Brave new world or same old same old?

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 retail arms 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.