Balance of Power

Rising Fuel Costs Force Tough Decisions for Businesses

It’s an election year, so it’s no surprise that, as soaring energy costs fuel increasing concern across America, the rhetoric is flowing as freely as $4-per-gallon gas.
A Congressional panel recently called a group of oil-company CEOs on the carpet, berating them for profiteering during an economic slowdown. The execs, in turn, blamed Congress for restricting drilling and refining at home, contributing to an unhealthy dependence on oil-rich but often-unfriendly foreign governments.
Caught in the middle of this heated exchange are average Americans, who increasingly find themselves diverting money from other household needs to filling up the gas tank, leading to often-difficult spending decisions.

Receiving less media attention, however, are businesses of all kinds, which are also forced to make tough decisions, whether it’s retail stores pondering whether to pass hefty shipping surcharges to customers or construction firms seeing profits shrink as the cost of fuel and supplies far outstrips what they had anticipated during the bid process — not to mention auto dealers watching as consumer anxiety keeps would-be buyers from making that big purchase.

“It’s certainly having an effect on the auto business,” said Don Pion, president of Bob Pion Buick Pontiac GMC in Chicopee. “Any time people feel uncertain about the economy, they tend to hold back and not make long-term purchases — and that’s what automobile purchases are. Few people are coming in paying cash; it’s a four-, five-, six-year commitment. A lot of people are standing on the sidelines and seeing how this all shakes out.”

Big Y Foods, with more than 50 stores across the region, has seen its fuel surcharges on produce trucked from California and other distant locales increase by $1 million over just the past six months, on top of everyday energy costs that also continue to rise.

“Our customers are accustomed to having a great variety of produce, and we want to provide it, but those costs have gone up tremendously,” said Claire D’Amour, Big Y’s vice president for corporate communications. Rising energy costs have also raised the cost of paper and plastic packaging, and while the chain looks for alternative products where possible, that’s not always — or even often — possible. “If you’re buying Cheerios,” she said, “well, that’s the package it comes in.”

“Paper costs are higher than they’ve been in years, because of the higher fuel costs to get that paper to our door,” added Greg Desrosiers, sales and marketing director at Hadley Printing in South Hadley. “And it’s costing us more to fill up our own delivery trucks.”

It’s a story BusinessWest heard repeatedly from local companies, which are often saddled with the double burden of their own rising energy costs and the additional costs being passed on to them from their suppliers. No one wants to increase the prices they charge customers, but when the resource that runs much of the American economy costs so much, they often have no choice.

Cost Drivers

The auto-sales business would seem to be on especially shaky ground these days, and Pion said it’s difficult to know how much buyer reluctance has to do with gas prices and how much is typical behavior in a softening economy. But car sales have actually been holding up fairly well, he noted — it’s recreational purchases that are being hit the hardest.

“I think the biggest impact we’ve seen is with the discretionary truck buyer, who doesn’t need to buy a truck, but likes trucks and wants to own one as a first or second family vehicle,” Pion explained. “That person isn’t buying right now, and truck and SUV sales have fallen off because of that.

“Now, the person who needs a truck for work, or they’re towing a boat or a camper, or need it to do some other job, that customer is still buying,” he added. “But it seems like the only people buying a truck or SUV right now are those people who need it for a specific purpose.”

Rising fuel costs have forced many businesses to rethink their energy use, and a large, regional supermarket chain like Big Y deals with the issue on multiple levels.

D’Amour said Big Y buys as many goods as it can with each shipment, “stocking up just as we would encourage customers to do.” And, in fact, she has already started to see changes in customer behavior brought on by higher gas and food prices, such as shopping less frequently, combining food shopping with other errands, and buying more generic brands.

When examining rising grocery prices, however, factors other than energy costs are at play, she said, including a decline in wheat production in the U.S. while demand for the grain rises worldwide. “Corn is a more lucrative product because you can make more things with it, including ethanol,” she explained. But the fact that consumers demand a wide variety of produce year-round makes the shipping surcharges a more central issue.

Big Y has taken steps over the years to reduce its energy costs, D’Amour noted, including efforts to fill its own trucks completely before transporting items, installing lighting regulators in stores to avoid peak brightness during less-trafficked times of the day, and reclaiming heat from the freezer generators to heat the stores.

“The older stores are also replacing equipment,” she told BusinessWest. “After awhile, it becomes cheaper in the long run to replace an older refrigerator case than to keep repairing it.”

Culture Change

Municipalities struggle with energy costs on an even larger scale than most businesses; for example, the city of Chicopee spends about $4 million per year on electricity and $750,000 on gasoline and other fuel, out of a total budget of $150 million. Mayor Michael Bissonnette said the city has been proactive in reducing those costs, including implementing a Texas-based conservation program called Energy Education in Chicopee schools — a program that will soon spread to other city departments.

“It’s not rocket science. Either you’re proactive, or you pay more for energy use,” said the mayor, whose city also benefits from its own electric department to keep costs down. “This program is designed to assess and then curtail the use of energy in buildings. We hired a full-time staff person to take all that data and apply it to reducing energy use. In the past 18 months, we’ve saved $920,000.”

Energy, Bissonnette said, is something that most municipal governments don’t keep a careful enough eye on, but it can be shocking to discover how many lights, heating systems, and computers are left running all night when offices and buildings are unoccupied.

Besides cutting down on that type of waste, Chicopee — which boasts a fleet of 225 vehicles, from passenger cars to heavy-duty trucks and police and emergency vehicles — has begun replacing its SUVs with hybrid models and its Crown Victorias with Tauruses, both changes offering better fuel economy. In addition, the routes driven by patrolling police officers and sanitation vehicles have been studied and altered to reduce miles driven.

“It’s really about changing the culture,” Bissonnette said of the efforts, which will allow him to avoid an increase in the energy budget next year, despite the rising cost of fuel — efforts, he said, that homeowners and businesses can replicate. “If every single household in America were to change from a regular lightbulb to one of those newfangled, funny-looking, energy-efficient lightbulbs — just one bulb per house — it would be the equivalent of taking 600,000 autos off the street in terms of reducing pollution and global warming.

“People are coming to accept that we can’t use energy the same old way,” he continued. “It’s like it was with recycling — it takes awhile for people to change their behavior and accept a new reality, but that’s what’s happening now.”

Reality Check

All industries are now getting an education in that reality.

“Gas prices are certainly affecting our business,” said Andrew Crane, president of A. Crane Construction in Chicopee. “Every time the trucks leave in the morning, we have to make sure the trips are efficient,” meaning combining trips in order to do the most work on the least miles. “We’re just starting a job in Sturbridge; I made that deal a year ago, and now I’m trying to stay within what I thought the budget would be. It costs me $30 a day, per truck, just to get there and back.

“How do you stay competitive?” he continued. “Every two months, I get letters from our suppliers saying costs have gone up 8% to 10%. So we have to pay more attention to how we’re managing jobs to make them efficient, and that takes time and energy.”

Desrosiers said the rising cost of paper, because of production and shipping costs, is unavoidable, but Hadley Printing is reluctant to pass along to customers its own rising energy costs — both from operating the heavy printing machinery and using its own trucks for transport. That makes energy conservation a must if profits are to remain steady.

“Paper costs more, and that’s figured into costs,” he said. “But for the smaller jobs, we really try to absorb those other increased costs through volume, and try to do more with less.

“We have to make some tough decisions because people, including our customers, are very sensitive to the way everything is going up,” Desrosiers continued. “This isn’t a nickel-and-dime type of business. I don’t put line items in for fuel charges. I find that to be a big turnoff to many people, and not a good business tactic.”

In addition, Hadley Printing has embarked upon efforts to win ‘green’ certification from the Forest Stewardship Council, an organization that promotes ethical, environmentally friendly, and economically viable business practices. “We hope that spurs some interest from people and gains us some new business from people looking to print with companies that are greener,” he said — another way to increase volume and lessen the impact of rising fuel and electricity costs.

Driving Home a Point

If business owners are finding it challenging to stay profitable in such an environment, gasoline costs often pose a more immediate threat to employees who commute long distances to work.

Meredith Wise, president of the Employers Assoc. of the Northeast, said members of that organization are sensitive to the fact that employees who live check-to-check can find the extra cost of commuting crippling — and even a reason to search for a different job. But they’re divided on what to do about it.

“We found a split,” Wise said. “There are some organizations that are saying, ‘you know, that’s just a part of life,’ and continue with business as usual, but there are a few companies doing some neat things — they’re actually looking at the regular commute people have and giving them a monthly fuel adjustment because the price of gas has gone up so much.”

Companies taking this route are calculating the benefit in different ways. Some are paying a set amount per mile, while at least one takes the total weekly miles commuted and multiplies that by the difference in gas prices between today and 12 months ago. “Others are pulling a number out of thin air,” Wise said.

“The important thing is, they’re doing it for the regular commute, and that’s not something they have to do,” she continued. “But they’re recognizing that they need to keep their people, some of whom might drive 30 or 40 miles each way to work. This is a way of saying, ‘we understand what you’re going through.’ I don’t know how long these programs will stay in place at companies that have rolled them out, but my expectation is at least for the remainder of this year, as long as gas prices stay high.”

Wise hasn’t seen a rise in telecommuting at companies that don’t already offer the option widely, but businesses are examining other options, from shifting toward leasing company vehicles to increasing the mileage reimbursement for salespeople and other employees who spend a lot of time on the road. The problem is, it’s difficult to relieve costs for employees and ownership, so companies are forced to walk a difficult tightrope.

Already, many are preparing for changes in consumer habits. Pion noted that trucks and SUVs actually get better mileage, on average, than they did five years ago, but they’re still a tough sell with gas prices so high. “I think people are being cautious in how they’re spending their money today,” he said.

“We’re riding it out,” D’Amour added. “It’s a little frightening, frankly.”

That’s a sentiment that business owners across Western Mass. — not to mention their customers — certainly share.