Centrica’s £1.1bn deal with AA leads way to multi-utility future

Centrica is exploiting the potential of cross-selling in its bid for the AA, which will allow it to branch out into financial services

I’ll be interested to see how the old customer-care ethos of British Gas influences the breakdown services of the Automobile Association, assuming Centrica’s &£1.1bn offer for the business is approved by the AA’s members.

To replicate traditional British Gas engineers, before Centrica was spun out of the BG empire to provide retail services, the AA patrolmen should really turn up at the scene several hours later than arranged – or, indeed, on an entirely different day. If, in the meantime, you have to leave your car to answer a call of nature, or to collect the children from school, you will almost certainly return to find a note on your windscreen saying: “We called to repair your car, but you were out.”

By the same token, there is much the AA could teach Centrica about customer care. I suppose it might be a bit much to ask its operatives to salute their customers – even the AA doesn’t do that anymore – but it would be great to have your cooker towed away and the entire family put up in a hotel until it’s fixed.

This is what cross-selling is all about. Or, rather, it isn’t – it’s altogether less surreal and entertaining than that. But cross-selling is what Centrica’s deal is all about. As analysts had it this week, when the proposed deal was announced, the theory of cross-selling assumes that pushing a wider variety of products through a larger customer database will improve cost-efficiencies, cashflow, margins and market share.

It has certainly been the way forward for banks across Europe of late. Witness Lloyds TSB and what HSBC is doing with the Midland brand. It’s also partly why mutuality in the financial services industry has widely been abandoned, most recently by Bradford & Bingley, which is sad but inevitable. In roadside and insurance services, the AA’s smaller rival, the RAC, abandoned mutuality by selling itself to Lex Service for nearly &£440m.

It’s as well to see the AA and RAC deals in the context of financial services, rather than as motorist organisations. Loans and insurance services accounted for virtually all the AA’s &£20m profits last year, with the breakdown service contributing just &£7m, which was largely wiped out by losses at the now discontinued high street retailers.

Since the break-up of the British Gas group, Centrica has developed into a fine business, exploiting its 17 million-household customer-base well. It has now branched out into electricity supply, credit cards with the Goldfish brand (horribly successful), household insurance, plumbing and home-appliance maintenance. It’s fair to say that it has substantially removed the old image of the British Gas engineer that started this column.

It’s the likes of Centrica that will increasingly force the pace of retail financial services marketing into the new millennium. Its proposed alliance with Energis, which brought the National Grid to the telecoms market, will further provide a discount telephone service for Centrica’s customers. This will eventually present the prospect of Internet access, the other great millennial key to the development of the financial services sector.

The prospect is enormously exciting for everyone, with the probable exception of the old high street banks, which still don’t seem to understand it all, bless them. The pioneering retail financial services work undertaken by Tesco and Sainsbury’s would appear to suggest that investment is increasingly being sold as a utility, very much on the American model.

Speaking of which, it’s alleged that Wal-Mart has a two-year masterplan for the development of financial services through Asda, once the paperwork for its acquisition has been completed. If that isn’t symptomatic of the way the market is going, then Asda is a banana.

But, to revert, there are other significances to this deal for Centrica. The most obvious is that it takes its marketing beyond the garden gate for the first time. Centrica will consequently be a provider of remote, as well as domestic, services. That may not sound too important, but in terms of the psychology of developing national and international services – especially telecoms – it is vital to make the move.

Furthermore, Centrica is fulfilling an ambition to become a multi-utility, again very much on the model of American enterprises. Since privatisation of the British utilities, largely over a decade ago, it has been the aspiration of successor managements to develop the broad base of service provision that constitutes the multi-utility proper.

One of the first to try was United Utilities, formed by the merger of North West Water with local electricity distributor Norweb. Two factors frustrated its ambition: first, the largely trivial and politically-driven fat-cat issue ahead of the last general election, which forced United (and others) back to basics. The second was that United never enjoyed a national infrastructure, however much electricity distribution was opened up.

Centrica has no such problems. Long gone is the political campaign that dogged the old British Gas, pushing chief executive Cedric Brown from office and forcing the break-up of the monopoly. The latter has proved a golden opportunity for Centrica and, with its enormous national presence, it could be the UK’s first real multi-utility. The AA deal is just one move in that journey.

Which provides tremendous potential for the provision of utilities from energy to telecoms – and embracing financial services. It also provides pretty good prospects for Centrica’s shareholders, many of whom will already have enjoyed a good run with British Gas.

George Pitcher is a partner of issue consultancy Luther Pendragon.