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Microsoft Word - BHP Case.docx Diesel Price Risk at Bennett Hughes Productions In early 2007, at 65 years old, Bennett Hughes was ready to retire.
Microsoft Word - BHP Case.docx
Diesel Price Risk at Bennett Hughes Productions
In early 2007, at 65 years old, Bennett Hughes was ready to retire. To do so, he would have to sell the Nashville, Tennessee-based live event and concert production company, Bennett Hughes Productions, LLC (henceforth BHP), that he had founded and grown over the previous three decades. Bennett Hughes had used the connections he had made during his employment in the 1970s as The Leonard Skinner Band’s tour manager to start BHP in the early 1980s. Over the course of nearly 3 decades, BHP had done thousands of concerts and events in Nashville and the surrounding area.
As a full-service live event production company, BHP’s business was quite simple; BHP provided all necessary equipment and personnel to set up and run a concert or live event. On a typical gig,1 BHP employees would drive trucks full of staging, lighting, and sound equipment from BHP’s warehouse to the event site, unload the trucks, build the stage, set up the lights and sound equipment, and run the event. After the event was over, BHP tore down the stage, lights, and sound equipment, loaded up the trucks, and drove them back to the BHP warehouse. BHP bid for gigs on average one year in advance of the date of the gig, and contracts are signed within one month of submitting the bid to the client. When determining what they will bid for a gig, BHP’s policy has been to estimate what it will cost them to produce the event and double it. This has resulted in generally stable gross profit margins of 50%. When estimating fuel costs, BHP uses the seasonally adjusted spot price of diesel and adds 3% to account for inflation. Because the location of the gig and the number of trucks required to transport equipment to the gig site are known to BHP, BHP can estimate the number of truck miles traveled quite precisely. BHP, however, does not have the expertise to forecast future diesel spot prices.
For the last ten years, Alan Michaels had been employed as BHP’s manager and head engineer. Throughout his employment, Alan had tried to convince Bennett that BHP’s profits and revenues could be grown more aggressively if the company were to pursue gigs outside of the 200-mile radius that BHP had been serving throughout its existence. Alan argued that the large number of competitors in Nashville forced BHP to accept low profit margin local gigs. If BHP would expand its range of operations, Alan believed it could charge higher prices and achieve higher profit margins. Furthermore, there were a limited number of gigs within 200 miles of Nashville, so expanding its range of operations would enable BHP to do more gigs, further increasing revenue. Bennett, however, did not share Alan’s vision. Bennett believed that expanding BHP’s range of operations would pose more difficulties than Alan imagined. By staying within 200 miles of Nashville, BHP was frequently able, for example, to use any one of its eight trucks to deliver equipment to multiple gigs in one day. Nonetheless, Bennett was ready to sell, and Alan saw an opportunity to grow BHP as he had been hoping to do for the past ten years.