Five Questions to Ask Before Diversifying Your Product Line

by Martin D. Kirshner, CPA, MSA, Gray, Gray & Gray, LLP

Diversification is not a new concept in the fuel oil and propane industry. Many — if not most — energy retailers have long ago moved beyond offering just fuel delivery. The reasons are many, including having a “backup” revenue source, maintaining a revenue stream during the summer months, and giving the company the ability to retain employees on a year-round basis (an even more important consideration given the difficult hiring market we currently face).

Offering the installation and servicing of heating equipment is perhaps the most common form of diversifying. But fuel oil dealers who start selling propane, and propane dealers who add fuel oil to their product line demonstrate a frequent form of extension. Other service offerings such as electricity, plumbing, snow plowing, air conditioning, landscaping, sales of diesel fuel and kerosene, water filtration systems — even servicing (gasp!) natural gas equipment — have found their way into the portfolio of products and services offered by energy retailers.

The process has been slow. Looking back over the results of our energy industry survey, just 10 years ago (2007) only 10% of dealers responding reported they were considering expanding their product line. By 2011 that number was up to 22%, and more than half of the dealers were installing air conditioning, while 10% offered plumbing service.

Today? Every dealer who responded to our 2018 survey reported they sell both fuel oil and propane, and every one of them installs and services air conditioning systems. Most (82%) now list plumbing as a service, and 95% service gas equipment.

Research, Plan and Prepare

There is money to be made if you diversify smartly. But there are also risks if you diversify recklessly. If you are considering expanding into another product line, be sure you have satisfactory answers to these five questions before proceeding.

1. What does your company do best? It might be tempting to get into a business which you find interesting, or one that offers lucrative profits. But it is important you do not stray too far from what you know. Most dealers focus on taking advantage of proven strengths, which generally lie in the category of home comfort services. You know how to deliver product efficiently, so it makes sense to add an alternate fuel to your company’s product mix. Customers have grown accustomed to seeing your service technicians working on a heating system, so it is not such a big leap to trust them to service an air conditioning unit. Keep it close and you stand a better chance of making your new venture profitable.

2. Do you have the resources necessary to enter a new market? Are you planning to diversify because you are desperate for a new revenue stream? Better to think twice about extending yourself beyond available resources. Diversification should be a strategic move. Adding a new product or service will likely require a significant investment in equipment, inventory, employee training, and marketing.

3. Will expanding your product line hurt existing business? “Don’t sink the boat!” is a watchword phrase in the financial industry, and it should apply to any plans you may have to diversify. Having your service technicians learn how to repair gas heating system could certainly help introduce new customers to your business. But will they be pulled away from the work they have traditionally done for heating oil customers? Don’t overextend your reach and risk losing the goodwill and reliable revenues you have worked so hard to develop.

4. Can you be competitive with your new product? It is likely that your new product or service will already be offered by someone in your market area. How will you break into the hearts and minds of customers? You may have a built-in audience in your existing customer base, but you will still need to offer something bigger, better, faster or cheaper than the competition.

5. Do you have the internal organization to support expansion? Adding a new product or service can almost be like starting an entirely new business. Do you have a team in place that can take on the additional burden? You will need to consider everything from upgrading your accounting system, to finding more storage, to training your office staff and sales people, to obtaining new certifications and licenses – and the list goes on. The last thing you want to do is launch a new service and be unable to support it internally.

Is Diversifying Worth It?

What is the bottom line on diversification? As discussed, it is not an automatic “home run.” The investment in resources —time, money and people—can be considerable. And the return on investment is not instant. In our experience even the most successful energy companies who diversify into other products and services can expect to wait five years or more to recoup their investment, if they succeed at all.

To add propane to your product line requires a typical investment of $400,000 for delivery trucks, service trucks, a storage plant, customer tanks, hiring technicians, and retraining delivery drivers. It could easily take five years to recover this initial investment. Air conditioning installation and service requires a smaller up-front investment, typically about $100,000 for inventory, parts, service trucks, and hiring technicians. But sales volume is also lower and the competition for customers can be fierce. You might expect a return on investment of approximately $200,000 after three years. Other fuel types and products require varying levels of initial investment, with similarly variable returns.

Our firm has had multiple clients expand their product lines into alternate fuels and services. The results have been mixed. Two companies decided to become suppliers of electricity, taking advantage of deregulation in the industry. One had great difficulty in getting their existing fuel oil clients to purchase electricity as well. They did not have the right personnel in place to support the operation and gave up on electricity after two years.

The other company, however, invested in creating an infrastructure for electricity sales, including training for their people. They also made a big push to contractors for new construction work, which resulted in the opportunity to install heating systems (both propane and fuel oil) and provide the home’s electricity supply at the same time. As a result, electricity has become a steady income stream for the business.

Answers

If all this seems overwhelming, it should be. Diversifying your business is a big, important step that deserves extensive up-front planning, a commitment of resources (both financial and human), and the patience to wait until your new offering gains traction with customers. Diversifying also requires a change in your management approach. With only one fuel type and a limited number of services to offer, you can find yourself managing on a day-to-day basis, focusing on details and putting out fires. When you widen your company’s portfolio, you must also widen your own horizons, taking a longer, more strategic view of the future for the business. You need to start working on the business, not in the business.

But the payoff can be worth it. Having “more legs on the stool” can create a more stable business that is more resistant to seasonal variations, the impact of supply shortages, and the changing nature of how customers address their home service needs.

Martin Kirshner, CPA, MSA is a member of the Energy Practice Group at Gray, Gray & Gray Certified Public Accountants and specializes in accounting, tax, and consulting for energy company owners. You can reach Martin by calling (781) 407-0300 or at mkirshner@gggcpas.com.

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