“Npower-SSE, Watch out for that ICEBERG”
With the mud yet to settle on the proposed merger of npower-SSE’s retail division it might be a bit early to prognosticate on the likely success or failure of the proposition; but it’s worth having a stab and encouraging some debate on the matter. Before we do that it is helpful to provide context, and nothing provides context like an anthropomorphic analogy.
In attempting to describe the strategic positioning, or lack thereof, of the traditional Big 6 retailers, as seen from an interested and invested bystander’s perspective, I have alighted upon, rightly or wrongly, the analogy of polar bears on an ice cap. On this ice cap are six bears, an abundance of seals, and a step ladder. Seals have been plentiful for years although there has been an accelerating thinning of the population. None of the bears have seen the edge of the ice cap and don’t like travelling to the coast as it’s pretty windy and you might find something unpleasant when you get there. So they hang about the centre passing a few seals around. Periodically one of the bears is sent up the ladder to check whether the edge of the ice cap is in view – it hasn’t been for 15 years.
But one day, no-one quite remembers when it was or who was up the ladder at the time, the edge of the ice cap had hoved into view. But there is nothing to worry about surmise the bears. There are still plenty of seals, the ice-cap is still massive and there are only six of us. As the months roll by the trip up the ladder brings with it ever more trepidation. The edge is looming closer and the seals have started to dive off into the sea in ever greater numbers seeking out new breeding grounds on smaller more hospitable (and stable) icebergs. There comes a point when the smallest bear finds itself missing a meal periodically. How long does it hang about on the iceberg before striking out on its own into the perilous sea in an attempt to create a new space for itself where the seals will once more flock to its shores? How long do any of the bears wait?
As it stands that ice berg has shrunk by some 20% in 3-4 years but the bears are still planted in the middle; deploying a strategy that vacillates from one that can loosely be defined as one of blind hope; to one that is a variant on rearranging the deck chairs on the Titanic. And this week we learnt that two of the bears have decided to share a house and team up. Which will probably mean they survive longer than the 3 small bears. But it doesn’t alter the fact that they are still in the middle of a shrinking ice berg……
I am consistently amazed by how little the incumbency in the market really understands not only the threat that is posed by the new entrants; but the means by which they have arrived on the scene; and the reasons for their success. Most employees at these legacy businesses know nothing of Utiligroup, or Junifer, or Ensek and understand even less. But they should. Because these businesses, along with CNG, E24, BP (yes them) and others are helping these new entrants be smarter, nimbler, faster, more innovative and cheaper than the Big 6.
The media has consistently got it wrong when they have focused their guns on the Big 6’s profitability. That’s not the problem; in fact if anything the relative lack of profitability of the retail divisions should have long ago flagged up the more systemic issue of the inefficiency endemic within these businesses to a greater or lesser degree. One of the problems that has long beset the companies (notable exception of BG who were handed the golden ticket of being the single gas monopoly supplier operating in a world of 14 smaller regional electricity suppliers) has been that in their efforts to scale through acquisition they now have unwieldy and aged systems cobbled together with “sello” tape and bits of string. Their people and functions are geographically spread; the businesses are so silo’d as to be functioning almost as 4 independent business verticals (generation, residential, SME and I&C) that don’t understand each other; and critically they are wedded to an economic reality that to survive needs 70% +/- of their residential customers to be on an SVT or equivalently priced tariff that has at its heart an apathy premium that is massive and simply unsustainable.
So will the merger solve any of these problems or move the strategic dial at all? Highly unlikely although it may well provide a stay of execution. SSE have more customers on SVT than any other legacy supplier. So they have the most to lose when their customers wake up. They have delivered better customer services than their legacy peers but context is everything; their service rating when compared to most of the new players is still pretty woeful. They also have a significant SME book that, by all accounts, isn’t coming over to the new entity. That has an impact on hedging given the tendency to merge the domestic and micro-business books in most retailers (it helps with shape and the like). Npower has a strong track record in I&C but a less than stellar one in either SME or residential and their customer service issues have been well documented. Many of their problems stem from the ongoing struggles with the multiplicity of systems inherited from the old Midlands, Yorkshire and Northern acquisitions all being bolted onto the old National Power edifice. And it is safe to say that the SAP deployment has been horrendous. How exactly will the attempt to merge, once again, with yet another company and systems (Southern, Hydro and SWALEC systems all buried somewhere in the bowels of SSE as well no doubt) bring about a revolutionary new company that is lean, mean and ready to fight with fitter, younger, more dynamic companies?
The consistent beatings taken by the legacy suppliers in the media have also made these companies extremely risk averse. So not only do they have legacy issues around systems and processes, but they also have an inbuilt reluctance to be the first, second or even third mover. The new entrants take considered risks and are, more often than not, rewarded for it. Yes, the larger companies can point to a quite ridiculous level of government intervention in the market that places disproportionate obligations on their shoulders; whereby energy suppliers are effectively being deployed as surreptitious social engineering arms of either BEIS (previously DECC) or the DSS. They can also point at the fact that some of the new suppliers are happy to walk naked into the sea hoping that this time their flip of the wholesale market coin does not deliver another French inspired short term price spike (or equivalent disaster), which obviously benefits them in a benign market and buries them a la GB Energy if it isn’t. But that sword is double edged because the corollary is that smaller suppliers have a substantially more challenging time of it in the event that they do want to hedge; they have less collateral, no track record and are, as a consequence, clipped at every turn. However none of the mitigating circumstances above, valid though they may be, are enough to explain the precipitous fall from grace in recent years.
So in the short term the merger may well deliver some financial benefit to city investors, principally driven through the streamlining of back office functions and the significant redundancies that are likely to follow at either npower or SSE retail; but it doesn’t solve the longer term problems. So potentially a pile of people are going to lose their jobs, sacrificed at the alter of staying on the ice berg just that little bit longer than the other bears.