End of the line for Centrica’s strategy

With Centrica preparing to ring more changes by jettisoning telecoms arm One.Tel, it appears the group is reduced to its former core offer of energy production and supply.

Having attempted to be all things to all consumers, offering financial services through Goldfish and car breakdown recovery via the Automobile Association (AA), Centrica seems to be refocusing its energies on its British Gas domestic fuel division. Though it has stayed tight-lipped on plans to divest One.Tel, observers feel the group has over-reached itself and could be paring down to offering energy only. Now British Gas also appears to be a target for potential predators, rumoured to include Gaz de France and Russian company Gazprom.

In the mid-1990s, British Gas was renowned for unreliable service, fat-cat salaries and huge financial losses. The brand’s image was poor and the business unprofitable. Centrica was formed after the deregulation of the energy market to bolster the British Gas brand and embark on an acquisition drive. This expansion saw Centrica adopt a strategy of driving growth by offering consumers a range of services focusing on the home and cars.

In 1996, the company branched out into financial services, launching the Goldfish credit card in a joint venture with HFC Bank. Three years later it bought the AA, which was relying on financial services, from loans to home insurance, for the bulk of its business, for &£1.1bn.

In 2001, Centrica acquired One.Tel for &£58m and retail chain Halfords, which was merged into the AA group. The company’s vision, according to Centrica chief executive Sir Roy Gardner, was to cross-sell services from each division. The strategy appeared to be working, as in 2001 the group was returning a profit of &£540m.

But many observers now say Centrica’s vision was flawed, and it was merely creating an unwieldy business that was too disparate to manage effectively. Despite this, it was not alone in looking beyond utilities to achieve growth; Powergen moved into telephony and internet services, while npower also toyed with telecoms.

Interbrand executive director Andrew Milligan says: “Centrica was following a trend. There was an appetite among corporate businesses to stretch a brand as far as it would go. When it bought the AA, in the context of the time, it seemed that it could work. But the business grew too big for Centrica to manage – and it realises that.”

In 2003, Centrica sold its 70 per cent stake in Goldfish to Lloyds TSB, and the AA went to a private consortium for &£1.75bn last year. Centrica built the AA brand significantly. Before the takeover it was making &£6m a year, but by 2003 this had risen to &£93m, and membership grew to 15 million. But Milligan claims the AA brand became diluted, adding: “Centrica did manage to cross-sell products to consumers, but too many are conservative – they don’t want financial services from the AA, they want car insurance or motor-related products.”

Centrica spokesman Andrew Routledge says that “selling the AA was not a U-turn in strategy”, as Centrica’s focus was always on energy and offering domestic services. However, he does admit the AA was not core to the business. He says that energy and related services are Centrica’s focus, which would include One.Tel and Dynorod: “One.Tel has grown since 2001, when it made an operating loss of &£97m. Centrica paid &£58m for it, but it is now valued much higher and has more than 1 million customers.”

Routledge refuses to comment on speculation about a One.Tel sell-off, but few in the industry will be surprised if Centrica is no longer hung up on telecoms.