Home services and energy retailers

Utility Week explores the allure of home services for energy retailers. Could this diversification route offer suppliers a new lease of life, and who's best positioned to succeed in this growing arena for competition?

In a new premium report on energy supply and service growth, Utility Week found high ambitions among retailers to transform customer relationships, overcome trust challenges and attain sustainable profitability through the provision of a range of new digitally enable “home services”.

Interviews conducted for that report, echoed the expectations of market analysts, that strategically developed services which complement and optimise the assets of the legacy business, could allow retailers to rise above an undeniably challenging environment in the UK and realise a new lease of life.

So what characterises the strategies of the most assertive in home services, and what developments might thwart these plans?

The companies interviewed for Utility Week’s report were all clear that their new and expanding ventures into home services provision are motivated by a will to deliver better value to customers.

But while this altruistic intention may indeed be a consequence of their strategies in this arena, there are also more tangible business reasons behind the splurge of supplier investment in home services that we saw last year.

Intensifying pressure on domestic energy retail margins, and an increasing need for suppliers to differentiate themselves from a growing pack of peers, have made a new approach to attracting and retaining customers imperative.

Home services appeal, since research and the experience of pioneers – both in energy and other sectors – show that a shift to services can dramatically reduce customer churn, while increasing satisfaction and accessing bigger and more sustainable operating margins.

Dutch Utility Enenco, for instance, found that after achieving a high degree of market penetration for its smart thermostat and associated smart home management services in 2016, it saw customer churn drop by 60 per cent and overall NPS scores soar by 30 points.

In the UK, British Gas – the most established utility-home services provider in the market – has consistently seen its services division outperform its retail division both in terms of customer satisfaction and operating margin, despite a falloff in the market for boiler insurance products after 2013.

What’s more, the scale of opportunity to gain these kinds of business benefits via home services has recently ballooned.

Advances in mobile technology and data analytics, uptake of electric vehicles and the rollout of smart meters, mean that the gamut of home services suppliers can now offer, reach far beyond the boiler installation and servicing products that British Gas has dominated for so long.

Perhaps surprisingly, market and consumer research also suggest that energy suppliers – despite their poor public image and uncomfortable relationship with customer trust – are well positioned to optimise the home services opportunity.

Arthur Jouannic, principal analyst at Delta Energy and Environment tells Utility Week, “Energy suppliers have a lot of customer legitimacy for energy services – especially when positioned as an energy efficiency advisor – and therefore also broader home services.”

He adds that home services offer a truly promising prospect for energy suppliers to respond to increasing competition. Home services, he says, will allow suppliers “to differentiate themselves to keep customers” and “generate more revenues out of those who stay with them”.

Who’s best positioned to win?

But which suppliers stand out as having the best chances to become top dogs in home services provision?

Traditionally, Centrica has been the favourite of analysts. The huge market share enjoyed by British Gas, along with its established field force of engineers have allowed it to dominate the UK’s limited home services market – primarily revolving around boiler installation and servicing offers – to date.

In 2017, British Gas installed around 100,000 boilers in households across the UK. Meanwhile, its closest installation competitor, Home Serve, achieved a relatively meagre deployment of around 10,000.

Furthermore, beyond boiler services, Centrica got ahead of the game in expanding its ability to serve customers in their homes back in 2004, when it acquired plumbing company Dyno-Rod.

Centrica has made no secret of the fact that it now considers its future to be wed to service development. In 2015, following a board ranging strategic review, it published business transformation plan which began a process of fixed asset divestment alongside significant investment in newer ventures, like its Hive thermostat and associated connected home products.

Taking all these factors into account, a 2016 study of the home services market conducted by research company Lazarus placed strong odds on the firm’s ability to continue dominating the UK home services market.

It’s report The smart shift to services commented: “We believe Centrica has a clear competitive advantage over other UK utilities given its existing expertise and willingness to innovate. The transition from a declining commodity business to an expanding technology-based services business could lead to a material rerating of the group.”

And Centrica’s UK competitors agree. In interviews conducted for Utility Week’s home services report, industry leaders unanimously recognised British Gas as “the one to beat” as they too set out to develop competitive propositions in home services.

Overthrowing the natural order

However, Centrica’s leadership position in the UK home services market is not unassailable. There has been a decline in its traditional market for boiler and plumbing cover since 2013, and last year British Gas haemorrhaged more than 800,000 retail customers in a four-month period, causing its share price to plummet and significantly reducing its target audience for the upsell of its established home services.

The erosion of market share – suggesting the long-standing British Gas brand advantage may be losing its touch – and a stagnation in the market for traditional services undoubtedly contributed to Centrica’s decision to launch Local Heroes in 2016.

This platform for connecting customers with recommended local tradespeople and providing instant quotes for household jobs deliberately targets a new, younger demographic than has characterised British Gas’s customer base in the past. According to Mat Moakes, head of Local Heroes, around two thirds of the platform’s users so far have had no existing relationship with British Gas.

The launch of Local Heroes also marks that start of a new “on demand” approach to providing customer services, as opposed to the old insurance-style model which commits customers to regular payments over an extended period.

Moakes says this reflects a growing shift in consumer preferences, away from services which demand monthly fees and towards those which use a pay-as-you go model. “Typically this relates to younger customers who are tech savvy,” he says. “What they are trying to do is get the equivalent service that they would on Just Eat for a take away.”

British Gas has invested heavily in an aggressive marketing campaign for Local Heroes, aiming to quickly establish it as the platform of choice for making connections between consumers and tradespeople.

But in this new, increasingly diverse and digitally enabled market, its fair to say that the attributes which allowed Centrica to dominate home services in the past count for less. In short, there is a window of opportunity for other players to establish themselves as rivals or leaders.

And they have not been slow to do so. Home Serve, a specialist in home services and the closest rival to British Gas in terms of boiler installation and servicing, also sees on demand home services as a big growth opportunity.

To assert itself as a major player in this market, it completed an acquisition of Checkatrade in late 2017, bringing the UK’s favourite platform for identifying and verifying the credibility of trades suppliers under its control.

A host of other deals and investments reflect Home Serve’s determination to outpace British Gas in home service growth – and chief executive Richard Harpin is keen to partner with other energy suppliers to achieve this goal. He observes that many suppliers have tried and failed to sustain efficient home service propositions in the past, but believes there is much to gain by combining utility brands, and their relationship with customers, with Home Serve’s honed capabilities in marketing and service delivery.

Not all suppliers will be attracted by the idea of delivering home services through partnership however. Some may choose to develop proprietary technology platforms, as British Gas did for Local Heroes, while others like First Utility which took an equity stake in trades recommendation platform Bizzby in October last year, will favour acquisition.

It’s worth considering too that trade connection and guarantee services are far from the only new growth opportunity for home services, and some energy suppliers will focus their efforts elsewhere in order to define their competitive proposition.

While 2017 saw many suppliers grab for a share of the trade recommendation and accreditation market, Ovo Energy, concentrated on refining its ability to provide end to end smart home management.

In particular, Ovo has invested to ensure it is able to include smart management of electric vehicles in its home services portfolio. Its acquisition of VCharge in February 2017 gave it a platform for supporting demand response services to the grid and later deals with Chargemaster, Charged EV, Indra Renewable Technologies and Nissan have all added to its profile as a home services provider for a flexible, low carbon energy future.

Ovo is not without a foothold in boiler servicing following its acquisition of Corgi Homeplan in May 2017 and, unlike British Gas, its retail customer base is growing – it now has almost one million customers, bringing it on par with First Utility as a challenger brand with clout. In short, Ovo’s ability to make a distinctive mark in the UK home services market looks promising.

Who might energy suppliers loose out to?

Of course, the ultimate winner in home services provision in the UK, and further afield, may not be an energy supplier at all, nor even a specialist provider like Home Serve.

As in many markets, the real competitive threat emanates from global tech giants like Google and Amazon.

With regards to UK home services, interviews conducted for Utility Week’s home services report identified the latter in particular as a potential disruptor. The launch of Amazon Echo in the UK, with its voice-controlled interface, Alexa, lies at the heart of this perception, and not without due cause.

A consumer survey conducted by Utility Week in summer 2017, in partnership with consumer research firm Harris Interactive, found that, just months after its launch in the UK, Amazon Echo had usurped both Nest and Hive smart thermostats – which have both had several years to establish themselves as smart home essentials – as the favoured smart home technology for consumers.

It’s a finding backed up by research from Radiocentre, the trade body for commercial radio, which found that six months after its UK release, Amazon Echo had made its way into 9 per cent of UK households – that’s around 2.4 million homes.

The UK growth rate for Amazon Echo is only expected to accelerate in 2018. By the end of the year as many as 40 per cent of households may have purchased a voice controlled smart home assistant, according to Radiocentre, with Amazon Echo accounting for the lion’s share.

As yet, the explosive success of Amazon Echo has limited implications for smart energy and home services, since Alexa’s energy “skills” are in their infancy, relatively speaking. It’s safe to assume that this situation will soon change however, with a strong chance that individual supplier efforts to sell connected home management services direct to the consumer will be caste into the shade.

Then too, it’s worth noting that Amazon has been dabbling in the provision trade recommendation-style home services in the US. If it can overcome some snagging issues around the business model it is trialling, and takes the decision to expand this operation internationally, hooking it into Amazon Echo, the slice of the pie left for other market players to compete over might be small indeed.

It’s not a risk that today’s home services players are unaware of. But rather than letting it get them down, contributors to this report expressed a strong determination to grab as much early mover advantage as they can, before Amazon or another of its ilk blots out any chance of competition.

Indeed, some interpreted Amazon’s interest in augmenting Alexa’s energy-related skills and persevering with a trades connection service as a positive indicator that there is real value to be realised in the home services market.

Ed Kamm, managing director of First Utility observed: “If Amazon and Google move in, it will give this [home services] category instant credibility. They move anywhere they see value, so if they aren’t looking at your market, you should probably worry about the value in it.”

For the moment however, Kamm believes Amazon and Google are “probably focussed on bigger opportunities” leaving time for others to extract value and build market presence.

Home Serve’s Harpin agrees: “Everyone should be worried about Amazon and Google. We use that pressure to motivate fast growth, to pursue acquisitions which help us push beyond what would be possible via organic growth…we need to stay ahead.”