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Retail Power: Double Down or Fold?

Utility retail is at a crossroads. Energy executives must decide which path to follow.
Fortnightly Magazine - June 1 2003

offered by a myriad of retailers worldwide. What has made these three companies so successful? The common threads through these retailing success stories include improved customer convenience and access, at low prices, to good quality products. Add a marketing strategy grounded in developing and leveraging a strong brand name, and an operational plan focused on achieving the lowest operating expenses in the category, and you have a pretty good recipe for shareholder value creation. Gas and electricity are products that also meet basic needs of human existence, such as light and heat. They are commodities that customers do not want to think about, but depend on reliable suppliers to deliver. Given fair prices and dependable service, they also have the potential to be the stickiest of customers, creating a sustainable, long-lasting franchise. However, customer inertia can initially be an impediment to expansionist electricity retailers. As recent experience and statistics have shown, customers will remain with their incumbent utility supplier either by choice or, more often, the lack of a compelling motivation to choose. For the electricity retailer to succeed, the consumer must be motivated to choose.

Time To Choose: Growth or Cash?

As comforting as the slowdown in competitive retail activity in the United States can be for the traditionalist, we believe that this is only a temporary pause in the movement toward competitive retail markets. The evolution of the wholesale sector toward a single, seamless national market is continuing rapidly. Standing still is not an option. Market-facing companies in the retail energy sector should be making and implementing a strategic choice on their role in the retail energy sector soon.

There is a challenging, out-of-favor, but profitable path forward to create a customer-focused retailing business that happens to sell energy-related products. Centrica is the obvious market leader, and while other competitors may appear, unless a major player steps forward soon, Centrica's lead in the market will soon be insurmountable. Alternatively, there is a clear path to exit the retail space and generate meaningful cash along the way. AEP, facing the arrival of competition in Texas, chose this option and generated approximately $150 million in cash by selling its customer bases.

Whichever path is taken, it is very important to make a conscious choice. Failure to choose causes relatively small retailers to face a daunting road, over which the value of the business is almost certain to fritter away. Similarly, failure to choose can sentence retail books of major generators to oblivion, destined to simply be the retail hedge against the forward cyclicality of the wholesale business. Retailing in any industry has never been for the faint of heart, and that is certainly true in the emerging world of energy retailing. Those that grow large enough to achieve retail success will create significant shareholder value. A portion of that future value will be extracted, in cash, by those companies that pursue a thoughtful, timely exit strategy. So which will it be, double down or fold?

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