April 15, 2011
Members deal with tough issue of increasing gas prices
Gasoline prices at the pump are expected to continue to rise, but by how much is the tough question. With prices spiking to $1.20 per litre by late March, some experts predict it could reach much higher this summer.

What steps can members of Landscape Ontario take in order to be proactive in dealing with the unpredictability of fuel costs for the coming season? Horticulture Review asked some of our members how they cope when gas prices jump.

Peter Guinane, CEO of Toronto’s Oriole Landscaping, says, “Our experience at Oriole indicates we will face two fronts with higher fuel costs. In addition to the direct cost for our fleet, many of our suppliers have a fuel surcharge they instituted back in 2007 or 2008. Materials end up costing more than we allowed in our estimates, often completed six months earlier. That being said, I am not overly concerned for our bottom line.”

He went on to include a list of fuel expenses as a percentage of sales for the last four years. “This is probably low for the industry, especially compared to a maintenance business, but even if fuel is a much higher percentage of sales, an increase of 10 per cent at the pumps will not reduce your bottom line by much,” stated Guinane.

“If fuel averages are close to $1.25 for the entire summer, our fuel will consume closer to 1.4 per cent of sales in 2011,” says Guinane. He lists the fuel expense as a percentage of sales for the last four years, as well as his budget for this year: 2007, 1.04%; 2008, 1.34%; 2009, 1.21%; 2010, 1.06%; 2011, 1.28%.  

“The key is to have a good budget to start the year. Don’t bank on healthy sales or everything going perfectly. If you allow for some unforeseen circumstances in costs and labour expense, you should be able to maintain your profit margin through a volatile market,” says Guinane.  
Paul Doornbos CLP, CLT, who owns Thornbusch Landscaping of Lansdowne, began a discussion on Landscape Ontario’s LinkedIn web discussion group. He asked, “What steps is everyone taking to be proactive in dealing with the unpredictability of rising fuel costs for the coming season?”

Mark Humphries, owner of Humphries Landscape Services, responded, “Many years ago we added a fuel surcharge line to all our stationery. It is always there in front of the customer, even if the amount is 0 (or we make it a negotiation tool).” He went on to explain that with the notice it is always allows his company flexibility against the rise and fall of gas prices. “It is not a complete surprise to the client, and (as they feel the pain in their own wallet), they are more likely to understand.”

Terry Childs, owner of Nature’s Way Landscaping, Gananoque, said, “My prices are based on $1.50 per litre, so we will have a little room to play with if the price goes up.”

In answer to the question that he generated, Paul Doornbos wrote, “Two years ago when oil spiked in cost per barrel we added the line to all our maintenance contracts that if fuel went above $1.30 a litre for a period of 10 consecutive days, that a fuel surcharge of one per cent of the total value of the contract would be applied to their next bill; we never removed that line and will continue with it this year.”

One member wrote that a hedging strategy is an easy-to-use method and works for more than just fuel. He explained that a less sophisticated way is to buy a basket of stocks like the larger producer and extracting companies stocks themselves, Imperial Oil and Suncor which tend to have much larger profits during spikes in the price of oil, as their processing costs usually remain quite static.

Peter Scholtens of Verbinnen’s Nursery in Dundas agreed, saying, “I have an acquaintance in the biz in the U.S. who invests in oil as a hedge against price increases. When prices go up, the investments do better and compensate for the increase in his business expenses. The more closely you can invest in the commodity itself, the better the hedging.” He cautioned that the tax implications of any decisions are an important part of the process. “I know that, for registered core investment income, it is taxed at a far higher rate than business income, so that definitely has an impact.”

Robert Kennaley, who formerly wrote a legal advice column in Horticulture Review, and now appears in Landscape Trades, wrote in his April column, “The contractor will assume the risk of materials availability or price changes in his contract. The contractor is required to anticipate and include for all of his costs of performing the work he prices.” He goes on to explain that if the contractor is being paid monthly by way of a unit price, for example, the contract might provide that the unit price will increase by a certain amount or percentage during any month in which the gas price in the vicinity of the place of work exceeds a certain threshold per-litre cost.  

Keep vehicles in good condition

“We have always tried to keep our travel time to projects to a minimum, more for labour cost savings than fuel. High fuel costs may make that strategy more appropriate for all contractors,” says Peter Guinane. “Our Green for Life message will be reinforced by our actions if we can reduce the volume of fuel consumed by our industry as a whole.  

There is the option of saving on gasoline usage: keep vehicles tuned, tires properly inflated, change run-and-gun driving habits, unnecessary idling, keep spark plugs up to date, check tire alignment.

Joe Salemi, member services manager at Canadian Nursery Landscape Association, added, “Let’s not forget the discounts available through Esso and Petro-Canada via your membership with Landscape Ontario/CNLA. That’s 2.9 cents per litre off at the pump at all Esso retail locations, and 2.4 cents per litre off at all Petro-Canada retail locations.”

John Hofmeister, the former president of Shell Oil, expects price hikes to continue until November 2012. He bases his forecast on higher demand for gasoline worldwide, especially in Asia. Of course political unrest in the Middle East, natural disasters and economic uncertainty puts the accuracy of such forecasts in the questionable section. But then, only taxes and death are absolutes.