As announcements go it was pretty low key, but 2nd March 2017 may well go down as a
landmark date for the water sector in England.
On 2nd March Open Water released confirmation that the Environment Secretary has given
the go ahead for business retail market opening on 1 April 2017. With a few short days until
that landmark Saturday, what beckons for this sector?
The rules have been pored over, the systems have been tested and assured and the market
players (some old and some new) are standing ready to enter this brave new world. In the
words of the Open Water note:
“More than 1.2 million eligible business,
charity and public sector customers are set to
benefit from better service, increased value for
money and improved water efficiency when
the new market launches. It is estimated the
industry shakeup will deliver up to £200
million worth of benefits to the economy and
customers, including better service and
choice.”
The industry shakeup is already well established. The water retailers from North of the
border (Business Stream and Castle Water to name two) are ready to bring their brands of
water retailing to business customers in the South East. Even William Wallace didn't
venture that far South. Well not until his infamous demise at Smithfield.
Their Southern counterparts have also been busy. We have the newly created Waterplus
merging the retail sides of United Utilities and Severn Trent and now busily developing new
water broker networks and secondary markets, while the smaller scale merger between
South West Water retail and South Staffs retail awaits only approval. And the business retailarms of Anglian Water and Northumbrian Water are the latest incumbents to join forces in
this ‘Wave’ of corporate activity. On the other side, some established water companies have
facilitated some of this shakeup by deciding to exit the business of doing business retail.
Shake ups in themselves can be cathartic once in a while, but what can we really expect
post 1st April? The emergence of a brave new world or same old same old?
Two factors seem key to determining which outcome seems most likely.
1. Awareness
“Water is open for business” is the strapline promoted by Open Water. The doors may be
open from 1st April, but do those 1.2 million eligible customers know where to find the
doors and if they do, have they any desire or time to take a peek at what lies beyond those
doors?
With large scale market transformations there is always an element of Say’s Law at work;
the supply side has to work hard to bring forth the demand. Choice might well be good for
these 1.2 million customers but they have to know it and want it.
Most evidence – even current evidence - we have seen suggests awareness on the demand
side still remains extremely low and limited. A limited number of regional (3) workshops
less than a month before market opening combined with some social media activity might
catch the attention of a few but it will be only a very few. A nationwide launch would be
deserving of nationwide attention on mainstream media like TV and Radio. Both notably
absent to date.
So the awareness push appears very much a slow burn rather than a big bang, and perhaps
from the view of ensuring systems and processes bed down in real time there is some sense
to that.
2. Scale
A slow burn is likely to translate to a slow take-up. And that means any water retailer
starting day one in this market with an empty customer book is most likely onto a loser. No
surprise then than the new serious movers and shakers in this new market will commence 1st
April with established customer books. But the million dollar question is can new larger
scale players like Business Stream and Castle make their acquisition investments pay in this
new market?
In this regard all market players will have to work with the retail margins that Ofwat re-set
as part of its PR16 determinations for business retail. Those determinations attempted to
reconcile the objectives of protecting customers (particularly those not switching) from
excessive price increases as well as making market entry a worthwhile venture. From a
headline perspective retail (gross) margins of 5% and just over 3% for larger end customers
suggest this is a market that offers at best slim pickings. If for every £100 of retail business
you hand-over at least £95 to your wholesale supplier, fashioning an economic return from
the remaining £5 could end up taxing even the most creative mind.
The answer to this conundrum we suspect ends up being not so creative. In a fundamentally
low margin activity, maximising sales volume and scale becomes the lever to exercise. The
consolidations that we have already witnessed in this new retail market, therefore, are most
likely only the beginning of that trend. And in the context of a static, largely inert customer
base still unresponsive to new offerings and promises of value added the need for such
consolidations will only rise.
So our best guess on how this market will evolve is that those 1.2 million eligible customers will quite quickly see their retail alternatives and options narrow quite noticeably to a smallish number of scaling up retailers – perhaps less than 10 within 24 months of market opening. Maybe this brave new world will indeed just end up being same old same old in the water sector.
