Critical mass in the UK energy market

Npower’s capture of 1.6 million electricity customers in an asset swap with Northern Electric heralds the endgame for consolidation in the UK energy market. The survivors will need strong brands.

A &£1bn asset swap between Innogy and Northern Electric last week, which hands an extra 1.6 million domestic electricity customers to the former’s npower arm, suggests that it is easier to buy energy customers wholesale than it is to persuade individual households to sign up to a new supplier.

The deal, under which Innogy acquired Northern’s retail customers in exchange for Yorkshire Electricity’s distribution business and &£742m of debt, is seen as the beginning of the end of consolidation in the deregulated domestic energy market.

But it raises questions about how successful energy providers will be in creating brands that customers will trust, and whether selecting an energy supplier will ever be anything more than a choice based on price.

Npower intends to gradually move the Yorkshire and Northern brands over to its own branding (MW last week), but this strategy risks throwing away the prestige of the brands it has acquired, and could be seen as forcing the npower brand on reluctant consumers.

But npower head of brands Kevin Peake says: “Yorkshire had fantastic prestige, but outside its home region it was not very successful. We will still use the Yorkshire and Northern brands, but if the npower brand is strong enough we may replace them.”

He says research shows consumers are “pragmatic” about brand switches, but they expect a replacement brand to provide good service and prices.

The balance between the local branding of the former regional electricity companies and the establishment of new, national brands is a tricky one.

TXU Europe has decided to discontinue its Norweb Energi and Eastern Energy brands and integrate the two businesses as TXU Energi, with the new brand to be launched later this year through a campaign created by Roose & Partners.

London Electricity, on the other hand, is considering keeping the LE brand in London but using Virgin Energy, of which it now holds 75 per cent (MW July 12), nationally.

But such a strategy risks missing out on some of the economies of scale enjoyed by single brands, especially as local brands are unlikely to survive for long in the present climate.

The demise of regional brands could be an advantage for new brands such as npower and Virgin, which can start their marketing efforts from a clean slate, without being bogged down by bad memories of profiteering and poor customer service associated with some local suppliers.

Datamonitor head of research Iain Bosbery says consolidation could be complete within six months, and will be followed by a flurry of branding campaigns as players seek to establish their positions in the market. “In six months there will be six big players who will start to hammer home their brands,” he says. “Once they are established, there will be nowhere else for them to go as the regulator won’t allow further consolidation.”

To keep up with British Gas Trading, claims Bosbery, rivals are going to have to establish national brands and “really crank it up. It is going to be cut-throat”.

The big six energy suppliers are likely to be British Gas Trading with 18 million customers, followed by npower with 7 million. TXU has 5.5 million customers; Scottish & Southern has 5 million customers in Scotland, Wales and England, London Electricity (which owns energy retailer SWEB) has 4 million; Scottish Power has 5.5 million; and lastly Powergen – perhaps the strongest brand after British Gas – has 3.5 million customers.

Only a small proportion of the big six’s customers have been won over by the power of argument: the majority have been bought through big acquisition deals, or have simply not bothered to change supplier since deregulation.

There is little evidence that brands are making any difference at all to the energy market. Suppliers know that unless they successfully build brands, the market is doomed to become an attritional slog of shaving prices, knockabout advertising attempting to prove competitors are more expensive and aching feet for the massed armies of door-to-door sellers.

Thom Newton, marketing director of branding agency Bamber Forsyth, which has just carried out a study on brand values in the utilities market, says: “I don’t think [the energy companies] have worked out a clear long-term strategy – they have concentrated on the short term. The only three companies that have really thought about branding – British Gas, Powergen and npower – are trying to play up service in a market that has been entirely price-driven.”

But these efforts have, as yet, come to little. British Gas Trading has managed to hold on to 70 per cent of its gas customers since deregulation, but has only been able to attract electricity customers through a heavyweight ad campaign trumpeting its pledge to keep prices lower than local suppliers. The company’s own research shows that 77 per cent of people who switch (6.34 million of the 20 million gas customers have switched suppliers, as have 7.8 million of 24 million electricity consumers) do so because of price – only three per cent of gas users are dissatisfied with the service they receive.

All the big players dream of becoming “household” brands, catering for all the basic needs of running a home – energy supply, telecommunications, insurance – and comparable to the supermarket giants in terms of size, brand recognition and customer loyalty. But experience from other sectors such as banking, which have attempted this type of cross-selling of products, shows that such an approach still has a lot to prove.

Npower has ploughed over &£20m into making its brand well-known, with heavyweight advertising and sponsorships including test cricket and ITV’s The Bill drama series. But the fact it had to buy 1.6 million customers (at &£275 per customer, each of whom produce &£30 to &£40 profit a year) in one swoop indicates what a long slog it would have had had it recruited them organically.

The company is investing &£45m in the Siebel marketing system, which will permit call-centre staff to run data about customers together and have information about all their npower accounts. This, the company believes, will bring the day closer when the full benefits of cross-marketing of products can be realised.

But to many observers this still appears to be a far-off promise. The latest figures from Ofgem show gas switching is tapering off, though electricity switching remains buoyant. The utilities providers must avoid replicating the car insurance market, where customers shop around each year for the cheapest deal and there is next to no brand loyalty. But as with car insurers, it is hard to see who will be prepared to take the first step in putting service over price and loudly proclaim that they are “reassuringly expensive”.

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