As the increasing price of gas and electricity compounds the slowdown, how can retailers minimise the impact of mounting energy costs on their business? Katie Kilgallen investigates

The days of cheap energy are undoubtedly over. The wholesale price of gas is on the rise and electricity is following suit. And, far from being part and parcel of cyclical peaks and troughs, the trend looks set to continue as gas production in the North Sea slows faster than expected and the UK becomes far more reliant on expensive imports.

Retailers are feeling the squeeze from spiralling energy costs even more acutely, as rising oil prices lead to greater transportation costs and a hike in commodity prices, putting pressure on retailers’ margins from all directions. The effects are twice as potent when you consider that consumers are under exactly the same pressures and pulling ever tighter on their purse strings.

And with consumers showing a greater interest in sustainability issues, energy usage is coming into sharper focus than ever. As a result, businesses are becoming more efficient – they are having to – but for many, there are further opportunities to reduce energy costs to maintain margins and still be competitive.

E.ON retail manager Nick Sandham remains optimistic. “It’s not that hard to reduce your costs,” he says. Sandham’s first piece of advice for retailers is to not be afraid of switching from a tariff to a contract. He acknowledges that it deprives businesses of the option to switch suppliers whenever they want, but points out that they can often save 15 to 30 per cent by opting for a fixed contract of between one and three years. He says: “It takes away the risk in the short term. It’s a great way of reducing and guaranteeing the price.”

Effective procurement is vital, but even when head office is on top of its game, the benefits will be minimal unless this cost-saving ethos filters down to stores. DTZ head of sustainability Peter Langley says: “There is a lot of activity at head office, but they may not be doing an enormous amount at store level.” He believes store managers have control locally and motivating them to save energy at their store will result in visible savings and an improved bottom line. “The trick must be to engage with staff at a local level,” he says. He urges retailers to make sure they provide the right training to make sure all staff are fully aware of the simple, practical things they can do. Getting all staff to sign up to an energy-saving agenda can reduce costs considerably.

Accurate billing and “smart metering” – using meters that provide up-to-the-minute energy readings across the business – allow retailers to examine their portfolio in minute detail. They can compare outlets, pinpointing those that could reduce their energy consumption and highlighting best practice. Being able to see energy and cost savings instantly can also motivate store employees.

Langley says that, staff engagement aside, store design is possibly the biggest issue that retailers face in the battle to keep energy costs down. “A lot of the costs are built in at the design stage,” he says. Some companies – for example, Marks & Spencer – are rolling out environmental design programmes, but not all retailers are that far ahead. Many are still in the mindset of using high-energy light fittings, because they believe it gives the store and products a better look.

Not only is the initial design of a store critical, but it needs to be reviewed on a regular basis. “Retailers need to be asking themselves: ‘Do we have the latest low-energy products?’,” says Langley.

There is no doubt that, if they haven’t already, retailers will have to change general working practices and create roles and accountabilities to respond to the very real and irreversible rises in energy costs.

Good procurement practices, efficient design and engaging staff from head office down to store level will all be more critical than ever.

What’s behind the rising costs?

  • Because the UK’s North Sea gas supply has been declining faster than expected, the wholesale price of gas in particular has been rising as fears mount over this shorter supply. The UK is now a net importer of gas

  • On the Continent, the wholesale price of gas is directly related to the price of crude oil and therefore has been driven higher by record oil costs

  • When the price of gas goes up, the price of electricity rises; 40 per cent of electricity in the UK is generated by gas-powered stations

  • Coal prices are also rising, making producing electricity at coal-powered plants more expensive

  • The rise in petrol prices means the cost of transporting the energy to customers has risen significantly

  • The need to meet carbon reduction targets has led to an increase in demand for greener energy. This has caused energy suppliers to invest millions in developing sustainable sources – E.ON, for example, will invest£1 billion over the next five years in biomass power stations and on-shore and off-shore wind farms

Top tips for cutting costs

  • Switch to renewable energy – it can make you eligible for tax breaks

  • Ensure store staff are engaged fully in energy saving initiatives

  • Switch from a tariff to a fixed-term contract

  • Invest in environmentally friendly store design and re-evaluate this regularly

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