"Could Sainsbury's add value to their business by using an alternative fuel for their HGV fleet?"

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        Contents           Page No.

 1. Executive Summary……………………………………………………………………………2

1.1 Topic Description

1.2 Title Question

1.3 Objectives

1.4 Recommendation

 2. Research Agenda and Assumptions Made………………………………………………..3

2.1 Agenda

2.2 Assumptions

 3. Sainsbury’s current fuel source and the associated costs…………………………….4

        3.1 Overview of current situation

        3.2 Economic costs of using diesel

        3.3 Environmental and social costs of using diesel

 4. Alternative fuel sources available to Sainsbury’s……………………...………………..5

4.1 LPG

4.2 Biodiesel

4.3 Electric Vehicles

4.4 Fuel Cells

 5. Why Natural Gas?………………………………………………………………………...……7

5.1 Future availability

5.2 Non-financial and financial benefits

5.3 Technical options available

5.4 Government support and incentives

 6. Investment Appraisal…………………………………………………………………..……..9

6.1 Net Present Value

6.2 Payback

6.3 Conclusion

 7. Consumer Perception & Brand Image……………………………..……………………..11

7.1 Overview

7.2 What proportion of the population is concerned with environmental issues

7.3 Implications for Sainsbury’s

7.4 Positive spill over effects

7.5 Actionable

7.6 Evaluation

 8. Conclusion…………………………………………………………………………...………..14

 9. Appendices…………………………………………………………………………………….15

10. Bibliography……………………………………………………………………………..……25

1. Executive Summary

  1. Topic Description

Sainsbury’s is a leading UK food retailer with 583 stores across the country. This investigation will seek to find out whether Sainsbury’s can reduce their operating costs by adopting an alternative source of fuel for its Heavy Goods Vehicle (HGV) fleet.

In the current economic climate with oil prices hitting a record high of $55/barrel, Sainsbury’s recently announced that their profits had fallen dramatically from £323 million to a loss of £39 million. Empirical evidence shows that fuel represents 30% of total vehicle operating costs. Since Sainsbury’s HGV fleet is 2,200 strong, there is significant potential to reduce operating costs. In order to give a holistic account of any strategic implications, we will also identify any non-financial benefits that can be gained as a result.

  1. Title Question

“Could Sainsbury’s add value to their business by using an alternative fuel for their HGV fleet?”

  1. Objectives

  • To look at current types of fuel used by Sainsbury’s fleet

  • To evaluate the impact fuel prices have on Sainsbury’s costs
  • To give a detailed account of the benefits and limitations of using selected alternative fuel sources
  • To identify an optimal alternative fuel to be used in the medium term (5 years)
  • To perform a detailed analysis of the strategic financial and non-financial implications of Sainsbury’s switching to another fuel source
  • To give a recommendation based on our findings

  1. Recommendation

Having carried out a SWOT analysis, an investment appraisal, and considered non-financial implications of adopting a greener fuel source, this report recommends Sainsbury’s would add value to their business by switching to Natural Gas in the medium term.

2. Research Agenda and Assumptions Made

2.1         Agenda

In carrying out this investigation, the group agreed on a set of guidelines and basic philosophy to abide by in order to maximise the integrity and significance of our report. These are as follows:

  • Any conclusions drawn should be based on empirical data.
  • Primary data should be used wherever possible. Primary data from an employee at Sainsbury’s was collected. Secondary data was also obtained from researching Internet publications, newspaper articles and industry websites.
  • The analysis should be objective and un-opinionated.
  • The focus of the investigation should be narrow and clearly defined, in order to produce a definitive answer to the research question.

2.2        Assumptions

In order to reach a satisfactory conclusion from our calculations, we have made the following assumptions:

  •  Data collected from secondary sources is assumed to be accurate and reliable.
  • The figures we have used for the average number of miles travelled in a year and cost of fuel are assumed to be accurate and reliable.
  • Our analysis will be based on past and current figures. Hence, for any conclusions to be valid we will have to assume continuity of current fuel price trends in the medium term.
  • The firm will be able to reclaim VAT paid on fuel and on the conversion costs.
  • At present there are only 25 service stations offering natural gas in the UK. However, Esso predicts that a comprehensive network of service stations will be in place by approximately 2009.  We will therefore assume that the availability of natural gas will not be a limiting factor in the future.
  • Sainsbury’s website1 states that they will only look to take on projects in the medium term. For the purpose of this report we assume this means 5 years.

3. Sainsbury’s current source of fuel and the associated costs

3.1 Overview of current situation

As each Sainsbury’s supermarket offers over 34,00 products, and serves more than 11 millions customers a week, there is great pressure for reliable delivery of fresh food. Currently Sainsbury’s distribution network consists of 2,200 Volvo FM12 trucks1. These all run on Ultra Low City Diesel fuel and cover a total average of 6.6 million miles a year.

3.2 Economic costs of using diesel

Sainsbury’s consume £2.85 million worth of fuel each year. Fleet running costs, including maintenance, depreciation, taxes and other expenses amount to £12 million a year. Sainsbury’s are in partnership with BP Oil, which ensures that they are consistently provided with diesel for their fleet and enjoy lower costs due to the bulk-purchasing economies and partnership arrangements. However, as oil supply is unstable, BP Oil is bound to pass on the rising prices of crude oil to the consumer, increasing the price of diesel and contributing to higher operating costs for Sainsbury’s.

3.3 Enviromental and social costs of using diesel

Sainsbury’s incur private costs from their economic activity but also produce a range of externalities, both positive and negative, which have to be taken into account. A large fleet of diesel vehicles has a strong adverse effect on the environment due to emissions, contributing to air, water and soil pollution. Carbon dioxide (CO2), carbon monoxide (CO) and nitrogen dioxide (NO2) are the main pollutants. Secondary research has estimated that road transport is responsible for almost 90% of all CO2 and 50% of all NO2 emissions in the air, causing serious health problems such as impairing of intellectual development, cardiovascular & respiratory problems, cancer and even death. These negative externalities add to social costs and ultimately result in a welfare loss to the entire society, which is something Sainsbury’s can avoid by improving their environmental strategies. In recent years Sainsbury’s have changed from using diesel in their HGV’s to the Ultra Low City Diesel. Levels of CO2 emissions have been reduced from 2.82kg CO2/litre to 2.57kg CO2/litre as a direct result of this change. We suggest that by using alternative fuel source, levels of CO2 emissions could be reduced further in the future.

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4. Alternative Fuel Sources Available to Sainsbury’s

This section analyses the four main alternative sources of fuel. The following overview of these options is based on a systematic SWOT analysis.

4.1 Liquid Petroleum Gas (LPG)

LPG is half the price of diesel. It is seen to be superior to most road-transport fuels with respect to public health and environmental impact. The Commercial availability of LPG is higher than most alternatives. There are a range of financial incentives when using LPG. For Example, the fixed PowerShift grants towards the cost of buying a new LPG vehicle or converting an existing ...

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