Major Grocer Takes Scientific Approach to Budget Certainty
Like most grocery store chains, Giant Eagle operates in a highly competitive industry where unpredictable power costs can significantly impact the bottom line. The company needed a way to take a more strategic approach to sourcing and aggregate its procurement process. Here’s a look at how the company achieved that.
The Challenge: Constantly Shopping Around
Several years ago, the Giant Eagle team was sourcing short-term fixed-price agreements from multiple suppliers based on the lowest price. When Ted Smith joined the team as Director of Indirect Sourcing, the purchasing goals were structured around a moderate level of risk tolerance and a fixed-price strategy that locked the price for a predefined volume based on usage patterns. Any incremental load was purchased at market price. This strategy still exposed the chain to unpredictable results. After experiencing extreme power price volatility with this strategy, the grocer could have reverted to a fixed-price strategy. Instead, it chose to evaluate other blended strategies that would offer the flexibility to take advantage of market opportunities while achieving the budget security it desired.
The team began to look for a more diverse approach that would mitigate volatility risks.
With the help of Constellation, Giant Eagle developed a smart power purchasing strategy that addresses those challenges. Previously, Giant Eagle purchased electricity through a blended strategy in which it fixed quantities of load. With Constellation’s expertise, the grocer implemented a strategy that was based on securing percentages of load instead: a Flexible Index Solution. Today, Giant Eagle purchases a significant portion of its total load through this strategy which it actively manages with Minimize Volatile Pricing (MVPe), an algorithmic program in which smaller percentages of load are purchased at regularly scheduled intervals over a longer time horizon—similar to the concept of dollar cost averaging in investing. This Flexible Index Solution coupled with MVPe helped Giant Eagle reduce exposure to electricity price volatility.
“We’re in the market every month making purchases,” Ted Smith said. “MVPe allows us to actively manage it over time, rather than trying to time the market.”
Giant Eagle now makes smaller, more frequent purchases without being burdened by each transaction decision. The team sets its goals in advance, monitors progress and allows the program to do most of the work. This has allowed them to:
- Balance the needs of internal stakeholders
- Streamline the purchasing process
- Reduce anxiety over making purchasing decisions over time
- Simplify the process of invoicing and reporting
- Free up time to devote to other sourcing decisions to further improve the bottom line
Advantages of a Flexible Index Solution and MVPe Strategy
Constellation’s Flexible Index Solution is a blended strategy in which a customer purchases power at a fixed price for a load following percentage of their usage with the remainder floating on the index. Customers can choose to fix any percentage up to 100 percent of their load, and can reach that desired percentage over time. Minimize Volatile Pricing for electricity (MVPe) is a tool to manage FIS purchases and is a structured, systematic plan that reduces exposure to electricity price volatility through a time-diversifying purchasing program. MVPe encourages longer-term thinking and budgeting.
Over time, you make smaller and more frequent purchases without having to be burdened by each transaction decision. You set your goals in advance and monitor progress, and the program does most of the work. Constellation’s team of experts can help you monitor market volatility, mitigate risks and manage your energy portfolio in a way that meets the unique needs of your business.
To learn more about our solutions, contact us today.