Rising Fuel Costs Add New Pressure on the Bottom Line; Vendors Seek Solutions

Days after Hurricane
Katrina dealt a devastating blow to the nation’s largest energy hub, the worst-case possibility was quickly becoming a reality: gasoline prices surging above $3 a gallon, with some consumers complaining of price gouging; reports of violence at the pumps; underground storage tanks running dry; and gas runs by drivers worried about supplies.

Vending operators who participated in the 2005 NAMA Operating Ratio Report spent an average 3.8 percent of their sales on vehicle expenses in 2004, as indicated in the chart on page 44. Given the fact that participants posted an operating profit of 1.5 percent of total sales in 2004, higher fuel costs pose a definite threat to profitability.

Vendors face difficult choices
Vending operators were particularly concerned about the gasoline hikes, given the fact that many had already raised prices within a 12-month period to cover higher operating costs.

“I don’t know how many times we can go to the well,” said Tom Bergstrom, owner of Bergstrom-Daywood Co., an 11-route vending operation based in
Austin, Texas. Bergstrom observed in early September that his fuel bill had doubled over the previous month. The company raised its prices one year ago
to cover higher product costs.

Another reason Bergstrom was hesitating is he doesn’t know how much to raise prices. He doesn’t want to raise prices in the short term only to have to raise them again.

Fuel surcharges not seen as an answer
Most vending operators don’t think fuel surcharges — which vend product suppliers charge operators — are an option. The only options most felt they had in the short term was to raise prices, ask customers to reduce commissions, review routing, and cull unprofitable accounts.

Don McDaniel, owner of McDaniel Snack & Vending, a 10-route vending operation based in Huntsville, Ala., noted in early September that he told his drivers to fill up their gas tanks every morning. He said he wasn’t sure if and when supplies in his area would run low, and he doesn’t want his trucks to be low on fuel.

As part of his preventive measures, McDaniel said he plans to fill up his on-site fuel tanks in case of a shortage.

McDaniel has converted most of his vehicles to diesel fuel. Many operators have switched to diesel fuel over the years; however, as indicated in the chart above, diesel fuel costs haven’t differed significantly from gasoline. Both types of fuel depend primarily on crude oil.

McDaniel is one of many operators who has a fleet fuel card that allows him to review how often his drivers are fueling, where they are fueling and how much they buy. The card provider sends him a weekly report which he can review over the Internet.

In the meantime, he continues to review different fuel card programs. Trade associations and buying groups offer discount fuel card programs. The National Automatic Merchandising Association, the Better Vendors Association and the Vendors Purchasing Council all offer their members programs.

Price hikes seen as the only option
McDaniel, like many operators interviewed, felt that his only option in the short term was to consider raising prices or asking customers to reduce commissions.

He has also instructed his drivers to shut off the engines as soon as they pull up to a loading dock.

First Choice Food & Beverage Solutions Inc., based in St. Cloud, Minn., was fortunate to have prebooked unleaded fuel at $1.97 per gallon through September, noted Russ Ergen, controller. This benefit came to an end with the new prices, however. The discount did not include his diesel vehicles, which currently comprise more than half of his fleet.

“We’re going to have to find some way to recoup that; there’s no doubt,” Ergen said. “It’s going to have a major impact.” He is considering raising his prices and looking for places to cut costs.

New strategies sought for raising prices
Some operators are not questioning the need to raise prices.