Gasgen Inc. - MyConsultingCoach
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Case

Case prompt

Our client, Gasgen Inc. is a French gas sales and distribution provider. They currently enjoy a monopoly in the market. However, they have heard murmurs about the potential liberalization of this segment in the coming years.


They want to be prepared in case it happens. They have hired us to answer two key questions:

    • In the event of market liberalization, what would be the level of competitive intensity?
    • What kind of competitors are likely to enter the market?



Detailed solution

Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.


Suggested case structure

Key question: If the market gets liberalized, what would be the competitive intensity and what kind of players are likely to enter the market?

Allow the candidate some time to build a case structure and approach.


The candidate should go through the following steps:
  1. Context: The candidate must try to understand the market segment and seek information about the market.
  2. Market attractiveness: The key to determine the intensity of competition in the market post liberalization would depend on how attractive the market is. This can be estimated by looking at the following factors:
    1. growth prospects of the market;
    2. cost structure and margins; and
    3. risks, if any.
  3. Competitor analysis: After determining the attractiveness of the market, the candidate must aim to analyze the key success factors required in this segment, competitive advantage of potential entrants etc in order to answer the question around potential competitors.
  4. Conclusion: Based on the market attractiveness and competitor analysis, the candidate must succinctly try to form a point of view and answer the two key questions raised by the client.


Once the candidate has outlined a case structure, share Exhibit 1 with him/ her.

Share Exhibit 1 with the interviewee

    Exhibit 1 


     

    1. Context


    The interviewee should enquire about the market in order to develop a better understanding of the segment.

    Gasgen Inc. is the only provider of gas in France. It has two key business activities:

      • Sales - Retail (households) and corporate segment
      • Distribution - Gasgen manages the transportation, storage, equipment and other infrastructural services for the distribution of gas throughout France

    Gasgen Inc. is not involved in the production of the gas. It procures the gas and is then involved in its sales and distribution.


    In the event of liberalization, other competitors would be allowed to sell gas to households and corporates. However, due to the capital intensive nature of distribution, Gasgen Inc. would continue to have a monopoly over the distribution network. The Government would supervise this activity, in order to ensure equal access to all competitors after liberalization. 

    2. Market attractiveness


    Growth Prospects
    Ask the candidate to list the levers that could potentially impact the growth prospects of the industry.
    The following would be the key levers for the two customer segments:
    1. Retail (Households): Level of penetration, share of gas vis-a-vis other forms of energy (electricity, oil etc), the consumption pattern. The consumption pattern in turn, is likely to be impacted by climate variability, improved insulation of houses, etc.
    2. Corporates: Level of penetration and share of gas are likely to drive the corporate segment as well. On consumption pattern, the general growth of industry would also have an impact in addition to climate variability, level of insulation of structures etc.

     The candidate would now ask for information on growth prospects. Ask the candidate to use generally available information, make assumptions and lay out a likely scenario for the growth prospects of this segment.

    A good candidate would argue as follows:

      • Since France is already a developed nation, the level of penetration is likely to be high for both the retail and the corporate. There would not be too much headroom for growth.
      • It is also unlikely that the share of gas vis-a-vis other energy sources would drastically change, as typically there are switching costs involved for the end consumers.
      • The consumption pattern is likely to decline. Climate change is underway and is leading to warmer winters which would reduce the requirement for heating. Also newer structures are built with better insulation and hence, the demand for gas is likely to decline.
      • In case of the corporate segment, climate variability and better insulation techniques will hold true. The general economic growth is also likely to be stable, driven primarily by productivity improvements. This would signal a decline in the corporate segment consumption as well.

    Thus the market is likely to see low single digit growth or even a decline in the coming years. With limited new customers being available, new entrants would have to gain share from the incumbent. This can be done either by lowering price or by offering a better product. Since gas is a commodity, it is likely that a new entrant would reduce prices in order to gain market share.

    It is important that the candidate identifies price reduction as a strategy by new competitors. If required, prompt the candidate to arrive at the above conclusion.


    Cost structure

    Once the candidate identifies price reduction as a strategy by new entrants, he/she must examine the cost structure to understand the headroom available for price reduction.

    Share Exhibit 2 with the interviewee

      Exhibit 2


       

      Ask the candidate what he/she thinks about the cost structure. Which of the cost heads given in the structure can potentially be reduced by a new entrant?

      Some probable answers could be:

        • It is unlikely that a new entrant would be able to reduce the gas procurement costs. The incumbent has monopoly over the market, so it would be a fair assumption to make that they would have negotiated the lowest prices because of bulk buying.
        • Given the infrastructure costs are fixed by the Government, it is unlikely that they would reduce and would be different for different players.
        • A new entrant could potentially optimize operations and reduce the SG&A costs. They might also be willing to accept lower margins and hence that might also give them some room to reduce prices.
        • A new entrant is also likely to spend a much higher amount on advertising as compared to Gasgen in order to lure customers away.

      Ask the candidate to calculate the potential for price reduction in $, assuming that the average gas bill is 500 $. If the candidate asks for information on the savings on SG&A and margins - ask him/her to make their own reasonable assumptions and give a guesstimate of the potential savings. Ask them to ignore the increase in marketing spends for this calculation.

      Using the average gas bill value at 500$, the following costs can be calculated:

      Gas cost = 45% * 500 $ = 225 $
      Infrastructure costs = 45% * 500 $ = 225 $
      SG&A= 7% * 500 $ = 35 $
      Margin = 3% * 500 $ = 15 $

      The following calculations have been done assuming that the new entrant would be able to reduce 40% of SG&A costs and would be willing to accept 33% lower margins as compared to the incumbent.

      Therefore:
      Savings on SG&A= 40% * 35 $ = 14 $
      Margin = 33% * 15 $ = 5 $
      Total savings = 19$ or 3.8% of the total price

      Key insight

      The margins in the business are very low at 3%. A new entrant would not have much headroom for reduction in price. Even if the new entrant accepts a lower margin, the potential for price reduction is only ~4%.

      Risks
      Once the candidate has evaluated the cost structure, he/she must move on to the risks. If required, prompt him/ her in this direction. Ask the interviewee to lay out the potential risks in a market segment like this.

      If enquired, share the below information:

        • Climate variability is a significant business risk. 
        • In 'warm' winters, the gas consumption goes down by 10%. However, the cost structure is not fully variable, which affects the margins.
        • The SG&A costs are completely fixed. The infrastructure costs are semi-variable - with a 80% fixed component and a 20% variable component. The gas procurement costs are fully variable.

      The cost structure and the average bill, shared earlier was for a normal i.e 'cold' winter season. Houses with better insulation are a risk; however it is difficult to measure their impact and hence must be ignored.


      The candidate must now calculate the impact of climate variability on the margins. If required, prompt him to do so.

      Share Exhibit 3 with the interviewee and ask him to use it as a structure to estimate the impact.


      Exhibit 3


       

      For a 'warm' winter, the following costs can be calculated:

      Sales = 500 $ * (1-10%)= 450 $
      Gas cost = 225 $ * (1-10%) = 202.5 $
      Infrastructure costs = (225 $ * 80%) + ((225 $ * 20%) * (1-10%)) = 220.5 $
      SG&A= 35 $
      Total Cost = 202.5 $ + 220.5 $ + 35$ = 458 $
      Margin = 450 $ - 458 $ = -8 $

      Share Exhibit 4 with the interviewee after he has completed his calculations.


      Exhibit 4


       

      Key insight

      The business is susceptible to climate variability and hence risky. In 'warm' winters, the margins become negative. The margins in this segment are already very thin. That, coupled with the risk of negative margins during 'warm' winters would make the market unattractive for new entrants.

      3. Competitor analysis


      Although it has been established that the market is unattractive, ask the candidate to think of scenarios where some of the assumptions made in the case so far would not hold true? Prompt her to think of the kind of competitors who would still enter this market.

      The case, so far, was built on the assumption that the entrant would be a new player in this segment. However, some of the assumptions made would not hold true if the entrant is an existing energy player ( electricity, oil, water etc). In such a case, the entrant would have several cost advantages.

        • An existing energy player would have significant synergies with the business and would be able to reduce distribution and SG&A costs.
        • Such a player would also be able to leverage its existing brand name in the energy space and therefore might be able to lure more customers with significantly lower marketing spends.
        • Bundled offerings of gas with other energy options would definitely be a plus point in the corporate segment where customers are likely to have multiple structures with varied energy needs.
        • Such a player might also be able to negotiate and reduce the gas procurement costs on account of a combined order book ( gas + other energy procurement).

      4. Conclusion


      The market is stagnant with zero to low growth prospects. The current cost structure of the industry offers very thin margins and has the risk of negative margins during 'warm' winters. This makes the segment unattractive for new entrants and therefore in the event of liberalization, the segment would not attract a lot of competitors.

      However, there is the risk of an existing energy player entering the segment in the event of liberalization. Such a player would have significant synergies with its existing business and would therefore be able to mitigate some of the risks.


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