Most independent haulers and landfill operators do not use a floating fuel recovery fee-and that is a problem for them. Fuel expense can constitute 5%-15% of their expenses. When fuel costs start to rise and there is no meaningful mechanism to recover the increased cost, one sure result is erosion of the bottom line. The loss of profit impacts the business in a number of ways: equipment replacement, pay increases for employees, skipping preventive maintenance and lowering your leverage with your lenders, all of which can impact growth. Raging fuel increases have caused more than one company to leave the industry.
All of my clients have heard about the Floating Fuel Recovery Fee (FFRF) and why they should be using it in their business. The FFRF is a tool to adjust the charge to the customer based on where average price per gallon of fuel is each month. Most if not all of the publically traded waste companies and the large regional companies use some form of a FFRF. They do this, and you should also, to recover the cost of increased fuel cost when the price is rising and to be fair to their customers when their fuel cost decreases.
Many independents use a “Fuel Surcharge” which might have helped at the time of implementation, but became ineffective as the price of diesel increased or made their rates high in the marketplace when the cost of diesel when down. The form of fuel surcharge that I see most often is something similar to this: $1.00 per month for a residential customer, $5.00 per month for a front-load customer, $10.00 per roll-off haul and $1.00-$2.00 per ton for landfill customers. This pricing probably worked fine when rolled out to customers, but as the cost of fuel increased or decreased this model became ineffective in offsetting fuel price fluctuations.
Why aren’t more independents using a FFRF? There are probably as many reasons (that make good sense to the owner) as there are independents. From my perspective, the primary reason is the fear that their company will lose 1, 10, or 100 customers to the bottom feeders in their market area by using a FFRF. Obviously, the independent has to balance current market area pricing pressure against lost of profitability and its collateral impact to their business. I have discussed this subject with many owners and have gotten an array of answers. One very profitable operator that I have dealt with for years said “when a customer does business with me, they know exactly what it is going to cost.” Bully for him, a stand-up, honest businessman. Unfortunately, his diesel vendor cannot do the same for him. Another owner told me that he “can raise my rates anytime I want to.” My unspoken response was “well, you need to do it now.” Another owner that I made my case for the FFRF for 4 years finally implemented the FFRF and regretted not doing it sooner. (As I recall, the company loss 1 customer while seeing a month-over-month revenue increase of 5%, all to the bottom line). Another independent that used the “couple of dollars a month” was fine with his method when fuel was below $3.00 per gallon, but when it hovered around $5.00, I saw the fuel expense increase as a percentage of revenue while his profitability had a corresponding decrease. The worst case was a long-time independent that told me when I asked about his fuel recovery fee, “I don’t use one – I eat it when it goes up.” That owner was force to sell his business within a year. I am sure there are many other reasons for not having a FFRF that owners can espouse. However, independent owners and managers need to keep in mind that they operate and manage a “business” and not a hobby. As I have written about in the past, from a financial perspective, there is more to managing a collection, landfill or recycling business that taking a paycheck.
I am intimately aware of the daily challenges and pressures that an independent owner faces. I understand that there are one or more competitors in their area that have no clue about their cost structure and price their service to “get the business.” Some of these competitors’ businesses can be bought in the future on the courthouse steps. However, the successful independent has to be disciplined and quantitatively analyze their risk to prevent bottom line erosion. One of the tools available is the FFRF. Despite the reluctance to this model, it works and is a major step in the right direction.
I hope this is helpful to you. If you would like to explore the Floating Fuel Recovery Fee, please give us a call. We would enjoy helping you and your company.