Gasgen Inc.
Case exhibits
4 exhibits for this case
Gasgen-exhibit-1
Suggested case structure
- Context: The candidate must try to understand the market segment and seek information about the market.
- 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:
- growth prospects of the market;
- cost structure and margins; and
- risks, if any.
- 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.
- 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.
Exhibit 1
1. Context
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
- 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.
- 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.
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.
Exhibit 2
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.
Using the average gas bill value at 500$, the following costs can be calculated:
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.
Exhibit 3
For a 'warm' winter, the following costs can be calculated:
Exhibit 4
3. Competitor analysis
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).