Time for utilities to stop bundling?

Scottish Power has pulled out of schemes to supply financial services and telecoms to its customers, and is to concentrate on selling electricity and gas. Sonoo Singh discovers that not all companies share its pessimism.

The liberalisation of the gas and electricity markets has seen a rash of utility companies expanding into areas such as financial and telecom services in a frantic attempt to attract more customers.

But just as most utility companies, including Centrica, the biggest player in the market, have started rolling out “bundled” products, Scottish Power has abandoned its online banking joint venture with the Royal Bank of Scotland(RBS) and aborted its foray into telecoms.

The power company had signed up 16,000 customers for its telecom trial, which is separate from its Thus telecom subsidiary. Work24, its banking joint venture with RBS, had signed up 3,000 small business customers, and was on the verge of launching a financial services arm for Scottish Power’s residential customers before the utility company announced a return to its core businesses of gas and electricity supply. Work 24 has laid off all its staff (MW February 8).

Scottish Power argues that these new ventures did not justify their high entry costs. This raises a question mark over the strategy of other utility companies, which are now relying on cross-selling a whole range of services other than gas and electricity to build their core businesses.

But the gas and electricity industry hardly seems to be rattled by Scottish Power’s announcement that it has pulled the plug on cross-selling telecom and financial services to its gas and electricity customers. Only last week Innogy, the parent company of npower, ended months of speculation and admitted that it would roll out its financial and telecom services by April this year.

The announcement follows Innogy’s acquisition of Yorkshire Power, in a deal worth £1.84bn. Innogy intends to offer household insurance in partnership with Jardine Lloyd Thompson and a bill payment protection scheme with Bank of Scotland.

Scottish Power maintains that while it may be the first company to have come to the conclusion that cross-selling is not economically viable for utility companies, other companies are likely to follow suit.

The lead analyst at Datamonitor, Iain Bosbery, disagrees and believes that the bundling of services will continue to develop. He says: “Selling gas and electricity is a low-margin business, and the reason the utility companies want to increase their range of products is it allows them to take advantage of common billing and economies of scale. British Gas, for instance, is ideally placed with its 14 million gas and 4 million electricity customers. It can easily build more business with its systems and back-office people already in place.”

By 2004 more than 50 per cent of customers will be taking more than two services from their utility companies, according to research by Datamonitor. The average annual spend of a British customer on utility services at present is £250, and is set to increase to £520 by the end of 2004.

Centrica, the parent company of British Gas, also has the strength of national brands such as the Automobile Association, Goldfish credit cards and financial services. Last month, Centrica launched its Internet and telephone bank, a joint venture with Lloyds TSB.

Centrica group marketing director Simon Waugh says: “One of the reasons we built the Centrica brand is because we have a core proposition of taking care of most of the central needs of the home. And Centrica is able to use its existing channels, brands and billing systems to develop its relationship with its consumers”.

Centrica sells everything from central heating covers and ISAs to drainpipe cleaning services and telephone services, and also claims to be the single largest seller of home security services in the UK.

Another analyst says that Centrica will always have advantages over smaller, regional energy companies such as Scottish Power. He says: “It would prove very expensive for the likes of Scottish Power even to try to match the consumer recognition of well-established Centrica brands. The kind of advertising campaigns that Centrica or even npower invest in, would not be possible for a utilities company such as Scottish Power”.

Peter Bennell, in charge of sales operations at TXU Europe, says: “What does Scottish Power really mean to its customers and why would they want to buy telecoms from it? Most gas and electricity sales do not happen because customers wanted to buy but because these services have been sold to them.”

TXU Europe, which owns Eastern Energy and Norweb Energi, is also looking at the possibility of rolling out telecom services.

Earlier this year rumours were rife that Scottish Power was planning a major ad campaign to raise awareness of the brand. Insiders now say such a move would be too expensive for the company and plans for a branding exercise have been shelved for the moment. The company has also been forced to make cuts elsewhere and is on the verge of shutting down its high-street retail outlets, but not its out-of-town sites. A Scottish Power insider also claims that the company decided to halt attempts to diversify into other areas because it was unable to attract the necessary investment.

Bosbery believes Scottish Power encountered difficulties in attracting energy customers to its financial business because it was online.

“Virgin Energy started off as an online energy company but eventually had to go through traditional modes like door-to-door selling to attract customers,” he says.

Industry insiders also say Scottish Power dropped its proposed telecoms and financial services “because of a mismatch of expectations between the two partners”.

Waugh says: “Joint ventures can be quite complex. But we manage our various businesses ourselves. If we have a partner, then it is only for the back-office support.”

Despite Scottish Power’s return to its roots, most energy companies remain determined to press ahead with their expansion into other domains and some insiders believe financial and telecom services are only the beginning.

As one industry insider puts it: “The energy companies could now be considering stretching themselves further and might eventually offer home-cleaning services too.”

It remains to be seen whether the new products and services will be able to generate sufficient returns for the energy companies, or whether other companies will take their cue from Scottish Power and end up blowing the whistle on cross-selling ventures.

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