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 one to run on LPG. On the downside, LPG is more suitable for use in cars and light vans, which makes it an inappropriate fuel for Sainsbury’s HGV’s. As LPG use increases across the UK, there is a possibility of price increases in the future, which may threaten the viability of conversion altogether.
4.2 Biodiesel
Biodiesel is probably the most environmentally friendly fuel as it is renewable and highly biodegradable. It does not accumulate and pollute soil and waterways, plus it is carbon neutral, which helps to improve local air quality. To run on biodiesel, diesel engines do not have to be modified, but using 100% biodiesel can create problems with engine performance. However, it offers little cost advantage for Sainsbury’s, as current biodiesel pump prices are roughly the same as standard diesel. Also, it is only available from a limited number of petrol stations in the UK, which makes it an unsuitable option in the medium-term.
4.3 Electric Vehicles
Electric vehicles, powered by a battery and electric motor, have no tailpipe CO2 emissions at the point of use and need much less servicing and maintenance than a diesel vehicle. They are extremely quiet, which would potentially enable Sainsbury’s to extend its delivery times. As with LPG, financial incentives include: the PowerShift grant. A major disadvantage of this type of vehicles is that, due to the capacity of the battery, their range is limited (usually to 60 miles or less) between recharges. As a result they are better suited for use as city-based cars and vans with set journey patterns or a limited range, which is extremely inconvenient for Sainsbury’s HGV’s. Also, the top speed is significantly lower than an equivalent diesel car and there is currently a limited range of electric vehicles available in the UK.
4.4 Fuel Cells
Fuel cell vehicles are often considered to be the ideal sustainable transport solution of the future. They operate at the highest efficiency and emit only heat and water vapour when fuelled by pure hydrogen. Fuel cell vehicles can use regenerative braking, which can reduce fuel consumption by up to 20%. In its current stage of development, compressed hydrogen requires large storage tanks. This means that it is difficult to store sufficient quantities on board vehicles. Manufacturers including Ford and GM aim to make fuel cell vehicles commercially available by 2010-2012, which is beyond the scope of this investigation.
5. Why Natural Gas?
In order to recommend the implication of Natural gas, several issues need to be addressed. Firstly, does the technology have a future? Is the fuel going to be readily available? What are the financial and non-financial benefits? Are the manufacturers offering an appropriate range of vehicles? Is the government supporting the chosen fuel and will there be price stability? We will now discuss each of these issues in application to natural gas, in order to justify our recommendation.
5.1 Future availability
Natural Gas already has a sophisticated supply network in place across the UK, supported by The Natural Gas Vehicle Association. Although the number of Natural Gas refuelling sites in the UK is currently limited, security of supply is steadily increasing and many new refuelling points have been opened on motorway petrol stations. Esso, the leading UK supplier of Natural Gas, predicts that a comprehensive network of service stations will be in place by approximately 2009.
5.2 Non-financial and financial benefits
Natural gas is one of the cleanest alternative fuels available for HGV fleets, offering significant reductions in vehicle related pollutants (up to 99% in carbon monoxide, 75% in hydrocarbons and 86% in nitrous oxides). Natural Gas vehicles are also very secure. In the event of leak, natural gas will disperse into the atmosphere and not puddle like LPG, Petrol or Diesel. In addition Natural Gas powered vehicles are more than 50 percent quieter than those running on diesel, reducing noise pollution.
Safeway (in collaboration with Esso) has pioneered Natural Gas usage in their fleet, which has produced savings of around 10% in operational costs (see Section 6). Therefore, we can predict that Sainsbury’s will be able to make similar or even greater cost savings from switching to Natural Gas because of the large volume of fuel consumed. However, the residual value of second hand natural gas vehicles is uncertain due to an under-developed market.
Furthermore, there are substantial Power Shift grants towards the cost of buying a new Natural Gas vehicle or converting an existing vehicle to run on Natural Gas; users have 100% discount from the London Congestion Charge and lower Personal Benefit in Kind (BIK) tax liability. Vehicles over 3.5 tonnes also qualify for Reduced Pollution Certificate and a subsequent reduction of up to £500 in annual road tax. This will be applicable to Sainsbury’s fleet of Volvo FM12 trucks.
5.3 Technical options available
An increasing number of Natural Gas vehicles are available on the market. Natural Gas vehicles either have a dedicated gas engine or they are dual-fuel, which means they can burn both diesel and Natural Gas simultaneously in the engine. Based on a current FM12 engine, a Natural Gas-powered vehicle is 45% more fuel-efficient than a diesel vehicle and 40% more fuel-efficient than an LPG vehicle. For large commercial vehicles, converting diesel engines to run on Natural Gas is cheaper than purchasing new ones. Transport Energy also offers grants to offset a percentage of conversion costs through the Cleanup programme15.
5.4 Government support and incentives
Recently the UK government has kept to its agenda of overseeing a “greener” transport policy in both public and private sector. With regard to fuel, the main instruments of state policy include taxation and subsidisation. Diesel fuel duty has been steadily increasing by 8 to 9 % each year, where as tax on natural gas has gone in the opposite direction with largest reductions occurring in 1996 (25% cut) and in 1999 (29% cut)16. Consequently, the downward trend in Natural Gas prices still continues, with current pump prices of 27 pence17. The government has declared that tax on petrol and diesel will increase each year by the rate of inflation plus a minimum of 6%. They stated their intention to at least maintain the differential between diesel and Natural Gas prices. There have been proposals to extend other incentives such as lower vehicle excise duty and grants for gas-powered vehicles. It is not just the UK Government who is taking action to encourage greater use of natural gas as a vehicle fuel. The other developed countries, such as the members of the European Union, Japan, and USA have adopted similar policies in order to achieve significant reductions in pollution and increase the global availability of the fuel.
6. Investment Appraisal
Companies create wealth by investing in projects. Companies also aim to reduce their opportunity costs, so deciding what projects to invest in needs to be analysed thoroughly, due to having limited amounts of capital. We will use the Net Present Value (NPV), and Payback in order to assess whether it is worthwhile for Sainsbury’s to make an investment in this particular project. NPV is seen as the most accurate investment appraisal technique, whilst payback is the most commonly used, due to its simplicity. The investment appraisal has only been conducted on Natural Gas and LPG, since these are the only two viable alternative sources of fuel.
6.1 Net Present Value
NPV theory states that in order to increase shareholder wealth, the project with the highest NPV should be adopted. This is inline with Sainsbury’s corporate strategy. Both NPV’s are calculated on a five-year time scale, as shown in the table below:
The above table shows Natural Gas has the highest NPV. This suggests adopting Natural Gas would add greatest value to Sainsbury’s business.
6.2 Payback
Payback is the amount of time it takes for the cash inflows to equal the initial investments. Proposals with a shorter payback are preferred, because there is a lower opportunity cost. The table below shows payback periods for Natural Gas and LPG:
The above data shows that both LPG and Natural Gas have the same payback periods when converting existing HGV fleets. An alternative option would be to buy a new fleet equipped with gas engines. Under this approach Natural Gas has the shorter payback period. However the above table shows that this time scale is beyond the scope of this report.
6.3 Conclusion
Detailed analysis of the main alternative fuels concludes that for Sainsbury’s current HGV fleet Natural Gas would be the optimal fuel to utilise. Although the payback periods for Natural Gas and LPG are the same for converstion, Natural Gas has the highest NPV and therefore is the project which will add greatest value.
7.0 Consumer Perception & Brand Image
7.1 Overview:
Sainsbury’s could benefit by combining the switch to a more eco-friendly fuel source with a broader strategy to project a more environmentally friendly image.
The case for becoming more socially responsible has been extremely well documented. It has been shown that the sustainability of the environment depends on a combined business and governmental effort to ‘go green’. This section will aim to give a critical analysis of whether Sainsbury’s can positively affect consumer perception and brand image through marketing an ‘environmentally friendly’ image. A recent study by Grankvist Dahlstrand & Biel (2004) looked at positive and negative labelling with respect to a product’s ‘friendliness’ to the environment, and whether this affected consumer perceptions. The conclusion drawn from their results was as follows:
“Individuals who had a weak or no interest in environmental issues were unaffected by labels stating that the product was environmentally friendly or environmentally hazardous.
Individuals with an intermediate interest in environmental issues were more affected by a negative label than by a positive label.
Individuals with a strong interest in environmental protection were equally affected by the two kinds of labels”.
These findings are reiterated by Clare D’ Souza’s study examining the effectiveness of brand perception on environmentally friendly products. D’ Souza concludes
“Results indicate that consumers were favourably influenced by the presence of environmentally friendly labelling”.
The theoretical implications of this are that a firm can only gain from projecting an environmentally friendly brand image. This is because whilst unconcerned consumers will remain unaffected, promoting an environmentally friendly image may help the firm better target those who have a mild or strong interest in environmental issues.
7.2 What proportion of the market is concerned with environmental issues?
A survey conducted in 1994 found that 82 per cent of British citizens rated the environment as an immediate and urgent problem (Dembkowski and Hanmer Lloyd). Furthermore a 1996 survey by the Ark Environmental Foundation found that 46% of the sample population were very concerned and 44% were fairly concerned about the environment.
7.3 Implications for Sainsbury’s
Evidence therefore suggests that Sainsbury’s can benefit from accounting the switch to Natural Gas as an attempt to be more environmentally friendly.
According to Kleiner (1991), many large firms are saving money, and gaining competitive advantage through promoting their products and themselves as environmentally sound. Kassaye (2001) gives many more examples of firms that have made efforts to be perceived as ‘greening’: “Procter & Gamble, McDonald’s, S.C. Johnson, Revlon, Lever Brothers, Wal-Mart, Coca-Cola, Tom’s of Maine, Campbell Soup, and Sears”.
However, Goldman, Hume and Schossberg, (1991) found that: “Consumer response to green marketing efforts has been generally unenthusiastic and has fallen short of marketers’ expectations”. P Yam Tang and Chan (1998) argued that this was because “public willingness to make sacrifices clearly does not always find expression in action.” In other words, the public may be inclined to say that their purchasing behaviour is positively affected by environmental issues18, but whether they translate this concern into actual practice is another matter. Sainsbury’s might be able to minimise this discrepancy by making sacrifices minimal. For example, if it is shown that they can make savings by converting to a more environmentally friendly fuel source, prices will not be negatively affected as a result.
7.4 Positive Spill over Effects:
- Increased consumer loyalty
- New customers switching from less environmentally friendly supermarkets
- Improved brand image
7.5 Actionable:
Sainsbury’s must utilise the spill over effects of switching to Natural Gas in a marketing campaign.
- Promote switch to Natural Gas
- Van fleet livery
- Carrier bags
- Television ads
7.6 Evaluation:
Due to the subjectivity involved in customer perception, it is difficult to predict exactly how any customer base will react to new marketing strategies. However, the prevailing paradigm suggests that consumers are increasingly concerned for the environment. Indeed there is significant scope for Sainsbury’s to realise positive spill over effects by switching to more environmentally friendly fuels and marketing the switch as an attempt to ‘go green’, rather than to reduce overheads.
Currently, Sainsbury’s competitors have not gone out of their way to promote themselves as ‘green’. This presents Sainsbury’s with a great opportunity to gain a head start in an area that will continue to increase in significance as the world’s natural resources are consumed.
8. Conclusion
This report has sought to analyse whether or not Sainsbury’s could benefit from adopting a more environmentally friendly fuel source. It goes on to stipulate that Sainsbury’s could realise additional benefits from changing its fuel source and promoting an environmentally friendly, “green” brand image.
Findings from detailed analyses of available fuel sources suggest that natural gas is the most attractive replacement for Sainsbury’s diesel fleet. Analysis of both the NPV and Payback methods of investment appraisal conclude that switching to natural gas is a viable investment project that will increase shareholder wealth. In short Sainsbury’s can realise significant cost savings by using natural gas.
The report then considers how Sainsbury’s could add value to the business in lieu of adopting a new fuel source. Analysis of a range of academic literature suggests that British consumers are concerned about the environment. Adoption of natural gas and a marketing drive to promote Sainsbury’s as environmentally friendly should attract a larger customer base for two reasons. First, Sainsbury’s will benefit from being ahead of the competition who are yet to promote a “green” image. Secondly, cost savings derived from adopting natural gas could be used to lower the prices of products on the shelves or spent on advertising and sales promotion campaigns. Therefore competitors’ customers may switch to Sainsbury’s.
There are several options available to Sainsbury’s in order to reverse the recent decline in profitability, streamlining, reworking store layout, changing the product mix are but a few examples. This report suggests that one option - running the fleet on natural gas, will deliver both cost savings and additional positive spill over effects that will at a minimum make a significant contribution to improving profitability.
9. Appendices
9.1 Nature and effects of current fleet emissions
9.2 Summary of major pollutants
9.3 Welfare loss to society arising from negative externalities
When formulating a strategy, a firm is only taking into account the marginal private costs of its activities and produces at the point of equilibrium where private cost equals private benefit (private optimum). This cost would be equal to the marginal social cost incurred by the whole society if there were no externalities produced by the firm’s activities. However, in the real world firm’s operations may cause such problems as pollution, damage to the environment, depletion of non-renewable natural resources, nuisance to communities, etc. When there are such negative externalities, marginal social cost is higher than marginal private cost; and social optimum occurs at a lower level of output. If a firm will continue to produce at the level of its private optimum, this will ultimately result in the welfare loss to the society (shaded area on the diagram).
9.4 Welfare gain to society arising from positive externalities
The shaded area on the diagram represents the welfare gain to the whole society arising from positive externalities.
9.5 SWOT analysis of four alternative fuel sources
SWOT Analysis - LPG
SWOT Analysis – Natural Gas
SWOT Analysis - Biodiesel
SWOT Analysis – Electric Vehicles
SWOT Analysis – Fuel Cells
10. Bibliography
Source: www.J-Sainsburys.co.uk
Source: www.news.bbc.co.uk/1/hi.in_depth/world_fuel_crisis/default.stm
Source: www.uk.biz.yahoo.com
Source: www.TransportEnergy.co.uk
Source: Esso (2004) www.exxonmobil.co.uk
See tables Appendix 9.1 and 9.2
For a full SWOT analysis see Appendix 9.5
There are currently more than 1,000 LPG refuelling sites in the UK – www.Exxonmobil.com
Source: Esso (2004) www.exxonmobil.co.uk
Details of cost savings can be found in the Investment Appraisal section.
Source: www.TransportEnergy.co.uk
15 Source: www.sourceuk.net/indexf.html?00496
16 Source: http://www.hm-treasury.gov.uk/pre_budget_report/prebud_pbr04/prebud_pbr04_index.cfm
17 Source: http://catalyst-commercial.co.uk/oldnews.html
18 See Appendix 9.4 for positive externalities diagram