Petrol prices put the squeeze on business
Wednesday, May 28, 2008/
Businesses are taking their share of the fuel price pain by cutting profit margins instead of passing on higher prices.
Recent record crude oil prices in New York and Singapore – the key market for Australian petrol – have seen petrol move quickly to the $1.50 per litre mark and beyond in Australian capital cities.
The sudden and rapid hike in the price of fuel means business owners must make a difficult choice between passing on higher fuel costs to consumers by increasing prices, or absorbing the cost and take a hit to the bottom line.
For smaller businesses, which are often in a weaker market position, the decision can be a matter of survival or failure. One business wrestling with the question of whether to risk a price increase is restaurant food delivery business Cuisine Courier.
The business has been forced to almost double the amount it pays its contract drivers per delivery in response to fuel prices, but director Ryan Catzel says there has been little scope to increase prices to offset the increased cost.
“The increased fuel price is making life much harder for us and at some point customers will have to pay more. The hard thing is that will hit our volumes, but even so we are very, very close to passing on the cost,” Catzel says.
The problem for Cuisine Couriers, as for many other businesses, is that increased fuel costs – along with higher interest rates – are also putting consumers under financial pressure, increasing their sensitivity to product price increases.
And it is not only businesses in directly affected industries such as transport and delivery that are being hit by higher prices. Fuel is such an integral part of the production and supply process that its price affects the cost base of businesses throughout the economy.
John Cummings, chairman of the National Association of Retail Grocers of Australia and the owner-operator of an IGA grocery store in the Perth suburb of Duncraig, says his profit margins have been hit by higher fuel prices.
“Yes, our margins have been hit, and I just think to be in business in just about any sector at the moment you have to accept the costs are going up. It is a tougher retail market as consumers lose some of their expendable dollars, and the people who survive will be those who manage those dynamics the best,” Cummings says.
Since fuel prices have gone through the roof, Cummings says, some suppliers have started charging a fuel levy on deliveries of fresh produce, with one charging an extra $25 on each of its four weekly fruit and vegie consignments.
Like Cuisine Couriers, however, Cummings says he is reluctant to pass that increased cost on to consumers.
“The only thing you can do is concentrate on your figures, look at your expenses, watch your sales graphs and make sure if some prices do go up you’ve still got cheap alternatives on your shelves,” he says.
Cummings’ experience highlights the particular difficulty smaller businesses face in the current environment. While larger business or those with a strong market position are able to push higher costs down the chain, smaller businesses are more likely to be price takers, leaving them to bear the bottom line pain.
With more than 600 trucks on the road around the country, courier and freight company Australian National Couriers is not a small business. Despite fuel having a big impact on margins however, highly competitive tendering processes for many jobs mean it is largely unable to pass on higher costs.
Managing director Patrick Legget says: “We are competing with the big guys who are able to take advantage of big economies of scale for these tenders, and now the big industry customers are looking to make their own savings by driving down contract pricing, so the end result is margins aren’t what they used to be.”
Stuart St Clair, chief executive of the Australian Trucking Association, confirms that it is primarily the smaller operators that are being forced to swallow price increases.
“The small fleet operators often are not able to get the big line haul contracts with inbuilt price flexibility for fuel costs. They compete to pick up the piece work and small contracts where they take much of the fuel prices increase, and for many if prices increase by more, it could see them tip over,” St Clair says.
It’s not all bad news for small and medium sized businesses, however, with those able to lock in a strong, specialised market niche able to maintain margins in the face of higher fuel prices.
Hummer Limousines, for example, has enjoyed strong growth despite the big increase in fuel costs that have gone with running its fuel-guzzling four-wheel-drive super-limos, with the business about to add another 10 vehicles to its fleet.
“We have a product line that is unique, very much in demand and despite the fuel prices we’re going through a good period,” director Steve Kantonis says. “People understand the increase in fuel and we have found they are prepared to accept that we have to recover that cost in our prices.”
Read more about petrol prices