ICS Magazine

The Energy Squeeze

June 5, 2008

June 5, 2008 – (Portfolio.com) -- Some contractors argue with their clients over design specifications or the size of the bill. But Anthony Rawls has an entirely different sticking point with his best customer-the route he takes to work.

With the price of gasoline at $4 a gallon, Rawls, the president San-Marin Construction in South San Francisco, is trying to save money. His work can take him as far as Ukiah, more than 100 miles north of San Francisco. For this job, he carefully maps out the routes needed to visit 26 bank branches in the most fuel-efficient manner.

But his client, a major bank he declined to identify, often has a different schedule in mind.

 "It's really difficult because they're not even thinking about gas prices," he says. "But it comes out of my overhead, and the price has almost doubled."

For managers of businesses both big and small across the nation, the rising cost of fuel and energy is very much on their minds. It's not just airlines and trucking companies that are struggling with the recent sharp increases in energy prices. Businesses that use cars, vans, or trucks for distribution or services are feeling the pinch, as are manufacturers that use oil-based products from detergent to plastics. Gasoline prices are up nearly 28 percent from a year ago, and crude oil futures are up 85 percent from a year ago.

When oil prices began climbing several years ago, companies were able to absorb the hit, for the most part, as the costs of other goods fell thanks to global competition. Now, however, the prices of other commodities are also rising, adding to the pressure.

The quandary is whether to pass along at least some of the higher costs in the form of price increases. That's easier done when the economy is booming. In a slowing economy, raising prices could drive away customers. Still, there comes a breaking point for a business to stay profitable. The recent surge in fuel prices may be it.

Dennis Beatty, owner of Tiger Paws Carpet Cleaning in Memphis, says competition is too fierce to raise prices on his customers-even though the cost to run his nine-employee, three-van business has risen about $200 to $250 a week, equivalent to one and a half jobs.

    To deal with the situation, Beatty has instituted a strict routing schedule for the 50 carpets his vans drop off and pick up weekly.

   "Mostly we go by the zip code," he says. "I might be in one area in Tuesday and a different area on Wednesday. We send them to the furthest stop, and then they work their way back to the office. It takes more time, but it saves money."

   Some of Beatty's fellow small-business owners in Memphis have elected to close shop on certain days of the week, Beatty says, grouping stops together and operating only on Mondays, Wednesdays, and Fridays or Tuesdays and Thursdays.

    Despite these dire measures, Beatty considers himself lucky. A few weeks ago, when TV and radio stations first started talking about a recession, his business plummeted 50 percent until the panic subsided.

   "I was calling around, and the same thing happened to other carpet cleaners," he says. "Our business was really steady, and it was just like somebody had turned off a faucet, then after two and a half weeks, it was just like it came around. Gas is a chunk of my expenses, but if revenue stops, we're really in trouble."

   Indeed, the squeeze is felt especially hard by owners of small businesses because many operate with smaller profit margins and tougher competition, forcing difficult choices, says Lloyd Chapman, president of the American Small Business League.

   "It's having a noticeable negative impact-and on small business in the transportation industry, it's a devastating impact," says Chapman, whose organization serves Chambers of Commerce nationwide. "Truckers in Southern California are going into Mexico to buy diesel fuel. It's putting a big strain on employers: They're having problems with employees getting to work on time because they have to ride public transportation. And if U.P.S. starts charging more, that will hurt everyone."