Changing Consumer Habits
For pellet industry veterans, the winter of 2014 was a deja vu moment. Just like in 2005 following Hurricane Katrina and again in 2008 when crude oil jumped to $150 a barrel, a consumer rush to stock up on pellets caused a hiccup in some production and delivery schedules. Media and blogs picked up on disgruntled pellet hunter stories. Some consumers panicked when shelves at local stores were empty. Cold, disgruntled shoppers took to Craigslist, WoodPellets.Com, and other Internet sites on a quest for a pallet of bagged pellets.
“When it gets cold, many pellet users get scared and go looking to stock up,” says long-time industry expert Rob Davis, president of Forest Energy Corp., Show Low, Ariz. “If too many do that at the same time, the immediate demand causes a perceived shortage. But there’s no capacity shortage.”
While a true shortage did not occur this winter or during other peak events over the past decade, for those manufacturers serving the residential market, Pellet Mill Magazine has outlined a few market factors and marketing tips to consider. For the near term, it’s mostly good news for those stalwart manufacturers who weathered their own storms in this business.
3 Market Considerations
Most would agree with Jase Locke, Bliss Industries LCC in Oklahoma and a member of Pellet Fuels Institute’s promotions committee, who says, “It’s all about supply and demand.” While residential pellet heating demand, including eventual expansion of bulk delivery systems as well as furnaces, will probably continue to grow, don’t count on those consumers breaking the “wait and see what the weather and fuel prices do” habit in the near future without some marketing effort on the part of industry.
Two other major market factors are also influencing the pellet industry.
The East, especially south of the Mason Dixon line, and the Midwest will continue to benefit for some time from European, and even Asian, demand for “green” fuel. This spring, Wood Resources International LLC reported North American wood pellet exports to Europe reached 4.7 million tons in 2013, with the Southern states shipping 63 percent. The overseas demand is not limited to industrial pellets. Residential stoves and furnaces are popular and high-grade American pellets and stove technology are also being exported. For example, Greenwood, a high-tech pellet furnace that exceeds even the strict Washington state emissions standards, has found a growing market in the United Kingdom as well as New Zealand.
In the West, a new and potential gold mine of opportunity seems to be emerging with the booming natural gas production industry. Brandon Kramer, a former cellulosic ethanol producer, opened Rapid City, S.D.-based Deadwood Biofuels LLC in 2010 with retail pellet intentions. His primary source of raw material is the thousands of acres of beetle-killed ponderosa pine found across the western landscape. Deadwood relies mostly on material from state and private land. By 2012, almost all of his 50,000 ton annual capacity was shipped to oil and gas producers. It’s an overall win for Kramer and any other pellet manufacturers within 1,000 miles of an oil field, he claims. “It’s a year round outlet for 100 percent of our production, minus the cost of packaging.”
Jennifer Hedrick, executive director of PFI, confirms that more of her members are finding an oil and gas market emerging. The much-maligned hydraulic fracking for oil and gas requires some form of absorbent in the clean-up process around drilling operations. According to Kramer, the oil industry has discovered wood pellets cost half the price and are a more effective absorbent than fly ash (a byproduct of coal combustion).
Price Correction Due
Even with the recent European hunger for wood as an alternative energy source, pellets are typically a single digit margin affair. The industry has struggled financially for five of the past six years. The cause, in part, was an oversupply, which depressed prices. It started after the 2005 Katrina event and worsened with the 2008 run-up of oil prices. To stay in business, manufacturers must annually develop a delicate algorithm of supply and demand.
“Pellets are due a price correction, and when it corrects, pellet fuel will stay at home more,” says Darryl Rose, vice president, sales and marketing for Pennsylvania-based Energex American Inc. There is an increase in demand, but it can be exaggerated. “Europe is driving the market, but we’ve not had a significant residential pellet shortage. We’ve not seen a massive increase in stove sales, which would indicate an internal reason for a shortage,” Rose says.
For Davis, the challenge is leveling out demand. “The answer is to whittle out the surges, but it’s hard to do,” he says. “It’s hard to plan for periodically 1 million customers buying 2 tons each at once.”
Pellet manufacturers can proactively help lessen the demand surges for residential pellets by using several tactics and keeping several things in mind.
Incentivize The Customer
People tend to listen to three kinds of information: valuable, unusual and threatening. Pick one, but here’s a hint: They act more quickly on threatening information if it’s coupled with a call to action. To motivate a pellet consumer to act, an advertisement might say: “The National Oceanic and Atmospheric Administration predicts another cold, late winter. Order your pellets by July 15. We’ll lock in your price and ensure you get pellets in December and March.”
This “get in early” pitch can be operationalized in several ways:
• Ramp up summer production and launch buy-early initiatives.
• Use old-fashioned customer service to get in touch with distributors and outline the early buying offer. Send them a flyer or brochure that can be printed or placed online for in-store promotions.
• Work with small retailers to conduct a mail campaign to a loyal customer database with a “very special offer.”
• Invest in a simple Pay Per Click campaign online or buy a few banner ads at likely sites.
• Promote guaranteed fuel programs for preferred customers who pay now and can pick up when needed.
One model to consider, at www.woodpellets.com, offers a flexible buying plan, much like what fuel oil and propane dealers use. Some of the benefits listed are “convenient low monthly payments; flexible—you choose the amount and duration, personalized—you decide how to fund the plan, no special fees or charges,” and more.
When rumors of shortages begin to circulate, call PFI for help in getting a press release out and distributing other materials. Immediately counter the isolated parking lot incidents and empty shelves with facts about the benefits and availability of pellets.
Sell The Benefits
Americans still like a dependable, “Made in America” product—they just need to be reminded. And, pellets have clear benefits that can be sold. “They are a less expensive fuel, eco-friendly, clean and natural,” says Bob Smith, Department of Sustainable Biomaterials at Virginia Poly Tech University.
Additionally, Davis points out, “Pellet prices remain relatively stable, even during high demand.” Davis highlights a practice his company and many others employ, “We restocked our more remote customer base first. This meant a lag in trucks reaching Denver, but there are more stores in Denver than in Cuba, N.M.”
Target Bulk Delivery
Bulk delivery is feasible in the Northeast because the high concentration of consumers without access to natural gas look to pellets as an alternative to costly fuel oil or propane. New England Wood Pellets, just purchased by Rentech Inc., offers bulk delivery. Maine Energy Systems, another industry leader, offers bulk delivery as well as savings plans.
“Bulk delivery is the future—pellet tanks instead of propane tanks—but we are not there yet,” Davis says. “It requires a density of users to buy a truck and keep it busy.”
Dan Bihn, a Colorado-based biomass consultant and author of “Where Wood Works,” points to Europe as a place where bulk delivery works, but only because of combined factors such as the high cost of fuel, technology availability and closely situated housing and towns. “We should not put money and time into biomass projects that don’t make sense, for example, where natural gas is cheap and readily available or where forest resources are distant,” says Bihn.
To help producers with their marketing efforts, the PFI promotions committee has released a brochure about the benefits of buying pellets early to accompany an existing brochure on bulk delivery. A PDF version can be found on the PFI website at www.pelletheat.org.
For those businesses that have survived the past decade, new markets are opening. The demand for energy is not going away. A demand for diverse sources is growing. Pellet producers would do well to identify the best niche within the pellet market place and focus energy there. If it is residential, the low-cost marketing tactics described here could be implemented. Your customers will be back next year, especially if you work with distributors and retailers to invite them.
Author: Carla Harper
Writer, Marketing Consultant, West65 Inc.