By the time PowerGen rebrands its East Midlands Electricity business with a 4m ad campaign this summer, it could be too late. Its competitors may have already poached its customers.
That is the concern of some observers after PowerGen revealed its rebranding plans last week (MW March 18). The company wants to replace East Midlands Electricity, the best known power brand in the East Midlands region, with the PowerGen name – a brand that has never before been used in the domestic electricity market.
To do so, PowerGen has pulled the East Midlands ad account out of Rainey Kelly Campbell Roalfe and consolidated it with Saatchi & Saatchi’s corporate PowerGen account.
It now plans to begin rebranding at least six months after deregulation of electricity in the East Midlands region started, amid heavyweight marketing campaigns from rival power suppliers.
The move is evidence of PowerGen’s desire to exploit the lucrative opportunities that deregulation of the gas and electricity markets offers, through access to about 23 million households. It is the culmination of a costly and lengthy strategy led by chairman Ed Wallis, which has included sponsorship of ITV’s weather for ten years, an unsuccessful attempt to buy Midlands Electricity in 1996 and finally, the 1.9bn purchase of East Midlands Electricity last July.
East Midlands is the third largest electricity supplier in Britain, serving about 2.3 million customers over an area of 16,000 sq km. It also has a gas division, called Sterling Gas, and has turned PowerGen into a vertically integrated 10bn company with up to nine per cent of the electricity supply and distribution markets, in addition to 14 per cent of the generating market.
To get regulatory approval for the East Midlands acquisition, PowerGen was forced to sell two of its coal-fired generating stations, a requirement that will cost the company about 60m a year in profits.
But the deregulating electricity and gas markets appear to favour earlier entrants, according to market analysts Datamonitor. In a new report, called UK Domestic Electricity 1999, it claims that early entrants have made big in-roads, and cheaply, in signing up new users.
Centrica’s British Gas Trading, Scottish Power and Eastern Group were among the first to start signing up electricity customers outside their own franchises last year. They claim to be signing up 60,000 users a week at a cost of about 30 – 40 each – much lower than the price paid by later entrants to obtain customers.
The biggest losers of customers among regional electricity companies were those bought last year at premium prices. According to Datamonitor, East Midlands has lost 130,000 customers. As a result, some observers estimate PowerGen effectively paid up to 200 per customer. Midlands Electricity’s supply operation, bought by rival generator National Power, has lost 200,000 customers.
Preliminary results announced earlier this month show that in the nine months to January 3,
PowerGen’s profits slipped from 376m to 292m, due to milder than expected weather. This was despite an 87m contribution from East Midlands.
The results shaved 2.5 per cent from PowerGen’s share price, putting pressure on the company to make its acquisition work and to deliver the enhanced earnings it has promised.
That is where the rebranding comes in. It is part of a major overhaul of East Midlands’ operations, which analysts believe is likely to lead to the loss of several hundred jobs. The former East Midlands marketing director Colin Gruar has gone and has already been replaced by Duncan Sedgwick, a former customer services director who is now PowerGen’s director of mass-market retail.
Alongside Esther Kaposi, director of corporate affairs for PowerGen and steward of the company’s corporate advertising, Sedgwick will be responsible for the rebranding.
The logic of replacing East Midlands with the PowerGen brand is powerful. Thanks to the lengthy weather sponsorship and a 7m national advertising campaign begun last year, PowerGen is nationally recognised and has built up some trust in its brand. It claims that research shows 96 per cent of the country is aware of the brand and 50 per cent would like to buy electricity from PowerGen.
Unlike East Midlands Electricity, the PowerGen name is not regionally specific and can be stretched to encompass gas. PowerGen also has a strong historical presence in the Midlands, as its head office is based there and so are several of its generators.
However, rebranding also has its dangers. PowerGen risks alerting its customers to the fact that deregulation of the electricity market is underway and that alternative suppliers to East Midlands Electricity are available. Observers argue that one of the most effective and defensive things regional electricity companies can do as regulation rolls out, is nothing. The vast majority of customers don’t know about deregulation and don’t care. One analyst says: “By rebranding,
PowerGen megaphones that whole marketing issue to all its retail customers.”
In response to this, PowerGen argues that people in the East Midlands are well aware of deregulation because they are already being heavily marketed to by the likes of British Gas. “Customer awareness of deregulation is rising all the time,” Sedgwick says.
Which illustrates the second risk PowerGen faces. By the time it rebrands East Midlands this summer, deregulation of electricity in the region will have been underway since last December, giving competitors a head-start in trying to lure its customers.
Furthermore, claims Jon Kinsey, marketing director of British Gas Trading: “In any market opening there is a bunch of early adopters willing to move more quickly than others. It was certainly the case in the gas market. But PowerGen will miss out on that huge slug.”
PowerGen predictably disagrees with these points. Kaposi says that so far only ten per cent of the East Midlands region has been deregulated and the company has been monitoring the number of its customers who have changed suppliers. It has been gratified by how few have actually switched. She adds: “In other markets that have opened, people have got burnt by going into them too soon. If you plan better overtime, you can respond better.”
It is a point illustrated by analysts who say that less than ten per cent of customers have actually signed up to switch suppliers across the whole electricity market since deregulation started last September. The reason: the “tremendous apathy” of most British consumers and the slim savings that competing electricity companies can offer – usually less than ten per cent, compared with gas savings of as much as 20 per cent.
It is because of this that PowerGen and most of its major competitors will seek to offer both gas and electricity to customers – the combination delivers higher savings for the customer and higher margins for the supplier.
Many observers believe that because of PowerGen’s strong brand and its established reputation as a commercial supplier, it is capable of overcoming the risks involved in rebranding East Midlands and could well pick up new customers, particularly from neighbouring Midlands Electricity. But it is crucial that the company gets its marketing right.
The content of Saatchi’s new campaign remains unclear. PowerGen will not reveal whether the East Midlands name will be kept in some format, coupled with the predominant PowerGen brand, or whether it will disappear completely on bills and signage.
Affinity deals similar to this week’s tie-up between Vodafone and British Gas (see page 9) will undoubtedly be part of the marketing mix. Such deals offer added value and also help the supplier reduce the estimated 40 cost of obtaining new customers. Sedgwick says PowerGen is close to finalising several affinity deals but will not disclose details.
The Datamonitor report also offers some comfort to PowerGen. It shows that pricing is less important in the domestic market than had been thought. It is the players with strong brands that are making the biggest in-roads.
The report says: “Price may be less crucial than previously thought. Company branding and customer awareness, aggressive marketing strategies and dual-fuel provision have all played key roles in the success of suppliers.”
It cites ScottishPower – “by no means the most competitive supplier in terms of price” – as performing strongly through its dual-fuel offer. Eastern electricity does not offer dual fuel, but “has relied on high-profile marketing activities and a strong brand image to secure new customers, and as such has been extremely successful”.
What PowerGen will have to decide is how it intends to continue expansion outside the Midlands. It is widely believed to be pursuing up to 5 million customers, at which point it will be able to maximise profits.
But as analysts point out, encouraging people to switch from other suppliers means you are acquiring the most disloyal customers in the market. If PowerGen is to develop a stable platform for the future, it must have a bed of regionally-loyal customers, with a halo of “bribed” customers.
The easiest way to develop a larger number of loyal customers is to buy another regional electricity company. Given that PowerGen is expected to raise more than 1bn from the sale of its two power stations, analysts reckon it could be in the market for another small supply operation.
However, PowerGen finance director Peter Hickson recently ruled out the possibility of another purchase, at least for this year, saying the regulatory environment was not favourable.
Up to a point, PowerGen may not mind losing a few customers through its rebranding programme because it would be a useful way of stressing to energy regulator Callum McCarthy the intense competition it faces. It may help head off moves by the regulator to bring down prices and further break up the market.
Bearing in mind the cost of winning back the customers East Midlands has reportedly lost, PowerGen is taking a brave and risky move by rebranding and pursuing its national ambition. The effectiveness of Saatchi’s campaign will be a measure of whether it really has entered the market too late.