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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | JULY 11, 2000 MANAGEMENT Soaring Fuel Prices Put the Heat on Small Biz Should owners pass along rising costs or ride out this summer's price spike?
So when diesel prices nationwide shot up 28% in the first six months of the year, Chuck Mott, who owns three Supersuckers, faced a tough decision: Raise his rates and risk losing customers, or absorb the higher costs and watch profits erode. In the end, he struck a compromise. In May, he added a 5% surcharge onto the daily fee for industrial cleaning, but he left fees for residential furnace- and duct-cleaning unchanged. "You have to be very careful," says Mott, who with his wife, Mary Jo, owns Innovative Vacuum Services Inc., a 22-year-old Edmonds (Wash.) company that now employs 30 people and boasts a fleet of 25 trucks. "There's only so much you can increase your prices before it starts to work against you." COPING STRATEGIES. From the Northwest to New England, thousands of small-business owners have faced the same balancing act this summer as fuel costs soared to record levels. Although prices have dipped somewhat in recent weeks, unleaded gas remains 40% higher than at the same time a year ago, while diesel is 31% higher. On average, unleaded gasoline is selling for $1.62 a gallon in the U.S., while diesel is at $1.52 a gallon. Strategies for coping with the higher fuel costs vary around the country and from business to business. Some of the most fuel-dependent companies, particularly those in transportation, have added small surcharges to their fees. Parise's Auto & Towing in Batavia, N.Y., now charges $5 more for towing within the city's 2.5-mile radius to cover fuel bills that are $2,000 a month higher than last summer. But owners of other businesses are hesitant to pass along the higher costs, fearing they'll alienate steady customers. And still others say they consider fuel prices a temporary threat to their bottom line -- less of a long-term worry than rising health-care costs and the red-hot competition for skilled labor. "You bite the bullet while you can and wait for the prices to come back down again," says Michael Rogers, vice-president of the 8,000-member Small Business Association of Michigan, where unleaded is running $1.79 a gallon, up there with the highest prices in the nation. LOYALTY VS. COST. Among the hardest hit this summer have been small trucking companies. Most operate on razor-thin profit margins of 3 cents to 8 cents per mile, but with the added cost of diesel, they're now just breaking even, says Erik Madsen, whose Seattle-based company operates six refrigerated tractor-trailers that haul seafood from the Northwest and produce from California. The diesel bills for Madsen Trucking -- which, in June, ranged from $1.40 a gallon in Seattle to $1.62 a gallon in Merced, Calif. -- are more than 50% higher than last summer. To compensate, he has added surcharges of 3% to 5% to some deliveries. But Madsen says he can't afford across-the-board rate increases until the industry's largest outfits do so. "The loyalty's not there," Madsen says of his customers. "Or even if it is there, they have to look at their bottom line." For now, Madsen is searching for creative ways to cut costs. Drivers have been ordered to hold their speeds to 60 mph for better fuel efficiency. Tires are kept properly inflated. And gas tanks are filled as often as possible at the Seattle station with the best deal on diesel. Still, he laments, those measures only go so far. "If we have to carry our customers and the economy through a season, it's not too big of a deal," Madsen says. "But when you have to carry people through two seasons, a year and a half, or two years, then something's got to give." HAZY PREDICTIONS. But pinpointing when, and by how much, fuel prices will fall isn't easy. A variety of factors have conspired to push them upward across the U.S. and in the Midwest in particular, where unleaded topped $2.10 a gallon last month. Driving the price hikes are a rapid rise in the cost of crude oil, high summer demand, antipollution requirements, and regional pipeline interruptions. "There are so many things that go into this market that you just can't tell what the gas prices are going to be," says Norma Cooper, a spokeswoman for the AAA Chicago Motor Club. "It's just not useful to try to predict what's going to happen." Even so, gas prices have historically followed a cyclical pattern of rising in late spring and early summer, then flattening out and falling over the winter. (The pattern was skewed in 1998 and 1999, however, when prices first fell during the summer, then continued to rise through the fall and winter.) And many small-business owners, such as Chicago florist Gary Gudino are now betting that prices will return to normal this fall. Several of the messenger and delivery services he uses have imposed surcharges as high as $2 per delivery, raising his costs by about $500 a week. But Gudino has refrained from increasing his own prices -- so far. Instead, he's hoping delivery charges will drop, and higher sales volumes around the holidays will make up for the added expense. "We've been doing pretty well, and I don't want to get too greedy," he says. STEADY FLOW. Mike Kaya, who owns Long Island (N.Y.)-based A1 New York Limousine, is taking a similar tack. Though he's spending $2,000 more a month on fuel, his rates haven't changed. "The clients, they've worked with me the last 10 years, so I didn't want to raise right away," says Kaya who caters exclusively to business travelers and government officials from Turkey. Marketing niches are another reason some small-business owners are willing, for now, to absorb higher costs. On Grand Traverse Bay off Lake Michigan, Rob Shigley rents WaveRunners and power boats for $60 to $100 an hour. So do several competitors. But only Shigley advertises his services on the Web, guaranteeing a steady flow of advance reservations. So although his fuel bills are 40% higher than last summer -- about $9,000 a month -- Shigley is reluctant to raise his rates. "The cost is significant," he says. "I just decided to stick it out." It helps, too, that his part-time venture has been extremely profitable in recent years. Last year, he netted $60,000 in profit on $140,000 in revenue. Shigley has made one adjustment this summer, though. When customers rent a boat for the day and return it with an empty tank, he now charges $3 instead of $2 a gallon to refill it. Regardless of how they're dealing with higher prices at the pump now, small-business owners say if fuel costs haven't fallen significantly by the fall, they'll have few options but to pass on those costs. Mott, who owns the Supersucker industrial vacuum trucks, says he plans to spend the next month analyzing whether to permanently raise all of his rates 3% or 4%. Once that's settled, he can once again turn his attention to the problem that plagued him before gas-price worries -- finding and hiring enough drivers to keep his Supersuckers on the road.  By Julie Fields  | | |
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