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ENERGY PRICES: A SHARP POKE IN THE EYE
What You Should Do To Protect Your Business
Trick question: What’s more fun…a sharp poke in the eye, or an economic report?
It’s a tough call for most health and wellness professionals. Economic and financial topics confuse and intimidate many seasoned business owners.
And good luck translating CNN’s nightly economic update into actions you should take in your business!
In this feature, we demystify a critical economic trend: rising energy costs.
We look behind-the-scenes at:
1) why energy prices are rising
2) how they will affect your business and your customers
3) what you should do to protect your business.
Bottom line: your business will pay 30-50% more in 2006 for electricity to heat, cool, light and operate your facility. Typical customers will spend at least 20% of their take-home pay on gas and electricity….literally thousands of dollars more than last year.
And it gets worse after 2006.
The biggest mistake you could make? Ignoring the energy issue. It’s here for keeps.
If your pre-tax operating profit is under 10%, higher energy costs and changes in customers’ spending patterns may well drive your business into the red. Best case, you’ll probably see profits drop to near break-even.
Businesses with stronger profits, who can survive electricity and gasoline increases, will still have to deal with customers who are desperate to reduce discretionary spending and intent on changing their driving habits.
This is not a time to play ostrich. Every wellness business needs to take action.
While Hurricanes Katrina and Rita have made the situation worse, you need to know that increasing energy prices are primarily due to very long-term, big-picture trends in the supply of oil and natural gas versus our demand for gasoline and electricity.
Researchers and petroleum industry groups agree: the world has enough crude oil to support existing demand for about fifteen more years.
In fact, they believe that we have reached peak production already. We are now beginning to experience declines in production. In 2003, for example, oil companies were unable to locate any new oil fields for the first time ever. And Saudi Arabia, the largest oil producer, has not found any major new oil fields since the 1970s. In fact, most of the oil Saudi Arabia produces comes from fields first identified in the 1940s – 1960s, before some of you were even born.
So far, annual demand for oil has increased. It has never decreased. Oil producers have already begun using increasingly expensive sources of oil to meet that demand.
As a result, all of the things that require oil to produce are becoming more expensive.
This affects products ranging from gasoline for vehicles to anything plastic (think: treadmills, supplement containers, disposable plates in the café) to microchips for desktop computers to virtually all office and home equipment and appliances (copiers, water chillers and refrigerators, aerobic flooring, yoga mats and accessories, wicking fabrics, and more).
Certainly the most visible effect of this trend has been on gasoline prices. While weather drove recent gas price spikes, gas prices have been steadily increasing for years. While the hurricanes explain some fluctuation – for example, here in Texas, regular is back down around $2.60 instead of $3.00 -- no one should expect long-term lower gas prices. It’s just not going to happen.
Power companies use natural gas and coal to produce most electricity. So higher natural gas prices mean higher electricity prices.
Industry researchers predict that natural gas production will peak within 10 years. Demand for electricity (just like demand for oil) continues to increase. That trend, plus decreasing supplies of natural gas, will increase prices.
Other sources for electricity (nuclear, solar, wind, and more) exist. For various reasons, none of these sources are currently in use on a widespread basis. No immediately attractive, ready-to-go alternative to natural gas exists, so it’s very unlikely that electricity prices will drop in the foreseeable future.
Over the very long haul – centuries and longer – the world goes through colder and warmer periods. Scientists agree that we are currently in a warm-weather cycle, although they disagree about the causes.
Due to this warm-weather cycle, weather scientists predict unusually harsh hurricane seasons, with both more and worse storms over the next 10 years.
As you know from the news reports about Hurricanes Katrina and Rita, many oil and natural gas processing facilities are especially vulnerable to tropical storms and hurricanes. Weather-related disruptions reduce the available supply of oil and natural gas for months and years, which means yet more price increases.
Bottom-line: this winter, businesses and consumers alike will see electricity price and heating cost increases of 30% - 50%. Combined with higher gas prices, your customers will see at least 20% of their take-home pay going for gas and electricity.
This means less discretionary spending and increasing reluctance to drive several times a week to a health club, yoga studio, nutritional retailer, wellness center, and the like.
No one is immune. Almost everyone thinks twice when they’ve got to spend $100 a couple of times a week to fill the tank of a typical SUV. Even financially comfortable families feel the pinch, especially if playing chauffeur for after-school activities, sports events, and more means several fill-ups in a week. Now, add in 30% - 50% increases in heating bills.
Your customers will have thousands of dollars less to spend in 2006 than they did in 2005.
If your pre-tax operating profit is under 10%, higher energy costs and changes in customers’ spending patterns may well drive your business into the red. Best case, you’ll probably see profits drop to a break-even level.
Businesses with stronger profits can survive electricity increases. But even they will still have to deal with customers who reprioritize discretionary spending and dramatically change their buying habits.
This is not a time to play ostrich. Every wellness business needs to take action.
What You Should Do To Protect Your Business
First, get serious about reducing your business usage of electricity and gasoline.
Don’t waste time looking for a silver
bullet. It’s the little things that add up here.
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Revisit the basics. Check thermostat and hot water settings. Check insulation throughout the building and around windows. If you’re in a cold area where you lose heat every time a customer opens the door, add an enclosed foyer or at least a windbreak.
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Re-look at customer traffic patterns. They may be changing due to increased gas costs. Re-synch your operating hours and staffing as appropriate to reduce costs during periods when few customers visit.
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Revisit lighting levels throughout your business. When you’re not teaching classes in part of your yoga studio, dim the lights in that area and adjust the thermostat. Get serious about turning lights off when people leave rooms.
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Check the hot water settings. If your business uses lots of hot water -- for example, you provide food service or towel service -- make sure the water temperature settings are no higher than necessary to meet sanitation and health code requirements.
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Ask your local energy provider for a free energy audit.
Second, keep customers plugged into wellness by accommodating their personal budget crunch. Forget how you've always done things. Be the business your customers need and want you to be.
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Help customers stay fit at home. Customers who want to avoid multiple weekly trips to a gym may have an interest in staying fit at home. Why lose those dollars to Wal Mart or Target? Unlike them, your business is an authority on wellness. For example, you may be able to keep them plugged into fitness by offering videos, pedometers, walking shoes or other home-oriented fitness products and services.
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Go to them. Don’t make them come to you. Analyze your customer list by zipcode and neighborhood. Look for clusters of customers and offer group wellness programs in that neighborhood – at a church, for example. Train several people at one participant’s house. Partner with a related business to use their facility if it’s closer to a group of your customers. Don’t go it alone – ask your customers where it might be more convenient and gas-saving for them. Some will happily offer suggestions closer to home – for example, a conference room in their office building, or space at their subdivision's community center.
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Consider adding e-commerce and/or mail order. Help customers buy from you without driving to your store. It’s worth adding shipping and delivery services if you can price it competitively versus what your customer would pay in gas to make the trip. High gas prices make UPS and Fedex charges look good. Perhaps you can ship refills on supplements to local customers instead of having them pick up a new supply.
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Offer frequent shopper programs. Give points for every visit customers make to your business. Exchange points for products, services, extra membership months, etc. Offer bonus points for bringing friends. Even better, team up with other nearby businesses and make the points redeemable within, say, the same shopping district.
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Cross-market with nearby businesses. Let your customers know that they can take care of multiple errands with just one trip. They may not have noticed that a pet supply store is right around the corner from your “food-minus” low-sugar/low-carb/low-fat/low-calorie store. They may not have realized that there’s an insurance agent at the other end of the strip shopping center. Just because they visit your yoga studio doesn’t mean they know about the martial arts dojo a couple of storefronts down for their kids.
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Consider a new membership model. We’re seeing memberships cancelled at fitness centers because members want to avoid making extra car trips. Consider dropping the traditional monthly/annual membership model and allow people to pay for a predetermined number of visits. If they don’t use the visits this month, roll them over.
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Turn your one-trick-pony business into a one-stop shop. Bring more services into your location, tailored to your customer mix – perhaps life or career coaching, flu shots, personal convenience items, massage, healthy frozen entrees, fun parent/kid events -- so that visiting your business saves your customers gas money by letting them make one trip instead of several.
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Target work-at-home customers. Many businesses have employees who work out of their homes. While these people are often hard to spot, they’re actually all around you. These individuals often want a change of scenery during their workday. They want a reason to get out of the house. Perhaps adding WiFi wireless internet access and other business-friendly services would encourage them to visit your business.
- Make the most of drive-by visibility. Someone wearing a sandwich board, a banner hung across your store-front, a huge bunch of bright balloons – get their attention!
(C) 2005 The Radial Group
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