge increases on perhaps its largest expense ˆ fuel for its trucks. Moore estimates that his trucks drive 65,000 miles a week; at 5.5 miles per gallon, that's more than 45,000 gallons of gasoline used a month ˆ or about $110,000 in monthly diesel fuel costs these days. "It really affects our cash flow," Moore said. "We buy a huge amount of fuel. It's a huge investment we're putting out."
Moore says the stakes are extremely high for his company. "We have to haul a certain amount of product," he said. "We have to keep 260 employees on the roads." That kind of commitment means that "ultimately, [the cost] gets passed on to the consumers" through higher fuel surcharges, according to Moore.
Profit problems
Bob Morse, general manager of Brewer-based packaged ice and ice cream distributor Getchell Bros., has faced much of the same difficulty in meeting the needs of stores from Sanford to Millinocket. "Our cost of fuel has gone up 30% since last year," says Morse.
Nancy Raye, owner of Raye's Mustard Mill in Eastport, has seen her own fuel costs rise immensely. Raye, who sells stone-ground mustard to groceries all over the country, still does much of her own marketing locally, which means spending a great deal of time in her car. "If you do local marketing, you see it in your bill," Raye said. She puts all travel charges on her business credit card; this year, her average monthly credit card payments have doubled ˆ primarily, she said, due to the cost of gasoline.
Renys' own transportation needs become more difficult to meet with higher fuel prices. When moving goods from one of his stores to another, Reny says he frequently has to consider whether the trip is worthwhile. He has also taken note of the additional costs that shippers have shifted onto his shoulders. "We've seen huge, huge increases in freight costs," Reny said, noting that last year at this time he was paying five percent fuel surcharges on shipments; this year, the surcharges are 14%-15%.
But Reny is quick to point out that the cost of fuel is only one aspect of the problem. He has seen the cost of his goods rise 10% over the past year along with shipping costs. The example he provides ˆ patio umbrellas ˆ tells the story. Last year, Reny paid $11 per umbrella, including freight costs and was able to sell them for $19.99 each. This year, the same umbrellas cost $16; Reny is selling them for $29.99. "Manufacturers have the same problem we do," said Reny, noting that the cost of raw materials is on a steady upward trajectory.
Morse is also fully aware of the increased raw materials costs manufacturers face. Like Reny, he is paying them every day. Morse has seen a 10% increase over the last year in the price of polypropylene bags and shrink wrap that hold his ice products. "Everything we use from poly resin ˆ anything that is petroleum-based ˆ the prices have just skyrocketed," Morse said.
That ripple effect has some business owners concerned about the mounting pressures of the current price crunch. "I think everyone kind of realizes that the increase cuts through the whole gamut of goods," said Reny. "It could really contribute to inflation."
However, Rose of the State Planning Office said he is not convinced that inflation is an issue right now. Reiterating his contention that energy prices have a greater effect in some industries than in others, Rose said that "if we actually looked at [higher fuel costs] across all business types, the real effect is not as large as some might assume. Perceptions tend to get exaggerated."
That's also the case when it comes to tourism-related gas expenditures. Rose estimated through quick calculation of yearly driving distances that families are likely paying only $1.50 more per week per car for the gasoline they use. "For the vast majority of households, there hasn't been a large effect," Rose said.
However, he also points out that when it comes to gasoline pump prices, consumers' "perception is not trivial." He cited an interview he saw recently with a family that had decided to cancel vacation plans this summer. They made the decision because of the high cost of gas, even though the vacation "may have cost them an additional $10-$20 in gasoline over last year," according to Rose.
And some in the tourism industry are experiencing lower-than-normal traffic at their businesses due to what they say is continued consumer concerns about gas prices. Brad Jerome, director of marketing at the Bethel Inn and Country Club, has seen some of this effect in the number of guests who have visited this spring. "People are cutting back to one or two weekend getaways during the spring and summer from the three or four they have typically taken in the past," he said.
Creative solutions
Many business owners find themselves at a loss for how to control costs in the face of rising oil prices. Raye admits that it is a real struggle to maintain profit margins when prices increase as quickly as they have. "You can't charge $3 for something that people have been buying for $2," she said.
Kelly Moore says R.C. Moore is in a similar spot when it comes to controlling costs. The company has always tried to run as efficiently as possible, according to Moore, buying fuel-efficient trucks and keeping them tuned properly. R.C. Moore also buys bulk fuel and participates in national fuel networks to lock in lower prices.
Still, Moore finds it difficult to come up with new ways to save. "There's nothing we can do at all," said Moore, admitting that his business has been fortunate to experience low fuel costs for so many years. "We have our hands tied."
Reny also says he has always run an energy-conscious business. "We've always over-insulated our buildings," said Reny. "We also keep the thermostat low during the winter." But he has few other options for controlling costs. Between the increases and the cost of heat, "all that just adds up. It doesn't seem to be getting any better."
Other businesses are looking to clients and other community partners to turn the tide of rising energy costs. Jerome and the Bethel Inn have been working with the Bethel Area Chamber of Commerce on a promotion they hope will help regain business they might have lost in the spring.
The promotion, called "Tanks for the Memories," rewards summer visitors who stay for three or more nights in the Bethel area with up to $20 to refill their gas tanks on the way home. Jerome said that the promotion has created some "buzz in the market," with the Associated Press and "Good Morning America" picking up the story. Jerome adds, however, that he is unsure whether the promotion has turned into "heads and beds" yet.
Meanwhile, Bob Morse has turned to his Getchell Bros. customers for relief ˆ and has found a number of willing partners. Two years ago, Morse began asking customers, such as Barry's Store in The Forks and Lenny's Supermarket in Millinocket to make additional storage capacity available so he could deliver more products at once. The change has helped Getchell Bros. cut down on the number of trips to stores in the outer range of the company's delivery area.
In addition, Getchell Bros. has cut down on routes, utilized larger trucks and worked with fuelers such as H.A. Mapes in Sanford to lower overall fuel costs.
With oil prices not expected to come down anytime soon, such strategies are likely to become all the more necessary. In the meantime, many Maine business owners are thinking like Nancy Raye when she talks about the struggle to keep up with the pace of fuel increases. "You just have to go to work every day," she said, "and pray that things stay the same."
"Where you have to [consider it], you do," said Reny. He says that the cost of goods at his Newcastle-based company has increased at least 10% over this time last year, and he's faced with a difficult choice: "Either I make less margin," said Reny, "or I increase selling prices."
Reny is one of many Maine business owners contemplating the impact of a prolonged period of high fuel and heating oil prices on revenues. The reason? According to the most recent Maine State Planning Office survey of oil prices, conducted the week of June 29, the cost of heating oil currently averages $2.09 per gallon. That represents an increase of 31% over prices last September. (This is the first year the state has surveyed heating oil prices in the summer; data is not available from this time last year.) Gasoline currently averages $2.26 per gallon, a 19% increase over last August's average. Other fuel oils are currently averaging more than $2 per gallon, with diesel the highest at $2.44.
And the latest forecasts don't give any indication of short-term relief. According to the U.S. Energy Information Administration's July 2 projections, the price of oil will average more than $55 a barrel through the end of the year, with highs near $59. This is $6 a barrel higher than the previous projections released in June, and $11 a barrel higher than the same time last year.
So in addition to coping with their own heating and fuel needs, Maine business owners, like their counterparts nationwide, are feeling the energy price crunch in the cost of goods and shipping, and even in the amount of consumer traffic coming through their doors. Although there's not much Mainers can do to affect national energy prices, some of the state's business owners are turning to time-tested cost-cutting measures ˆ and a few new ideas ˆ to lower costs.
Still, Galen Rose, acting state economist in the State Planning Office, is not convinced that high gas and heating oil prices are causing major problems yet among the majority of consumers. However, he admits that energy costs are a serious concern for companies "for whom energy is a big cost of doing business ˆ trucking, bus services and manufacturing processes with high electricity content. For them, it has been significant."
Kelly Moore put it more succinctly. "It's really hurting us," said Moore, president of R.C. Moore, a Scarborough logistics company that carries goods for Barber Foods, Idexx Laboratories and the Poland Spring facility in Hollis, among others. His company has seen huge increases on perhaps its largest expense ˆ fuel for its trucks. Moore estimates that his trucks drive 65,000 miles a week; at 5.5 miles per gallon, that's more than 45,000 gallons of gasoline used a month ˆ or about $110,000 in monthly diesel fuel costs these days. "It really affects our cash flow," Moore said. "We buy a huge amount of fuel. It's a huge investment we're putting out."
Moore says the stakes are extremely high for his company. "We have to haul a certain amount of product," he said. "We have to keep 260 employees on the roads." That kind of commitment means that "ultimately, [the cost] gets passed on to the consumers" through higher fuel surcharges, according to Moore.
Profit problems
Bob Morse, general manager of Brewer-based packaged ice and ice cream distributor Getchell Bros., has faced much of the same difficulty in meeting the needs of stores from Sanford to Millinocket. "Our cost of fuel has gone up 30% since last year," says Morse.
Nancy Raye, owner of Raye's Mustard Mill in Eastport, has seen her own fuel costs rise immensely. Raye, who sells stone-ground mustard to groceries all over the country, still does much of her own marketing locally, which means spending a great deal of time in her car. "If you do local marketing, you see it in your bill," Raye said. She puts all travel charges on her business credit card; this year, her average monthly credit card payments have doubled ˆ primarily, she said, due to the cost of gasoline.
Renys' own transportation needs become more difficult to meet with higher fuel prices. When moving goods from one of his stores to another, Reny says he frequently has to consider whether the trip is worthwhile. He has also taken note of the additional costs that shippers have shifted onto his shoulders. "We've seen huge, huge increases in freight costs," Reny said, noting that last year at this time he was paying five percent fuel surcharges on shipments; this year, the surcharges are 14%-15%.
But Reny is quick to point out that the cost of fuel is only one aspect of the problem. He has seen the cost of his goods rise 10% over the past year along with shipping costs. The example he provides ˆ patio umbrellas ˆ tells the story. Last year, Reny paid $11 per umbrella, including freight costs and was able to sell them for $19.99 each. This year, the same umbrellas cost $16; Reny is selling them for $29.99. "Manufacturers have the same problem we do," said Reny, noting that the cost of raw materials is on a steady upward trajectory.
Morse is also fully aware of the increased raw materials costs manufacturers face. Like Reny, he is paying them every day. Morse has seen a 10% increase over the last year in the price of polypropylene bags and shrink wrap that hold his ice products. "Everything we use from poly resin ˆ anything that is petroleum-based ˆ the prices have just skyrocketed," Morse said.
That ripple effect has some business owners concerned about the mounting pressures of the current price crunch. "I think everyone kind of realizes that the increase cuts through the whole gamut of goods," said Reny. "It could really contribute to inflation."
However, Rose of the State Planning Office said he is not convinced that inflation is an issue right now. Reiterating his contention that energy prices have a greater effect in some industries than in others, Rose said that "if we actually looked at [higher fuel costs] across all business types, the real effect is not as large as some might assume. Perceptions tend to get exaggerated."
That's also the case when it comes to tourism-related gas expenditures. Rose estimated through quick calculation of yearly driving distances that families are likely paying only $1.50 more per week per car for the gasoline they use. "For the vast majority of households, there hasn't been a large effect," Rose said.
However, he also points out that when it comes to gasoline pump prices, consumers' "perception is not trivial." He cited an interview he saw recently with a family that had decided to cancel vacation plans this summer. They made the decision because of the high cost of gas, even though the vacation "may have cost them an additional $10-$20 in gasoline over last year," according to Rose.
And some in the tourism industry are experiencing lower-than-normal traffic at their businesses due to what they say is continued consumer concerns about gas prices. Brad Jerome, director of marketing at the Bethel Inn and Country Club, has seen some of this effect in the number of guests who have visited this spring. "People are cutting back to one or two weekend getaways during the spring and summer from the three or four they have typically taken in the past," he said.
Creative solutions
Many business owners find themselves at a loss for how to control costs in the face of rising oil prices. Raye admits that it is a real struggle to maintain profit margins when prices increase as quickly as they have. "You can't charge $3 for something that people have been buying for $2," she said.
Kelly Moore says R.C. Moore is in a similar spot when it comes to controlling costs. The company has always tried to run as efficiently as possible, according to Moore, buying fuel-efficient trucks and keeping them tuned properly. R.C. Moore also buys bulk fuel and participates in national fuel networks to lock in lower prices.
Still, Moore finds it difficult to come up with new ways to save. "There's nothing we can do at all," said Moore, admitting that his business has been fortunate to experience low fuel costs for so many years. "We have our hands tied."
Reny also says he has always run an energy-conscious business. "We've always over-insulated our buildings," said Reny. "We also keep the thermostat low during the winter." But he has few other options for controlling costs. Between the increases and the cost of heat, "all that just adds up. It doesn't seem to be getting any better."
Other businesses are looking to clients and other community partners to turn the tide of rising energy costs. Jerome and the Bethel Inn have been working with the Bethel Area Chamber of Commerce on a promotion they hope will help regain business they might have lost in the spring.
The promotion, called "Tanks for the Memories," rewards summer visitors who stay for three or more nights in the Bethel area with up to $20 to refill their gas tanks on the way home. Jerome said that the promotion has created some "buzz in the market," with the Associated Press and "Good Morning America" picking up the story. Jerome adds, however, that he is unsure whether the promotion has turned into "heads and beds" yet.
Meanwhile, Bob Morse has turned to his Getchell Bros. customers for relief ˆ and has found a number of willing partners. Two years ago, Morse began asking customers, such as Barry's Store in The Forks and Lenny's Supermarket in Millinocket to make additional storage capacity available so he could deliver more products at once. The change has helped Getchell Bros. cut down on the number of trips to stores in the outer range of the company's delivery area.
In addition, Getchell Bros. has cut down on routes, utilized larger trucks and worked with fuelers such as H.A. Mapes in Sanford to lower overall fuel costs.
With oil prices not expected to come down anytime soon, such strategies are likely to become all the more necessary. In the meantime, many Maine business owners are thinking like Nancy Raye when she talks about the struggle to keep up with the pace of fuel increases. "You just have to go to work every day," she said, "and pray that things stay the same."
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