In a survey conducted by the Associated Press, editors of U.S. news and broadcast outlets identified oil prices and interest rates as the top two business headlines of 2004. In many respects, green industry contractors agree. For better or for worse, contractors have been managing their businesses in the face of upswings and downswings throughout 2004. Moreover, contractors expect those issues to affect their businesses in the New Year as well.
GAS PRICES. According to Lawn & Landscape research, fuel prices is the No. 1 issue affecting business success in 2005, earning a ranking of 7.7 on a scale of one to 10, with 10 representing high concern.
“Our costs have gone up 4.5 percent in the area of fuel expenses across our company,” noted Bruce Bachand in an interview for Lawn & Landscape’s 2004 State of the Industry Report. The Vice President and Chief Operating Officer of Carol King Landscape Maintenance, Orlando, Fla., added that he expects fuel prices to continue increasing through 2005.
“I only look at our fuel costs on a quarterly basis because you can’t really gauge it month-to-month,” he explained. “It’s going to continue to bump up there for our fourth quarter and I believe they’re going to continue to go up. The world environment right now is such that gas prices are going to increase. Our country pays less for gas than most other countries in the world and I think that it’s going to start to catch up with us.”
Because of increased gas prices over the years, Carol King Landscape Maintenance began charging a fuel surcharge for their predominantly commercial business to help offset costs. The charges range from $25 to $100 a month for the company’s maintenance customers. In 2004, the company paid as much as $1.97 a gallon for gas, with a low price of $1.45 early in the year.
Other contractors around the country also expect fuel prices continue to increase or stay the same for a while. “We saw about a 30-percent increase in our fuel expense from last year to this year,” said Bob Grover, president, Pacific Landscape Management, Hillboror, Ore. In order to stay competitive, Grover chose not to implement a fuel surcharge for 2004, noting that most contractors in his area seemed to be absorbing the higher costs for as long as possible before raising prices. “It’s one of those tough decisions where if you’re the only one in the market that is charging extra, you set yourself apart in a way you don’t want to.”
Still, Grover expects gas prices to stay high and says he may add a fuel surcharge at a later date. “I don’t believe gas prices will ever go back down to where they were, but I think prices have moderated a bit,” he says. “We paid as much as $2.30 this year, but my gut feeling is that prices will stay around $1.90 to $2 per gallon.”
The reality of these predictions for 2005, however, could change from day to day as geopolitical events, weather and other factors play into the world’s and nation’s oil consumption. Reuters reports that on the last trading day of 2004 for U.S. oil, prices stood at $42.95 a barrel – up more than $10 on the year, but $12 below the contract’s all-time high of $55.67 a barrel on Oct. 25.
INTEREST RATES. In another roller coaster ride of upswings and downswings this year, contractors kept their eyes on mortgage rates, which reached a 40-year low of 5.85 percent in 2004, and housing starts which jumped and slumped throughout the year.
The survey conducted by the Associated Press found that falling interest rates was the No. 2 top story of the year. Respondents to a Lawn & Landscape survey ranked inflation/rising rates as the No. 7 issue affecting businesses for 2005 with an average of 5.4 percent on a scale of one to 10, with 10 representing high concern. Indeed, contractors are more concerned about rising fuel and insurance costs and low-cost competitors more than about rising or falling interest rates. However, many contractors reported increased business due to low rates and a better housing market in 2004.
“In 2004, there’s a clear increase in opportunities that are coming across our desk,” said Mike Davidson, chief financial officer, Gardeners’ Guild, San Rafael, Calif. “People have used opportunities to refinance and invest in new landscapes, which has helped our business.”
Joe Goetz has seen business increase as well. “90 percent of our business is high-end residential and it’s been a good business to be in,” said the president of Goetz Landscape & Irrigation, Centerville, Minn., in an interview with Lawn & Landscape earlier this year. “There are a lot of new homes going in, but about 80 percent of our work in that area is still landscape renovation. With interest rates so low, people were moving into older homes and then they would relandscape the property. Or, with the low rates, they decided to improve the area they were already in by landscaping at their own home.”
Goetz says he expects the same for 2005 and many contractors remain optimistic, as well. Additionally, the National Association of Home Builders (NAHB) reports that confidence among U.S. homebuilders remained strong in December, despite a slump in November housing starts. The December Housing Market Index (HMI) rose to 71. A number over 50 indicates that more builders view sales conditions as good than poor.
“Builders have every reason for good cheer this holiday season,” said NAHB President Bobby Rayburn, a home and apartment builder from Jackson, Miss. “The bottom line is that buyer demand continues to keep builders busy and, like most business owners, builders are happiest when we’re busy.”
“On a nationwide basis, the final quarter of 2004 has been a good one for home builders,” agreed NAHB Chief Economist David Seiders. “Indeed, the average HMI was up several points for the quarter, reflecting excellent financing conditions, rising home prices and an improving economy.”
And, while the Fed continued to increase rates through the end of 2004 and is expected to do the same in early 2005, green industry contractors are generally optimistic for the coming year. “I’m excited about 2005,” Davidson said. “I think the optimism from this year is producing results and something to build for and be excited about in 2005.”