It is either the perfect plan for improved efficiency and customer choice, or a dismal recipe for grand scale farce and consumer confusion.
The Government’s commitment to opening up the utilities industry to new competition both from inside and outside the UK means a plethora of newcomers in the market. Consumers in the South-west, for example, will have at least 15 different gas supply companies to choose from when new competition is introduced in spring 1996.
Next year’s developments in the gas market will be monitored closely by the UK’s 12 regional electricity companies (RECs) whose domestic business also opens to new competition in 1998. In anticipation of this, a number of mergers and acquisitions involving gas, electricity and water companies have taken place in recent months, and more are expected. Welsh Water’s 872m bid for South Wales Electricity this week underlines the pressure on the companies to merge.
The power companies’ future success depends on how they tackle a gargantuan marketing and communications task. Firstly, they must explain that, for the very first time, each household will be able to choose its own energy supplier.
This is rife with potential problems: imagine receiving direct mail from dozens of different gas and electricity suppliers competing for your custom. Confused? Consumers will be. And suppliers must also overcome the poor image associated with a utilities business, whether caused by high wages for “fat cat” bosses or perceived over-pricing coupled with poor service.
Yorkshire Water’s half-year profits of 99.5m at a time when the company is threatening to cut off water supplies reinforced the poor image of the utilities in the public’s mind. These companies have never before had to consider either marketing or customer service in a competitive and deregulated market.
“The scale of change required is enormous, and that includes cultural changes as well as systems and regulations,” says Gordon Steele, head of marketing and business development, energy services division at London Electricity. “It is too early to tell how well-prepared the electricity industry is, but there are some who are focused and laying the foundations. For others, time is short.”
In fact, the power industry has already experienced the first stages of deregulation. The business supply side of gas has been opened up, with the result that British Gas’s market share has been ravaged.
With up to 40 new players taking an interest in the market, British Gas has so far lost an estimated two thirds of its industrial and commercial supply business and is now bracing itself for an attack on its domestic customer base.
In spring 1996, an “open market” domestic gas trial in the South-west will involve 500,000 residential consumers. This will test the complicated billing and distribution systems a free domestic market will require, before a national roll out in 1998.
Many believe a price war is inevitable. Others warn of consumer confusion: “It is possible that customers are going to be overwhelmed by it all and will not know which way to turn,” says David Beavis, general manager of newcomer Gas West.
The RECs have also experienced the first stage of deregulation. Since 1994 they have had to compete in the newly opened 100 kW market, supplying business users which spend more than 12,000 a year per site on electricity. This has meant that RECs have faced competition in their traditional geographical catchment area from RECs elsewhere in the UK. The benefits to business customers are cost savings of up to 15 per cent.
“In London, it was a huge shock,” Steele admits. “Almost overnight, we lost 30 per cent of our business.” This quickly focused attention on the need to effectively market London Electricity in the UK.
Steele joined London Electricity earlier this year from Unipart, to oversee the creation of a new marketing department and implement a brand strategy and marketing services programme, which so far has involved two advertising campaigns.
“Our core proposition is purely a commodity – a 12-month electricity supply; it’s price-driven,” he explains. “But we have introduced a range of packages and offers alongside this, including 18-month contracts, with their associated cost benefits, and a six-month ‘competition clause’.” This means that business customers can switch if dissatisfied before the end of their contract. None have.
As a result, LE won new contracts, boosting the volume of sales by 30 per cent. Business customers now include British Airways and Ladbroke, while Safeway recently struck a deal with LE to supply 264 of its stores with electricity.
Other suppliers are also laying the foundations for 1998. Acquisitions by North American corporations, such as Southern Company’s 1.1bn purchase of South West Electricity (SWEB), promises the import of aggressive sales and marketing tactics honed in the US.
Other RECs are forging partnerships with separate utilities businesses. North West Water recently acquired Norweb for 1.8bn, while Seeboard has entered into an agreement with Amoco Corporation to supply North Sea natural gas.
“What’s happened in the gas market will provide an important pointer for electricity,” Seeboard strategy manager Robert Sansom says. Even so, many questions remain unanswered as power companies grapple with the best way to structure their business. “So soon after the acquisition we don’t know what our future strategy will be,” says a spokesman for Norweb. The challenge is great, but time is running out.
Experience gained by electricity companies in the business market can undoubtedly be applied to the domestic market when it is eventually opened up in two years’ time. However, the marketing challenges will be very different.
“Where business custom is about account management and mass customised product, exploiting the domestic market will depend on sophisticated mass marketing techniques,” says Rick Peel, managing director of strategic consultancy COBA Group, which is working with a number of utilities and telecoms companies.
“People may shift once for price but they will move again or stay with a supplier for another reason: the quality of customer service they receive,” he says. The low margins associated with supplying electricity will mean that exploiting strong customer relationships and the ability to cross-sell other services will be critical to future success.
The potential of cross-selling and the joint marketing of electricity with gas, water and even non-utility products and services is causing the greatest interest among prospective players. Gale Klappa, recently appointed chief executive of SWEB, is a former vice president, marketing for US-based Georgia Power. His experience was gained in a local market where 96 competing electricity suppliers chased just 1.5 million customers.
“If you look at what’s happening in other markets, I think in a few years the gas and electricity businesses will merge and you can see the benefit to customers where they have just one relationship for all their energy needs,” he says.
Klappa is positioning SWEB as “an energy solution company”. The company’s avowed long-term strategy is the creation of a “total utility company” – possibly covering waste disposal, water and telecommunications as well as power. In the short-term, the company plans to import tactics learnt in the US to the UK.
To ensure UK customer loyalty, Klappa declared recently that he is considering introducing a performance-related working structure for SWEB employees. SWEB is also committed to entering the gas market with its subsidiary, SWEB-GAS.
The possibility of combined utilities is bound to cause consumer concern – not least about the prospect of being “held to ransom” by a major corporation that controls all services to a household.
Already, there is a distrust of newcomers and scepticism about the plans for diversification. The common belief is that the utilities should concentrate on providing a sound, safe service at low cost and with a smile, rather than attempt to become broad-based international operations.
However, the City considers diversification essential. “[Trade and industry secretary] Ian Lang’s recent decision to refer takeover bids by National Power for Southern Electric and PowerGen for Midlands Electricity to the Monopolies & Mergers Commission is likely to leave the field open for further bids from overseas,” says one analyst. “Purchases are driven by the potential to combine customer bases and merge operations such as marketing and billing. It’s the logical course.”
Already, a number of RECs are mooting partnerships to market electricity. At the same time, Safeway is understood to be considering selling electricity under the Safeway banner. And others, such as a major clearing bank, are also interested.
“The benefits of such an arrangement include access to a partner’s markets, a stronger brand, new technology or simply bundling one product with another,” Peel explains.
It’s a radical strategy. But the industry cannot afford to be bound by traditional approaches, says Steele. He sees parallels between his business and the development of the financial services and telecoms markets in the 1980s. “Breaking down old perceptions is essential,” he says. “Look at BT. It has invested heavily in marketing, customer service and in special packages and customer offers. The ideas are not new, but implementation is key.”
Many issues remain unresolved, such as: whether to market a regional brand nationally or to create sub-brands for different geographical markets. “Those brands which have stretched furthest have been brands with a feeling, rather than function and geographical constraints, for example, Virgin,” Peel explains.
Then there is the question of how rival suppliers will be able to differentiate their product – through billing structures, meter reading technology or payment systems. “It will be about brand positioning, market segmentation, delivery of a promise, creation of tariffs and quality of customer service following through,” Peel says. “It will be about nuances.”
And it will be about whether the power companies really can reposition their product in consumers’ minds – as a branded good.