Death spiral? Energy utilities should check out the food industry | RenewEconomy

Death spiral? Energy utilities should check out the food industry

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How does a supermarket deal with the grow-your-own revolution? Not like Australia’s power utilities, or we would see another industry death spiral.

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Locally produced food is all the rage. Even more popular are fad food diets, discovering you have a food allergy and obscure food habits, like fine dining in the dark, in the park, or with complete strangers in a new place.

So, with all the recent coverage about the Utility Death Spiral reaching the mainstream (ABC’s Four Corners, no less), we thought we would put together a food-flavoured twist on this story.

Imagine you buy a supermarket for $10m (they don’t come cheap!). Business is booming, rents are strong and the bank is happy. Boom! Your path to food system hegemony looks clear.

But, hang on a minute, what’s all this grow-your-own, reclaim the curb, food sharing, swapping, and direct-from-the-farmer stuff? No-one was doing that last year!

Instead of handsome profits, fast cars and lavish Christmas parties, you are struggling to keep the shelves stocked and the customers happy. That wasn’t in the business plan…Grow-your-own

What do you do?

You put your strategic management hat on, developed during your years of prior experience in the energy industry, and you contemplate charging customers extra when they only buy small amounts of food from you.

Or you might increase prices at Christmas and Easter for all the yummy holiday season treats, hoping to claw back what you lost during the rest of the year.

If things get really bad, you might even ask government to discourage food self-sufficiency and run education campaigns warning of the health risks associated with gardening outdoors and eating food from the garden. Surely gardening at home could never be as safe or reliable as buying from the supermarket?

Would your supermarket thrive, or even survive? Absolutely not. You would be on the business recycling heap before you could say 21st century. In a nutshell, this is the Utility Death Spiral. Welcome to the wacky world of energy, Australia.

Let us hope the energy companies are taking management advice from the IT industry, as they intuitively “get” consumer-led markets. An efficient transition to a distributed energy world depends on it.

Tosh Szatow is Director of Energy for the People

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31 Comments
  1. RobS 6 years ago

    The supermarkets have seen the big changes in dietary demands as an opportunity, two sets of pretty much all veggies at my supermarket now, regular and organic, almost an entire aisle of chia seeds and protein powders, gluten free everything, reduced salt salt, reduced bread bread and reduced pasta pasta. Why lose customers to health food stores, supplement suppliers and organic markets and grocers when you can make double the margins selling these products yourself. If the utilities were smart they would be using their size to offer leased solar systems to lock people in to buying solar power from them for 20 years.

    • Jan Veselý 6 years ago

      There is a difference. They are not spoiled by governmental patronage, they are grown in tough concurence and they cannot blackmail by “all lights will go dark” or “economy will collapse”.

      • RobS 6 years ago

        Never said there weren’t differences, just that there were similarities.

        • Jan Veselý 6 years ago

          Agree, but that blackmailing is crucial difference why supermarkets would look ridiculous by doing same things.

          • RobS 6 years ago

            Considering the campaign the big two have run to drive down the price they are willing to pay for milk and other products at the farm gate which can be politely described as a price fixing racket that has literally bankrupted many farms I think your underestimating the commercial power of the big two.

          • Jan Veselý 6 years ago

            Sorry, I live in the country where it is big 6 (or 7?) and farmers got VERY powerful union.

          • RobS 6 years ago

            Here in Australia it is 95%+ Coles or Woolworths, if you’re a farmer and you lose a Coles or Woolworths contract you’re finished. They have used that to their advantage and driven farm gate prices to barely cost levels, or below in some cases.

  2. Warwick 6 years ago

    Not really a great analogy for the utility energy industry..supermarket profits have been growing and their market share has been increasing. They do increase prices at Easter and Christmas normally by re-marketing a ham or a chocolate by putting it in a new wrapping. You can also profit handsomely by flogging the same groceries and relabeling them organic or gluten free etc.

    • Paul McArdle 6 years ago

      Tony, I understand one reason why you might have drawn the analogy (i.e. that it makes it easy for Joe public to understand) but, like Warwick says, it’s not the best analogy.

      Warwick mentions one reason.

      Another is that, for the analogy to be true, the growth of the small organic shops would have to have been subsidised, over the last 10 years, by an “exit tax” slapped onto the supermarket bills of everyone who’s bought something from Coles and Woolies over that period. This tax would have to be in the form of mandating that some of the groceries were returned to Coles and Woolies (reducing their revenue), and bought from the organic stores instead.

      Whilst it’s fair to argue about the merits of this subsidy, it’s misleading to avoid attributing the growth of these organic shops to the subsidy levied on Coles and Woolies customers.

      Thinking through the analogy in that way will help Joe Public understand why the Coles and Woolies of the energy world might feel disconcerted by:
      1) The growth of a business that, it ends up, is now significantly eating their lunch (and threatens to be “worse” – from their perspective – if 41,000GWh remains their target); and
      2) Whose growth was funded by mandated reductions in their revenue stream over the past 10 years.

      The analogy you raise implies that it’s been purely customer preference that’s created the paradigm shift, which is certainly not the case.

      Without the major FIT subsidies and the RET, we would not have reached 1,000,000 rooftops, for instance. Solar PV would have remained the domain of the genuine organic shopper, happy to pay a big premium for other benefits they valued more highly.

      • Paul McArdle 6 years ago

        PS to my own note.

        To make the analogy truer, in terms of the RET Review, the question being asked is should the mandated “exit tax” on Coles and Woolies continue:

        1) The organic shops are arguing that, without it, their businesses will close (i.e. even the subsidies beforehand were not enough to make them sustainable); and

        2) The “Coles and Woolies” energy companies are arguing that the volumes of product that people have to return to their shelves are now significantly hurting their business – to the point where share investment analysts are starting to issue sell recommendations.

        Not an easy question to answer, as each shopper sees a different ancillary benefit for buying local/organic. Some see a lot of value, some see none.

        • Anthony Szatow 6 years ago

          Hi Paul, Rob S sums it up better than I could really. The point of the article wasn’t to make an apples for apples comparison between the food and energy industries (excuse me extending the analogy), just to place into contrast different approaches to dealing with change. The article is a bit of fun really, and tongue in cheek. There is a more considered piece on our company website that documents how we see the economics of stand alone power changing the energy market, some of the issues that poses, and what could be done about it. For instance, we would like to see network companies selling their assets to place-based service providers that can operate network assets with a more customer-centric model

          • Warwick 6 years ago

            So it’s really just an advertisement for your company…?

          • Anthony Szatow 6 years ago

            I’m sorry if you see it that way Warwick.

          • Warwick 6 years ago

            Apology duly accepted. Please use a proper analogy next time..maybe rainwater tanks vs town water, mobile vs copper wire telephony or something where the death spiral is possibly evidenced.

          • Anthony Szatow 6 years ago

            Perhaps you could write that one up Warwick? and I’ll offer some constructive commentary in response.

          • Paul McArdle 6 years ago

            But, Anthony, Rob S did not write the article – you did.

            It seems, to me, a poorly thought-through analogy.

            Furthermore, if your idea is to encourage the Coles and Woolies of the energy game to look a the success of Coles and Woolies in the supermarket game, it seems that you’d be encouraging them to employ the same types of tactics that many smaller (in some cases greener) participants would oppose – which some might sum up as “steam-roller the competition & lock up the supply chain”.

          • Anthony Szatow 6 years ago

            Hi Paul, Rob S didn’t write it but he has grasped what it was about. I’d hoped the article would get people to reflect on the standard big utility response to energy customers wanting to generate or store their own energy – i.e. utilities typically seek to punish their customers. The article tries to create perspective on why this is a maladaptive strategy. Just for clarification, I am definitely not trying to encourage an energy market duopoly and don’t think that’s a good idea. I’m not sure where this interpretation has come from

    • RobS 6 years ago

      Yes but they have done that by adapting to the demands of customers, had they not offered new health conscious and gourmet foods being demanded as a result of a combination of cooking reality shows and weight loss reality shows (I’m sort of kidding there) then there market share would have collapsed. It is a perfect analogy for the energy industry because if the utilities were smart rather thjan fighting the change they would see the potential in it and rather then being threatened by renewables make money off them by selling and leasing them.

      • Warwick 6 years ago

        I think much of their success has also come down to an effective oligopsony where there are really only 2 buyers who exercise great buying power. I’m sure many farmers and co-ops would agree with this. They’ve also often reduced the variety of products offered to promote their own higher margin home brands..

        I’m still struggling to see how supermarkets are in a death spiral …. most states (even QLD and WA which are laggards) are reducing trading hours restrictions despite protestations from smaller supermarkets. I also fail to see how someone could go “off-grid” for groceries even if they have a veggie garden and a chicken coop.

        • RobS 6 years ago

          Off grid from the supermarkets point of view is buying from farmers markets, local green grocers, bakeries and butchers. The rise of health foods and gourmet cooking had all of those suddenly popular gain and the supermarkets have had to step up both in their offering and their marketing to counter that. I don’t think anyone is saying supermarkets are in a death spiral, they are saying that the risk of a death spiral faced supermarkets but rather than wailing and gnashing their teeth they just did something about it to profit from the risks facing them instead of being killed by them.

          • Warwick 6 years ago

            So if there’s no death spiral, why the title? ”
            Death spiral? Energy utilities should check out the food industry”
            I think the energy utilities would actually love the food industry story…2 major players in the market with huge amount of market share…a couple of middling players and a small group of minor bit players. The majors also effectively choose their price when it comes to milk, bread, eggs etc and also have a much better on-line presence than the smaller players and the majority of A-list locations. They also own much of the real estate. Sounds like a good place to be in business,,,

          • RobS 6 years ago

            Because they’re saying the utility industry should look at industries that faced a potential death spiral and survived to see what they did to adapt and avoid it.

          • Warwick 6 years ago

            Ok? So now, increased sales volumes and increased profits are now an example of a death spiral? a la supermarkets.

          • RobS 6 years ago

            No as I’ve said several times, they are an example of an avoided death spiral, hence the suggestion for utilities to emulate them.

    • cocosmooth 6 years ago

      The profit growth here is a medium term aberration. Check out supermarket players in European and North American OECD. No wonder there is a duopoly here! And no, I don’t think Australian consumers are going to accept food commodity price spikes: refer: the Eastern seaboard electricity market.

      • Warwick 6 years ago

        OK…Walmart website “For the fiscal year ended January 2014, Walmart increased net sales by 1.4% to $473 billion and returned $12.8 billion to shareholders through dividends and share repurchases. Walmart ranks first on the FORTUNE 500 list of the world’s largest companies by revenue.”

        SPAR increasing too…http://www.spar.com.au/ckfinder/userfiles/files/SPAR%20International%20Results%20July%202014.pdf

        How does one not accept a food commodity price spike? Stop buying bananas?

    • Anthony Szatow 6 years ago

      Indeed Warwick, but just imagine if supermarkets were losing market share because everyone started growing their own food, buying direct from farmers market, eating less to lose weight etc etc….

      The article wasn’t designed to reflect the reality of the food indsutry, it is a “what if” scenario and a bit of tongue in cheek fun

  3. Macabre 6 years ago

    The idea for this article is nice, but it probably only warrants two paragraphs. At this level of detail you open yourself up to all sorts of criticism about the differences between the two.

    Most informed people accept that an energy revolution is required. When it starts to bite (e.g. solar takes off) then it is hardly a surprise that the incumbants start agitating. What is scary is the amount of power and influence they wield over government.

    Supermarkets are, in their own way just as in need of reform as energy markets. They have systematically undermined food producers, and encouraged the rise of a dummed-down consumer who thinks food somehow materialises in the back of the store they visit each week. Vast amounts of chemicals (largely petroleum derived) are used which deaden the soil, reduce biodiversity, and which almost certainly play a significant role in increased cancer (and other disease) rates in the human population. At the same time it has to be accepted that malnutrition is almost non-existent in Australia. But in the process we have become dependent on a duopoly who are proud to admit they put the needs of their shareholders ahead of those across the entire food chain.

  4. cocosmooth 6 years ago

    Boy oh boy, I can’t wait for 2 electricity companies too!!! Oh, and maybe the odd community/farmer market. 😉

  5. José DeSouza 6 years ago

    Maybe electric utilities should also try to sell something else other than kWh; could be heat, lighting, cooling, torque and maybe even —heresy of heresies— personal mobility: http://www.eei.org/issuesandpolicy/electrictransportation/FleetVehicles/Documents/EEI_UtilityFleetsLeadingTheCharge.pdf
    The electric utility as a supermarket full of a diversity of energy services for sale? Why not?

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