Off the record... Snow contractors, like a lot of business owners, are diplomatic about the state of their business. Ask them how they fared during a low-snow winter, and they may blow it off with a “We’ll survive to do battle another day” attitude. Some are too proud to admit how they are doing, others don’t want to provide competitors with too much information. Wanting to dig a bit deeper, we asked, off the record, to put Winter 2011-12 into perspective for us and how it really impacted their businesses. Here’s how a few snow fighters really felt.
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Contractors study annual snowfall numbers to calculate a fair estimate of what to expect for any given winter. But every now and then Mother Nature throws a monkey wrench into those careful calculations and winter produces far less snow than the norm.
For instance, Cleveland’s average annual snowfall is roughly 57 inches, with a record high of almost 118 inches in 2004-05. However, this past season was one of the least snowy on the books.
Dave Dudash, co-owner of Cleveland-based Green Estates, is only partially protected against a winter like this. In an average year, his company’s “guaranteed” revenues represent about 30 percent of the company’s total revenues.
“Our total revenues from snow operations were only about 60-65 percent of our projections,” he says of Winter 2011-12. “It is always the customer’s choice as to the contract format. I prefer to have a ‘fixed’ portion in every contract we do, usually that would be all plowing operations, and possibly sidewalk cleaning. The rest of the services would then be charged on a unit or per-event basis. For example, so much per salting a parking lot, and hourly rates per piece of equipment for (snow disposal).”
Joe Kujawa, executive vice president at Kujawa Enterprises Inc. in Oak Creek, Wis., says his region receives around 52 inches each season, but saw fewer than 30 inches last winter. KEI works on a fiscal calendar, so he was fortunate to have a robust January through March (2011), although he started 2012 in a hole.
Like many snow fighters through North America’s snow belt, KEI diversifies its snow portfolio to minimize exposure to weather fluctuations. And because snowfall averages out over time, KEI’s policy is not to sign seasonal agreements on a one-year basis. Striking that balance, though, comes with consequences.
“Depending on the (contract) type, some clients – such as those paying per push – were very happy,” Kujawa says. “Those on seasonal contracts, we have to work with them and communicate.”
David J. Frank Landscape Contracting Inc., of Germantown, Wis., has it down to a science. The company has both computer-assisted and manual scenario analysis modeling different production levels – under average, average, over average or severe – with detailed performance budgets for each scenario. Through this, his company is able to arrange funding through its reserves and/or lines of credit to support extraordinary snowfall production, which is very expensive, or in low periods of billing, be able to still fund fixed expenses.
As for client relations in each scenario, Frank’s team is in regular contact – ensuring both client and contractor are on the same page.“We have a very proactive client-service program involving biweekly meetings per client request, as well as ongoing emails and open lines of communication to communicate consistently our service response plans,” he says.
Troy Clogg prefers to handle customers’ expectations on a case-by-case basis. “Certain clients understand the averages over long-standing relationships. Others are not,” says the owner of Troy Clogg Landscape Associates in Wixom, Mich. “Communication is always the key. Sit down and understand their perspective and help them understand ours.
“Disagreements can be very frustrating and disappointing,” he adds. “If you take it personally, it can hurt.”
Rick Bell, COO at Arctic Snow and Ice Control of Frankfort, Ill., says his team has created some unique service options for their clients and agrees maintaining an open dialogue, while taking advantage of down time. “Communication is always the key,” he says. “A light season gives the sales team more time to communicate.”
Most of Dudash’s clients are long-term. The only ones who did not benefit financially this year were those who were tied to a fixed price for all services, which constitutes about 10 percent of the company’s total revenues. Clients who chose unit charges for all operations – per plow, per salting, per sidewalk service, or per piece of equipment moving snow – made out the best.
“Things usually don’t change after just one abnormal winter,” he says. “If we have another one or two like this last one, customers will move toward the unit-charge contract.” Things even out over the course of a five-year-plus relationship, he adds.
Scott Neave, president of Greater New York’s Neave Group - Outdoor Solutions, agrees relationships even out over time.
“Most customers understand that either way it is a risk,” Neave says. “There are some people who take a negative approach, but most people understand it is a give and take.
“Last year was a brutal winter if you had fixed contracts.” he adds. “So it balances out and it should. That is how they get the pricing they do. If we based their prices on heavy winters they would be paying much more overall.”
Jim Hansen, chairman at Reliable Property Services in the Twin Cities area of Minnesota, takes a proactive approach to staving off customer concerns. “We are committed to an aggressive program of communication from the first encounter with our company, through the information-gathering stage, to having them join us as customers,” he says. “They receive a preseason plan for their property with budgeted amounts by type of service by month.
“At the end of the season they get a recap of all service calls and resolutions, a budget record of this season and the five-year average by month, by service, and a copy of the damages report and repairs that have been completed ... and a contract for next year. During the off-season months we reach out through industry associations and our internal training events to potential and existing customers.”
Prior to this disappointing season, though, Hansen witnessed a change in the business model. “During our leadership retreat last summer we anticipated a desire by hourly customers to look for contract alternatives to protect their budgets,” he says, pointing specifically to the retail, food and beverage and health care industries that are most affected by weather volatility. “We increased our communication efforts with customers early offering several variations of seasonal, fixed-rate contracts with minimum and maximum features as well as our ‘guaranteed’ contract.”
The guaranteed contract allows the client to pay an up front “premium” equal to the cost to hedge their snow risk at the maximum payment they are willing to endure for the season and then buy services on a time and materials basis with no budget risk.
In addition, they created an efficient tiered financial model that allowed them to determine the percentage of seasonal business that could absorb the risk of loss and allow them to be profitable even with no snow fall. Reliable then accepted that amount of seasonal work for the winter 2011-12.
“As you can imagine, when we saw snow fall drop from over 85 inches to under 25, that decision worked in our favor as we were nicely profitable, covered all of our capital needs for the year and still paid a meaningful dividend to shareholders ... even in the worst year in modern history,” Hansen says. “The downside of that strategy would have been that we were more profitable at 60 inches than we would be at 85, but even in that case we met our return-on-investment goals.”
Clogg suggests another scenario. If a $50,000 contract is based on a 50-inch average, offer the client $1,000 back for every inch under 35 or charging $1,000 for every inch over 65.
“It takes sitting down with, and most importantly, seeing their needs and learning what they feel is important,” Clogg says. “Each is a different negotiation. Take what’s important to them and what’s important for us and spin it into a long-term relationship.”
So how can a contractor prepare for more abnormal snowfall? “Planning to combat this for the future, we may try to up our guaranteed money another 15 percent,” Dudash says. “The danger of having too much fixed-price work is that in a record snow season like Cleveland in ‘04-’05, giving the service you promised may put you out of business financially. Not delivering the service you promised may also put you out of business.”
Neave suggests a mix of fixed and per-service contracts and looking at the possibility of buying snow futures.
Hansen likes the elasticity of their business model in industry known for its unpredictable nature. “Weather volatility is the No. 1 issue for our industry, even if customers are not yet ready to recognize it,” he says. “We have worked diligently to alter our contract offerings, operations and culture to build flexibility into our systems so that we are profitable and meet our customer intimacy and return-on-equity goals anywhere in the spectrum of weather results.”
Many contractors say they don’t believe a light snow season will force a change in the way customers prefer to do business, but two or three in a row will shift the matrix. Hansen believes that day may have already come.
“Property managers have been reluctant to use risk-management tools to adjust the risk their tenants are taking on weather volatility,” he says. “But knowledge in the industry is growing and our sales of the guaranteed product have grown dramatically over the past three years. I have seen the success that sophisticated operators are having... In the long run, having a sales force that is knowledgeable about creating contracts that meet the risk profile of the tenants will differentiate snow-and-ice-management professionals.”
An educated client is key to this strategy, says Paul St. Pierre, Landscape Effects, Belle River, Ont.
“Certainly a lot of people in the snow-and-ice-management industry have had a lower-than-expected revenue year, so financially there is a overall negative impact,” St. Pierre says. “But with proper education, I don’t expect any pushback from the clients on fixed contracts. We have had numerous winters recently where clients have significantly made out on fixed contracts.”
Neave doesn’t believe there will be a major shift, but he knows there are plenty of variables to contend with. “You cannot win betting on the weather so why try?” he asks. “Yet some people, and so many contractors, do it. It makes no sense to me.
“I get asked more times than I care to think about what I think the weather will be,” he adds. “I always answer the same, ‘If I knew, I would be a very wealthy man.’”
Frank looks closely at the Chicago commodity market weather insurance contracts and has passed that option through to clients to protect them from heavier-than-normal circumstances. As it relates to handling unpredictable amounts of snow or revenue, he suggests balancing agreements between time and material, per push and fixed-price contracts to yield an acceptable result in the case of each scenario – under average, average or over average occurring.
Contractors should understand the weather volatility of their community and how that is changing so they can build a financial model of their business and determine what profile of contract types they can accept and still meet financial and customer-experience goals, Hansen says.
Rob Thomas is a Cleveland-based freelance writer and frequent Snow Magazine contributor.
What Happened to Winter 2011-12?
Although this winter, like the last winter, was considered to be a La Niña winter, it was very different in terms of snowfall for the northern and western areas. For many, it was a year without a winter.
La Niña is part of the El Niño Southern Oscillation (ENSO), a climate pattern that occurs in the Pacific Ocean roughly every 5 years. The El Niño brings warmer surface water temperatures while the La Niña brings cooler surface waters over the tropical Pacific Ocean. On average, during a La Niña, the jet stream takes a dip into the North-Central and Northeastern U.S. allowing periodic cold air invasions and greater opportunities for snow.
Why such a warm winter?
According to the National Oceanic and Atmospheric Administration (NOAA), over the lower 48 states, the winter and start to the year topped a list for warm winters dating back to 1895 when records were first kept. The winter was the fourth warmest on record. This past January was also the fourth-warmest on record. The overall period from January to April was the warmest on record.
So how did the same climate pattern that created an unusually cold and snowy winter last year create a record-breaking warm winter?
The overriding factor in this past winter’s weather pattern was an unusually strong and persistent positive Arctic Oscillation (AO), says Paul Pastelok, head of AccuWeather.com’s long-range forecasting
The AO represents surface pressure anomalies north of 20 degrees North latitude. In a positive phase of the AO, the pressure is low in the polar region. In a negative phase, the pressure is high in the region and leads to one or more southward pushes of arctic air, known as arctic outbreaks.
On average, the AO changes from positive to negative every few weeks allowing alternating cold air invasions, warm-ups and often major storms in between. But not this year.
The persistent, strongly positive AO pattern this winter brought month after month of a jet stream locked from west to east across Alaska and northern Canada, says Canada Weather Expert Brett Anderson. Arctic air was locked up near the pole much of the season, meaning outbreaks over southern Canada and the lower 48 states were practically non-existent.
As a result, warm air had free range over much of the continent. “The strong west-to-east jet also whisked storms along very quickly, giving them little time to strengthen and allowing only limited opportunity to bring front-end snow and lake-effect snow near the Great Lakes, Pastelok says.
Other factors
Unlike other weather patterns, the AO cannot be predicted months in advance. “From early in the winter, the persistently positive AO resulted in little snowcover over the North-Central U.S. and the southern Canada Prairies, which created another cycle suppressing cold air masses,” Anderson says.
The minimal snowcover impacted invading cold air masses, causing them to lose potency. Since the air was less cold when it reached the Great Lakes, it contributed to warmer waters and a lack of ice.
While open Great Lakes waters can result in a bounce-back of lake-effect snowfall and did so to some extent later in the season, arctic air continued to fail to “lock and load,” limiting the lake effect. A lack of a cold, frozen and snow-covered surface then continued to cycle resulting in a lack of big, late-season snowstorms from the Midwest to the mid-Atlantic and southern New England.
So where did winter go?
The art of long-range forecasting incorporates looking at years of similar weather patterns. Years with similar ENSO and other sea surface and pressure oscillations are examined and a forecast is made based on anticipated similarities or differences. Because of the unpredictability of the long-term AO, an AO that balances out over the season is usually assumed. “When the AO doesn’t average out over the entire season, a seasonal forecast can really go astray,” Pastelok says. There was one area of the continent that did rack up snow this winter: Alaska. The presence of the strong jet stream nearby brought frequent storms loaded with moisture. Slight shifts in the jet brought significant swings in temperature from one month to the next over much of Alaska.
Meteorologist Alex Sosnowski, senior member of the AccuWeather.com News Team, has worked in many forecasting areas, including their snow warning service.
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