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The Future of Retail Sales and Marketing: The Pure Retail Business Model

Published by: Datamonitor

Published: Aug. 29, 2006 - 15 Pages


Table of Contents


DATAMONITOR VIEW
CATALYST
SUMMARY


ANALYSIS
Rising wholesale price rises have squeezed retail margins across Europe
Forward curves suggest potentially falling wholesale prices in coming years
Conditions may be right for new wave of market entry from asset light providers
Asset light retail has not succeeded over the course of a full commodity cycle
There is considerable variability in the scope to compete between different European markets
Levels of customer inertia are indicative of the fact that competition is yet to be fully effective
Incumbents remain powerful in many European markets despite ongoing regulatory pressure
Ability to offer fixed term enforceable contracts may contribute to the success of asset light retail
Confidence in the direction of the wholesale market will dictate asset light players' procurement choices
Larger utilities are at a substantial advantage in terms of Cost-to-Serve
Asset light retail is more than likely unsustainable over the long term due to wholesale market volatility
Choosing when to enter and exit the market is crucial to whether asset light retail can be profitable
A customer base has a market value and is an attractive proposition to larger utilities


APPENDIX
Further reading
Ask the analyst


List of Figures
Figure 1: Wholesale versus Retail price gains
Figure 2: UK NBP Forward Curve
Figure 3: Margins and costs under falling wholesale market
Figure 4: Historic UK wholesale prices for electricity and gas
Figure 5: Datamonitor's Market Competitiveness Intensity Index (MCI)
Figure 6: Cumulative Residential Switching in the EU
Figure 7: Structural balance of Major European Utilities in Power
Figure 8: Short notice switching versus contract permitted
Figure 9: Buying forward versus buying spot
Figure 10: Cost to Serve by supplier type
Figure 11: Timing of market exit is key

Abstract

Introduction

Rising wholesale energy prices across Europe have squeezed residential retail margins in a market dominated by large asset heavy players . This report highlights the potential commercial opportunities that exist for asset light players in the wake of an easing of wholesale prices and the long term sustainability of this model.

Scope
  • An assessment of the fundamental drivers of success for asset light retailers in European B2C energy retail
  • A comparative benchmark of the level of effective competition across major European markets based on an innovative scoring methodology
  • An understanding of the key challenges for asset light retailers to overcome including an assessment of the demand requirements of key competitors
  • A comparison of revealed consumer behaviour with regards to switching energy supplier based on aggregated surveys
Highlights

If the commodity cycle turns and wholesale prices were to start on a downward trend, reversing recent rises, this could create an opportunity for asset light retailers to enter the B2C residential market, pricing at a discount to large incumbent providers that presently dominate the European retail landscape.

Switching in European markets is variable with no one single country having seen over half of its customers switch from their original energy providers post liberalisation. The vast majority of major European retailers own more generating assets than the volumes of power they supply and are insulated against a rising wholesale market.

Larger utilities benefit from operational advantages, with larger European utilities enjoying Cost-to-Serve advantages of up to 13%. This is telling over the long term, however in the short term asset light retailers may have sufficient procurement advantages to be able to compete effectively.

Reasons to Purchase
  • Understand the challenges an asset light player must overcome to gain and retain customers
  • Maximise the advantages held over structurally hedged players who have less flexibility to react to a falling wholesale market
  • Assess the investment potential of the asset light model as a viable long tem option


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