The last 18+ months have been a whirlwind for most businesses around the globe. But retail electricity suppliers have particularly been in the center of a shift in how we all do business. If your portfolio is comprised of predominantly commercial real estate – whether strip centers or office space – you have seen a significant downturn in consumption. Although many of us believed that summer 2021 would bring a return to normal,” changes in work-from-home policy coupled with rising COVID-19 rates from the Delta variant have put into question, what is normal? My hypothesis is that the pre-pandemic normal is gone for good. The businesses which will be most successful in the next decade are those who will be best able to pivot to the “new normal.”
What is Happening?
Retail stores are closing at rates never seen. According to Fortune Magazine, over 12,000 retail stores in the United States closed in 2020, up over 2000 stores from 2019. The World Economic Forum notes that in addition to stores, hotels, offices, and even industrial complexes have been affected. These closures have been compounded by the shift from face-to-face to online shopping.
Additionally, many companies are giving employees the option to work hybrid or to defer returning to the office indefinitely. And as their leases end, many companies will take the benefit of reduced overhead and choose not to renew or to significantly reduce their physical footprint. Likewise, the dramatic reduction of business travel has also reduced hotel occupancy, driving down consumption or in some cases forcing hotels to close.
If you also serve residential customers, you may be receiving the benefit of that shift in rising residential consumption. Many people who relied on a programmable thermostat to adjust temps up during the day are now home nearly 24/7. But what if your portfolio is predominantly commercial and industrial? How can you protect against falling consumption and shifting needs amongst businesses?
One of the best risk mitigation strategies is knowing your customer base. How often are you analyzing your portfolio? What percentage of your customers are at risk to fluctuations based on COVID, work from home changes, and other current drivers? As a retail supplier, you have access to the necessary usage data needed to model pre- and post-pandemic consumption. This usage, along with industry data, can reveal where you may have risks. It may also point to good opportunities for sales expansion in industries where usage has been unaffected. For example, targeting sales toward large manufacturing companies vs. retail will likely be a safer bet in the near term.
Another area to consider is the potential for bankruptcy or shut down. Periodic reviews of your customers’ credit and of any news surrounding their businesses may alert you to the need for additional deposits or risks associated to contract renewals. This knowledge is key to the accuracy of your financial forecasts.
Do you have products in place that protect you from usage decline? Most energy contracts have provisions for early termination that allow for liquidated damages. But are you protected if the account isn’t closed but consumption dramatically declines or disappears? Full requirements and fixed-price contracts offer a margin premium but may not protect you in a period of falling consumption and falling market prices. Given that these changes exist across the country, the likelihood is that substantial sellbacks will be at a loss. Block, bandwidth, or full-passthrough may be less risky in this environment. Does your current billing system allow for these more complex products or “blend and extend”? How compatible is your billing system with your sales roadmap?
Alternative Revenue Sources
If you believe, like I do, that this commercial consumption drop is here to stay, what is your plan to replace that revenue? Do you have existing teams focused on renewables or demand response? Is there other consulting work you might want to offer clients? Often, suppliers have other teams who make focus on these areas, but coming to market with an integrated approach is a differentiator. Likewise, your ability to quickly shift and offer new products and services will make your bids more competitive against those still focused on P*Q.
So, what now?
The next 12-18 months will likely continue to be tumultuous. Unfortunately, we will likely not be out of “COVID times” for quite a while. That, along with trends in terms online shopping and permanent shifts to remote working, will continue driving traditional commercial consumption down. Now is the time to identify risks in your portfolio and devise a mitigation strategy. Having the right tools in place will be key. Suppliers who use information to drive strategy will be best positioned to succeed in this new normal.