Few options as energy costs soar for small businesses

CHICAGO (Reuters.com) -- Scott Graham won't do it - not yet.

Despite the rising cost of gasoline, Graham, president and co-owner of a Las Vegas-based medical supply business, refuses to raise prices or to exact a fuel delivery surcharge from customers.

"I've attempted to absorb it by cutting my own business operating costs," says Graham, whose MBI X-Ray & Medical Supply has 14 employees that deliver and service equipment and products for physicians in private practice throughout southern Nevada. "We try to make sure we cluster service whenever possible in the same area."

But Graham says he can't hold out much longer. Many vendors have raised minimum orders for the diagnostic devices, pharmaceuticals and other supplies that MBI distributes, forcing the company's costs up as they take up additional warehouse space.

Medical wares are often are made from petroleum products, and their costs, too, have been rising. Meanwhile, MBI's employees, saddled with higher transportation expenses, want more money. To top it off, Graham expects some competitors are managing to keep their own prices down by procuring inventory over the Internet and failing to report state sales tax.

"I cannot keep absorbing these price increases," he says.

With gas pumps taking in more than $4 a gallon in some parts of the U.S., small businesses are faced with increasingly difficult choices: wringing more efficiencies from their operations, passing the costs on to customers in the form of price increases, cutting staff, or, if competition is too great, sucking it up and trying to hang on.

"Anybody who uses vehicles, whose got delivery services, anybody that has to really depend on gasoline or oil derivatives of any kind is having a problem," says William Dunkelberg, chief economist for the National Federation of Independent Business.

Some industries such as construction, he says, hurt especially hard by the economic downturn and the fall-off in housing, are lowering their prices just to stay in business. "You can't raise prices if you don't have customers," he says.

Energy costs for small businesses are primarily linked to vehicles, which account for about 38 percent of the expense, on average, according to recent data from NFIB. In the past year, around half of the businesses NFIB polled that use vehicles in their operations have been taking steps to save gasoline, including rescheduling routes, using fewer vehicles or using them less and purchasing more energy-efficient models.

Strategies to counter rising energy costs

While big companies like AMR's American Airlines make headlines with moves to offset fuel costs such as charging customers $15 to check a bag, smaller companies are carving out their own additional strategies for surviving the latest energy crunch.

One area that transportation-heavy businesses are looking at is fuel management and logistics. Vancouver, B.C.-based 4Refuel helps some 6,000 businesses with fleets - some with as few as three or four trucks - rein in costs by bringing diesel to vehicles when they're not in service. Among the many benefits, this approach eliminates having to interrupt a route - or pay a driver who is on the clock - to burn more fuel to get to the station and then idle the truck while it's filling up.

"Our service comes in and refuels their vehicles during down time," says Norm Bogner, a 4Refuel vice president.  "Anytime that's spent in unproductive time - fueling is one of those - is really taking time away from the return on the asset."

Using computers installed in vehicle engines, the company also uses analytics to measure fuel-wasting practices such as time spent idling with the engine running.

In Chicago, where gas is now more costly than anywhere else in the U.S., fuel-dependent businesses like Go Airport Express, a shuttle service with some 130 vans in its fleet, are using hedging contracts to minimize the impact of volatile gasoline prices. By purchasing options to buy 42,000-gallon contracts six months out, the company has more time to evaluate pricing trends, says John McCarthy, its chief executive.

"It's still a significant increase," says McCarthy, whose May fuel costs were $35,000 higher than a year ago. Go was forced to take a 3.5 percent price increase in the fall, and may raise fares another $1 per trip in the near term, he says.

The company is also trying to carry more passengers on each run by offering pair and group fares, promotions designed to give customers a price break when they buy in volume, but push the overall revenue per trip higher.

McCarthy says he tries to cushion the blow of price increases by partnering with museums and other city attractions to provide coupons and related incentives. "These different groups are willing to provide discounts because of the exposure to the visitor market," he says. "We're trying to look at the whole value package."

(Deborah Cohen covers small business for Reuters.com. She can be reached at smallbusinessbigissues@yahoo.com)