August 23, 2017

When will energy companies start selling coffee?

Olof Ferenius

Head of Energy Utilities, Tieto

Energy retailers should learn from petrol stations. Selling petrol gives only a slim margin, so to stay in business you need to find a complementary offering that has a better yield. Petrol stations have found coffee – how will you do it?

Petrol has a profit margin between 0.5 - 1.5 %. Sell one litre of petrol and earn 0.01 €.

On the other hand, the margin on a cup of coffee is around 80 %. Sell one litre of caffè latte and earn 6.00 €.

So someone who buys 50 litres of petrol profits you 0.50 €, and for the attached cup of coffee you make 2.00 €. No wonder all petrol stations try to lure us into the store with a great promise of amazing coffee.

What has this to do with electricity retail? Everything, since the margin on a kWh is almost in line with that of a litre of petrol.

The million-dollar question many utility retailers are asking themselves is what to sell instead of electricity, which is something of a paradox since their core business, after all, is electricity. There are many good and creative attempts in this field, from electrical bicycles to light bulbs – all somewhat related to electricity and many aiming at enabling the customer to consume less electricity (hence not supporting the core business which is to sell more electricity).

To follow the petrol station example, there are two alternatives.

The first is to go for the unmanned petrol station set-up, that is, a very lean and fully automated, digitalized process for managing customers and thereby cutting cost and increasing margins. This has been successfully done in other industries such as telecoms with low-cost brands like Halebop and Apelsini, or in banking with companies like Avanza.

The second way to go is to find the coffee! The retailer must identify the best complementary product to be attached to their core product (electricity). This product must add both volume and margin. The best examples seen in the market today are moving into services rather than re-selling physical products. Many companies have started to attach installation services for domestic electricity, energy saving advice, bundles with e-vehicle companies. Also, solar panels and other solutions for Distributed Energy Systems are showing good profits, but only if selling them as a service rather than trying to re-sell solar panel hardware.

It is impossible to say how many energy retailers will “find their coffee”, but one thing is sure: the era of selling physical goods is gone, and it is imperative to choose one clear path to secure future profits. Whether that is unmanned stations or coffee houses remains to be seen, but not choosing the path will be painful.

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