Energy – far more than a retailer’s ‘impulse buy’
Recent research has suggested that some £300m worth of energy is being wasted across the UK retail sector.
As major energy consumers, retailers have had a tough fight on their hands to balance the challenges of delivering to customers on an increasingly multi-channel and 24/7 basis while also keeping costs to a minimum and meeting their carbon reduction targets. Energy purchasing and management in the sector is by no means one-dimensional, and there lies the challenge; there are many factors affecting successful use of energy and the retailer needs a sound and holistic strategy to do so.
Back in 2012 the Carbon Trust estimated that a 20% cut in energy costs represents the same bottom-line benefit as a 5% increase in sales. But have retailers grasped the nettle? Are they managing energy as an integrated part of their business plan rather than as an add-on cost? The aforementioned research suggests that, certainly in some cases, this is not yet happening
The head of energy management of one of our major multi-site customers recently told me that unless you gain a holistic view of energy management and purchasing it’s impossible to get your energy under control, meet environmental commitments and save money. For him, doing so has involved a five year strategy, building an internal energy team to look after the various aspects of the job, linking key areas, such as procurement, carbon and waste management, technology innovation, rather than managing them as separate entities. With such vast and complex real estate portfolios and so many different people involved in the use and management of energy from store managers to catering staff, the challenge takes some beating. So what exactly are the core tenets for a retailer looking to improve its energy strategy?
Considering the full energy lifecycle
First of all, it’s vital that retail energy managers take a properly holistic view of all aspects of energy and how it is impacting their business. How much are they consuming? What are they paying for it? Are they conserving it? It was recently announced that Sainsbury’s was now generating 10% of its gas consumption from leftover food waste. This is a great example of how energy is being considered as an integrated part of strategy – meeting environmental goals, tying in with waste management targets, reducing standard energy consumption and in turn lowering costs. If, traditionally, energy has simply been purchased at best price with little thought into its utilisation or source, building a holistic strategy can take time but contributes greatly to a number of key business goals.
Education is vital
A key characteristic of a large retail environment is its distributed nature as a business. This especially applies to high street brands with any different outlets each with its own staff and individually small energy consumption. However it’s also key for online retailers too, with a growing number of distribution hubs required to get products to customers ever more quickly. It’s the sum of these parts that creates the energy challenge. Many people playing a small role in the use of energy can mean that pockets of bad practice go unnoticed for years on end. One of our customers found that a faulty building management system had been switching on all of the lights in a major store for two hours every night for many years. Another had found that staff at a catering facility in one of its distribution centres left the ovens on overnight so that they were already warm when they came in to cook each morning. Making an energy strategy work requires everyone to play their part and creating knowledge about energy consumption is vital. Common tactics can include publishing store by store energy league tables, reviewing and changing working practices (such as one person coming in 30 minutes early to turn the ovens on), and even creating competition between company divisions to see who can conserve the most.
Prepare for the future
Following a Brexit slump, retail sector acquisition has been on the up again. Tesco recently acquired Booker, and Sainsbury’s has acquired Argos. Large retailers can find themselves gaining new ground and operations very quickly, but also reducing their networks equally fast. Early this month market analysts said that Asda urgently needed a turnaround strategy after its profits dived by a fifth. It is far from alone when it comes to retailers closing unprofitable stores to cut their losses. From an energy perspective, retailers must define a strategy that is future proofed. When it comes to energy buying, forecasting needs to be done in line with broader business plans. What are the chances and implications of a sudden expansion on purchasing? How does taking on another brand’s estate impact renewables obligations, or does it leave you needing to consolidate relationships with numerous energy providers? What would suddenly cutting 10% of stores mean for your energy contract?
Beyond the high street
Its common knowledge that the retail sector has become far less store-based. ONS statistics from January revealed that in December the UK high street experienced its biggest slump for four years, while at the same time online sales rose by over 21%. For many retailers the move from high street to online or indeed to a multi-channel model can mean a major change in operations. Different types of staff, new real estate requirements and changing distribution models, for instance. This can also have an impact on energy consumption patterns and requirements. While high street stores may well be staying within the retailer’s portfolio, it may also be adding new facilities with different needs alongside them. Consider how brands like M&S and Tesco have changed their real estate footprints with out of town stores, food halls and small local outlets. Again, from a future forecasting and planning perspective it’s important to think about what the energy consumption needs of the business are as well as what opportunities new business models may present.
Get your hands on data
Earlier I discussed the fact that one of our customers’ major energy challenges is the distributed and fragmented nature of its retail consumption. Compare it to say an energy intensive industrial manufacturer, which may well use more energy in its production processes on one site than a retailer does across 100 stores. Retailers need granular and site by site data in order to pinpoint and investigate issues with energy consumption. Increased use of building management systems (BMS) to regulate energy in store, as well as use of automated and smart meters to interpret usage patterns, are essential. However energy industry data has a bigger role to play for the sector too. It can also be used to alert buyers to market trends and price changes which could trigger a purchase, or it may provide the evidence needed to show the business that more scrutiny needs to go into energy buying methods. Billing data accuracy is critical too; how else could a complex retailer be able to assign costs and internal spend across regional and departmental budgets? The relationship between the retailer and its energy providers, consultants or brokers is essential for access to the right data and the help needed to interpret it.
Get your procurement in check
Retailers generally procure energy in one of two ways based upon their appetite for risk. Some choose a fixed contract which guarantees static energy prices for the duration. For low risk businesses that means budget certainty and this option can work well. However as retailers are generally operating on tight profit margins some want to find every opportunity to reduce budgets and energy is no exception to this. Considering that wholesale energy prices have fallen quite considerably in recent times it has been seen by some in the sector as opportune to switch to a flexible purchasing contract. This allows them to trade at will, based on daily prices, able to buy volume for future use at the chosen time and rate. However, flexible buying requires a really sound strategy in terms of accurately forecasting demand in months and years to come, especially if rapid growth or shrinkage of the business is anticipated. There’s no right or wrong answer regarding fixed versus flexible – it’s a case of assessing which is right for the business at the time.
If one thing unites the players in the retail sector it is that life does not stand still. Changes to the dynamics of the market are as frequent and unpredictable as the latest food fads and fashion trends. That means that while energy is in many ways a commodity purchase, the sourcing, procurement, buying and management of it is anything but commoditised and needs a sound, forward looking strategy, backed by robust data and managed by a team of specialists.
