To move forward, Centrica must go back to basics

A first ever fall from the FTSE 100 and the announcement that 5,000 jobs are likely to go as part of a huge restructure – June was a truly remarkable month for Centrica. Once the undisputed energy heavyweight, it now faces a future as a much smaller company, as years of shifting towards a more technology-focused business have failed to bear fruit. It is a wounded beast facing difficult decisions, writes Utility Week’s retail reporter, Adam John.

For years industry observers have joked that “it must be about time for another Centrica restructure”, but historically the company has failed to grasp the root of the issues. As a legacy retailer with a heavily unionised workforce, it’s no wonder previous CEOs have been reluctant to cut as far as they may have thought necessary. Yet this restructure has proved Chris O’Shea will not shy away from tackling deep-rooted problems in the way his predecessor was often criticised for. 

But once the dust has settled, will he continue Iain Conn’s legacy of moving towards the connected home market? Or does the answer lie with “British Gas X”, Centrica’s response to increased competition from the challenger brands? After speaking to several senior industry sources, this is my take on where Centrica can go next.

Too many cooks spoil the broth

“You can’t cut yourself back into the FTSE 100” is how one observer reacted to the axing of thousands of mainly managerial roles, commenting on the fact that while O’Shea’s intentions are to bring more of the company under his direct control, there was a distinct lack of clarity over what this means going forward. Furthermore, the fact there are 2,500 managerial roles to cut in the first place speaks volumes. The challenger brands are not carrying this level of fat, they are not building their businesses in the same way and they are demonstrably more efficient because of it.

After axing thousands of roles, whether Centrica will continue to focus on its struggling connected homes business with Hive or become more focused on the things it historically does well – energy supply and home services – still remains to be seen. Some see scope for combining the two and upselling additional extras such as boiler services to its energy retail customers. This has the potential to work well, both are markets Centrica already has a large presence in and it would make sense to stick with what they know.

A new supplier?

Increased competition is another area that has hit Centrica hard in recent years, with British Gas saying goodbye to almost 1 million customers in 2018 and 2019. By way of mitigation a new supplier, British Gas X, could be the company’s answer. British Gas X was incorporated in 2017 and granted a supply licence earlier this year. It is already available to customers in the form of a 100 per cent renewable matched, digital-only tariff. According to a recent article in The Times Centrica is due to announce the creation of a new cut-price, digital-only supplier in July and while a name is yet to be decided for the new challenger brand, it is thought British Gas X is the trial of this concept. However, according to its website, British Gas X’s platform is currently unable to read smart meters and asks customers to submit their own readings. “Reading your smart meter should be simple” according to the company. It certainly should, with just five years to go until the rollout deadline, getting the fundamentals of meter reading right from the off is essential if any supplier is to prove viable.

In addition Centrica has previously announced it aims to become the cheapest supplier on the market by 2022, and this may be where it sees British Gas X coming into its own.

However, there is still immense value in its core brand – British Gas remains one of the UK’s best-known and trusted businesses. Its reach and familiarity is something challenger brands still covet and O’Shea will be mindful of the dangers of stepping too far away from that.

Centrica has attempted to channel a small start-up vibe previously, which has not ultimately paid off. In 2017 former chief executive Iain Conn referred to the company as a “£15 billion start-up”, in reference to the foray he led into the connected home business. Yet Centrica’s move into the technology market has not taken off in the way it had hoped, with the company not delivering the revenues it had anticipated. Centrica has never really been able to bridge the gap between being a corporate giant and a tech start-up, which again demonstrates why sticking to the basics remains the best way forward.

New blood

O’Shea’s appointment came as a surprise to some, with many believing outgoing Centrica Consumer chief Sarwjit Sambhi would take the helm after Conn’s departure. Sambhi, along with Centrica Business chief Richard Hookway, is on his way out as part of the restructure. Sambhi has been a Centrica stalwart, having worked at the company for close to 20 years. He only recently joined the board however and his departure signals O’Shea’s willingness to do things his own way with his own board.

New blood comes in the form of Johnathan Ford, Centrica’s new chief financial officer, who joins from Homeserve. There is a certain irony in the fact Centrica is about to drop out of the FTSE 100, while energy services company Homeserve is on its way in. Less than a decade ago Homeserve looked to be facing oblivion after being fined more than £30 million by the Financial Conduct Authority for misselling, but it has since turned its fortunes around and Ford was one of the architects behind that. It will be interesting to see whether O’Shea makes much of this going forward and whether he wants Ford to bring his expertise of turning a struggling company around.

There is a question as to whether this restructure really does mark a new direction for Centrica or whether this is more about setting up the shop window for a potential future sale. During the seemingly never-ending search for Iain Conn’s successor, the idea of actually selling parts of the company was mooted. One City source tells Utility Week: “If someone comes along with a good offer, O’Shea will sell anything at the right price”. Others believe a foreign investor looking to get into the UK energy retail market might be an option, as French firm Engie did several years ago.

A sale would not be outside the realms of possibility and it’s clear O’Shea is attempting to simplify the business structure, which will make any future sale easier. The questions that remain however are, who will buy it and at what price?

For now, a return to the FTSE 100 seems a long way off. If Centrica is to return it will have to compete on efficiency against more nimble competitors and find new ways to connect with customers, all under the shadow of post-lockdown challenges. The hard work has only just begun.