Can British Gas weather the storm?

Last week Centrica announced it had lost 823,000 customers in four months. It was then hit by a record fall in share price and its worst ever day on the stock market. The papers would have you believe the company’s down and out, but the industry sees things differently. Alice Cooke investigates.

The story wasn’t a pretty one for Centrica-owned British Gas last week. The company reported that it had lost 823,000 consumer accounts in the four months to the end of October. In the wake of that announcement it saw the biggest share price fall in the company’s history, which wiped £1.4 billion off its stock market value. This drop was thanks in part to a £46 million accounting error in North America, but closer to home there were other factors at play…

And these factors came to light hot on the heels of the announcement earlier in the week that the company will drop its standard variable tax (SVT) in the new year, for new customers at least. At the time this looked like a rather obvious pre-Budget attempt to head off government price-capping plans, but with hindsight, perhaps the timing was orchestrated to get the news out before it was entirely upstaged and forgotten.

Perhaps it might be prudent to ask why this happened in the first place. Centrica said customers left due to the supplier’s decision to hike prices by 12.5 per cent from September, which it announced in August – and it chose to do that months after all the other big suppliers, meaning the media had something of a field day. But it said it also lost further accounts because of “collective switch, white-label fixed price and prepayment tariffs”.

A question of balance

It is no coincidence that in the same period that 823,000 people jumped ship, the company unveiled the 12.5 per cent price hike. It said as much in the announcement, attributing 150,000 lost accounts to that and market switching trends.

But this doesn’t tell the full story.

“Add to that the collective switch effect,” says Paul Massara, former chief executive of Npower. He says judging by the figures, British Gas will probably have gained around 5,000-6,000 low margin customers on a collective switch, and then found keeping them didn’t make business sense. They would have been great for customer numbers, but wouldn’t have brought in much revenue at all. British Gas would have been well aware these customers would be contacted and asked whether they’d like to switch to a lower-priced tariff, and it just wouldn’t have been worth their while to offer them all a competitive deal. So, letting them leave would make financial sense, but would have made the previous numbers look over-inflated, and created a jolt in these figures. “It just happens to have been realised now.”

David Elmes, professor at Warwick Business School, agrees, but adds that it is also a question of strategy: “[Centrica chief executive] Iain Conn came in [in July 2014] and gave the company a new direction – one that’s more focussed on giving customers services and choice rather than just commodity products, to help them manage their energy in a more efficient manner. The challenge is that he’s trying to make a transition in the company when the markets continue to be as tough as ever.”

He adds that traditional utility businesses are under pressure, and says: “We’re yet to see the fruits of some of the shifts Conn’s encouraging the company to make – the new services and the ways of doing business that he’s trying to introduce, so he’s had an awkward earnings call where some of the traditional businesses have stumbled, and he doesn’t have the good news yet. That’s what’s happened here.”

Green Energy chief executive Doug Stewart says the price hike announced in the summer didn’t help: “British Gas gained nothing from delaying their price increases until the end of summer rather than putting them up with the rest of the industry. They were pilloried in the press even though they had offered all their customers lower rates for the best part of a year. They gained nothing in reputational terms.”

And Massara adds that the political and technological fields are changing all the time, and British Gas isn’t keeping up, pointing in particular to renewable energies and the potential these have to affect revenue. But adds that this is not a company-wide problem, so much as continent-wide: “It’s an issue throughout Europe – the transition is happening faster than people think, and the whole industry needs to be taking much more radical steps to change with it.”

But in the absence of radical steps, where have the customers gone? “It’s hard to say,” says Elmes, “but smaller suppliers have been winning market share lately, so they may well be spread around the market place.”

If the latest Energy UK figures are anything to go by, he may well be right – more than 600,000 customers switched electricity provider in October alone, taking the total number of customers who’ve done so this year to date, to over four and a half million. A third (32 per cent) of those changing providers in October moved to small and mid-tier suppliers.

The need for speed

There is unlikely to be any knee-jerk reaction from British Gas, says Elmes, and this is a good thing. “Because it’s not that they don’t have a plan. But they do need to be asking ‘is the plan working, and is it working fast enough?’ Because if not, something’s got to change, and soon.”

The plan for the immediacy would appear to be the SVT-scrapping announcement that came earlier in the same week as these results were published – but this doesn’t come into effect until next April, so the fruits of that labour are a long way off.

Hayden Wood, co-founder of green energy supplier Bulb, agrees that speed is of the essence: “Along with the rest of the big six, British Gas will have to take swift action to deliver a different kind of energy for customers if they want to retain, rather than lose them.”

But Elmes says it’s all too easy to be critical of the big six, and that Conn deserves some credit: “He has forged out a clear, different path for the company to move in. The question now is does he have the scale and the speed to support the continued growth of the company – and will the smaller companies beat him to it if he doesn’t?”

With the market becoming increasingly competitive and the threat of a price cap looming, Massara says the time for change is now: “Centrica has to look to re-shape its business model, with new services and new products. The wheels of this are already in motion, but it needs to be doing it much more radically, and much faster.”