The Time of Tough Choices is Upon Us
By Tom Zara
2012 marks a magnificent yet dubious human achievement: populating the Earth with over 7 billion inhabitants. It’s estimated that 2 billion more will join our ranks by 2052. With the population issue comes climate change, threatening to radically alter life on our planet. These facts make the relevance and poignancy of “sustainable” existence a sobering reality. Unless we dramatically improve the way we procure and produce energy and responsibly deal with greenhouse gases and other pollutants, it will be impossible to satisfy the relentless global demand for reliable, affordable energy without also creating a global catastrophe.
The rising demand
According to BP’s Annual Report 2012, the growth in world oil consumption slowed in OECD (Organisation for Economic Co-operation and Development) countries in 2011, but robust growth in China and other non-OECD nations continued, partially off setting the overall slowdown in demand. Though efficiency has improved, the National Bureau of Statistics reports that China’s energy use rose at the fastest pace in four years in 2011 with consumption climbing 7%. To put this rapid growth in global perspective, if China alone were able to achieve First World living standards while everyone else’s living standard remained constant, our total human impact on the world would double.
Yet, marketplace realities, global population trends, global urbanization, and geo-political tensions around energy will not abate. The US government Energy Information Administration predicts that by 2035, global energy use will balloon 53%, fossil fuels will be the dominant fuel of choice (with renewables constituting just 14% of the world’s overall energy consumption), and that most renewable energy is likely to come from wind and hydropower.
The most troubling fact that we must consider, rather than scarcity, is that further fossil fuel reserves will be deeper underground, dirtier, and more expensive to extract or process, with higher environmental costs risks.
Challenges for energy brands
More complicated extraction and processing also translates into higher prices. According to BP’s most recent annual report, average crude oil prices in 2011 were significantly higher than in the previous year, exceeding $100 per barrel for the first time (in nominal terms) and natural gas prices diverged globally. In the short-term, this may be good for the quarterly profits of energy companies, but it’s not necessarily good for energy brands or the long-term needs of businesses and consumers that are currently dependent on fossil fuels.
As the world roils in the aftermath of Fukushima and debates hydraulic fracturing and Arctic drilling, a sense of discomfort with current energy choices is growing. This sentiment, combined with higher oil and gas prices (and falling costs of alternative energy technologies), have helped drive solar energy installations across the US and, of course, Germany (since announcing it would abandon nuclear power last year). India, Spain, and the UK are also making significant investments in renewable energy. In fact, underscoring grid vulnerabilities, recent blackouts in India were summed up in one telling headline: “coal failed, solar delivered.” While the move toward renewables is still in its infancy, this trend is definitely on the rise.
In general, consumers have low confidence and satisfaction with energy brands because of rising energy costs and a justified perception of irresponsible actions regarding the environment. Global research conducted by Ernst & Young in 2011 found that, in the majority of the 13 countries surveyed, consumers’ relationships with the largest energy providers were “at best…transactional, cold and distant; at worst, hostile.” These negative perceptions tend to undermine a brand’s efforts to secure a more meaningful relationship with its customers. There is currently a disconnect between what energy companies say and what they do — and that gap must be bridged through real efforts to adopt environmentally sensitive practices, clean up accidents if they occur, address health impacts, and invest in clean energy.
Brands in this sector need to appreciate the role of the public in determining their “social license to operate.” Unlike other fossil fuel companies with longer supply chains and a less public face, oil companies sell their fuel to consumers at gas stations, thereby making them an easier target for boycotts and blame. Another unfortunate disadvantage is the tendency of consumers to lump all brands in a sector together and condemn them more or less equally, regardless of real differences in the track record and polices of individual companies. Amplifying these risks, the ubiquity and accessibility of social media has given consumers increased power to determine the fate of a brand — whether they have their facts straight or not.
In order to build trust, energy companies need to become more engaged and respond to the concerns of consumers. Rather than relying on one-way communication, essentially telling consumers what to think about their brand through feel-good commercials or a clever logo refresh, energy companies need to interact with consumers and take advantage of social media. To gain credibility, energy brands must show consumers that they are not monolithically uniform in their attitudes. It might, for example, be smart to launch discussions with social and environmental organizations and associations of indigenous people, implement their recommendations — and make that public. In short, energy companies that behave and communicate like progressive, socially responsible organizations — and take the right steps during this pivotal time — may very well outcompete less progressive companies in the years to come.
Power companies might also benefit from extending their product lines, though merely having the capabilities is not enough to ensure success. Consumers have to trust the brand. If they don’t give the brand “permission” to supply other services, they will look at an integrated offer with skepticism. It must be kept in mind that brands create differentiated choice for customers beyond price. Price certainly matters to consumers, but it’s not the only consideration. Studies have shown that most consumers don’t mind paying a fair price for energy, particularly “green” energy.
Shell is a strong brand in this category, at least for the time being. Despite a serious oil spill off the coast of Nigeria, Shell is still considered a premium brand that ensures best quality. In general, brands that live up to their promises, show genuine commitments to safety and sustainability, and regularly engage and communicate with their target audiences stand out in the category. The rise of Shell and the decline of BP illustrate the power and the failure of strong brand management in a category ripe for leadership and strength. Energy companies, as we know, are not non-profit charities, but profit-making entities that are under obligation to maximize profi ts for shareholders. We who specialize in managing brands, of course, want to see every brand succeed, but at some point, we have to ask ourselves — what kind of world are we going to be managing brands within? The urgency for sustainability is undeniable and, the truth is, we do not have to prosper at the expense of people and the environment. There are other, smarter ways — and we must fi nd them. While our energy future still remains somewhat unclear, one thing is sure: How the world’s leading energy brands carry the standard for innovation, consumer trust, environmental stewardship, and responsible practices will shape their relevancy and legacy as vital components of societal well-being in the years to come.