Is there a white label way for water?

Many companies are keen to be active in the opening of the water retail market, but have an investment dilemma. Rahul Gupta asks if white labelling could offer them a commercially viable option.

The structure of the future non-­household water retail market in England is becoming clearer. Ofwat and Open Water are providing ever more information on the requirements for market opening in 2017; water companies and new entrants across the UK are rapidly defining their approach to competition. For many, a nationwide competitive water retail market is an attractive proposition, with a potential market size of around £2 billion.

Agile retailers are already scouring the country for the most profitable customers to target, while at the same time multi-site organisations are evaluating the benefits of consolidating their service with one single provider. A consistent nationwide service is expected by customers and great change will be required for water companies in order to provide this.

But for many, the expansion of retail competition brings a major dilemma. Many companies are keen to be an active player in the market, but recognise that this would require significant investment, with no guarantee of success in a highly competitive market. How can companies address this conundrum?

One strategy currently being evaluated by many water companies and new entrants is “white labelling”. This is common across many industries and involves outsourcing many elements of a process to an organisation with greater operational capabilities, while using the brand to attract and retain customers. At its most extreme, the entire function can be outsourced and just the brand name used, but there are intermediate steps whereby, for example, the direct customer interaction could be retained.

If we consider the strategic options available, it is clear to see why many water retailers are currently considering a white label approach to the new water market.

Firstly, to expand operations and compete nationwide poses many problems for retailers in their current form. Historically, water companies have operated in their allocated region and have required limited investments to retain and attract new customers. While this approach provides commercial opportunities such as cross-selling of services, achieving this state of maturity on a nationwide basis will require significant investment in infrastructure, people and processes. This tactic provides no guarantees of profitability and customers will vote with their feet if service levels are not consistently high enough or if they are provided with more attractive offers. As companies lose customers, their fixed costs will erode the margins and could drive them into loss.

For water companies with less appetite for risk, retail exit may be enticing. Although not yet fully defined, this would likely result in all legal duties relating to the provision of retail services to non-household customers being removed and transferred to another licensee. This provides a get-out clause to water companies without the appetite to invest in the infrastructure required to keep up with a market that is likely to develop rapidly.

Exiting the market will provide clearer focus on core business operations, ­freeing up valuable resources required for the ­delivery of AMP6.

For organisations looking to find a middle ground between investing in full competition, and the point of no return posed by market exit, white labelling may provide a low-risk option. Through effective contractual negotiation, incumbent retailers can retain rights to cross-selling of related products, or even open up entirely new revenue streams by taking advantage of their delivery partner’s existing capabilities.

White labelling has been successful in a wide range of sectors with customers often unaware that their product or service is a rebrand of that provided by a different company. For example in financial services, Post Office Money sells products provided by Clydesdale Bank. In telecoms, Tesco uses the O2 network and in broadband, John Lewis repackages the Plusnet service.

Brand recall in the energy sector has seen both M&S Energy and Ebico beat SSE in the 2015 Which? Switch energy satisfaction survey, despite being white label products. In fact, the practice is already being used successfully by many regulated water companies to sell water efficiency products online through Save Water Save Money.

However, recent comments made by First Utility to the Competition and Markets Authority (CMA) have focused the spotlight on white labelling. First Utility asserted that large suppliers “may be using their white labels as a tool to simply switch on and off aggressive acquisition tariffs, whilst leaving disengaged consumers of the licence holder on a high-priced standard tariff”. The energy market is very different from the fledgling water non-household market and Ofwat will have the benefit of guidance from the CMA conclusions on the issue – however, this does indicate that white labelling should not be considered an entirely risk-free approach.

It is clear that white labelling of water services presents an opportunity to incumbent suppliers that should not be overlooked. As April 2017 creeps ever closer, water companies will have to decide for themselves the scale of their respective investments and their approach to a competitive water market. If the rest of the utilities industry is anything to go by, white label water will have a place in that market sooner rather than later.