Market View: End of Year 1
Updated: May 22, 2018
The non-household water market in England was opened to retail competition in April 2017. MOSL - the market operator for the sector and manager of the central registration system (CMOS) - publishes some data on activity in the market and has now released the figures for the first year.
The underlying data can be found here: https://www.mosl.co.uk/market-performance/market-charts
Retailer Mix (Customer Gains)
The charts below show how well each retailer group is doing, as a portion of all sales. 'Incumbents' include companies that bought portfolios before market opening, namely Castle Water and Business Stream.
We see that around 1 in 4 of all switches are to new entrants or self-suppliers. We feel that's a decent uptake of new entrants and of the self-supply model - both of which portray a certain degree of confidence in the market.
This is true by both SPID and volume count, though - as you would expect - self-suppliers represent a bigger portion when considering market gains by volume. That will be further reinforced when Coca-Cola takes on its production sites, which will see very high volumes concentrated in only a small number of SPIDs.
But it also sounds a cautionary note that the market is perhaps a little slow if just 3 organisations can account for 5% of all switching (by SPID). Yes, they are large users but they are not exceptional, other than in that they have chosen the self-supply model. There will be other 'high street' companies with high site counts represented in the figures elsewhere.
Brodick Retailer Grid
The Brodick Retailer Grid plots market share against momentum (the difference between gains and losses) as a way of showing who is winning and losing, while also getting a sense of the emerging trends. It takes inspiration from Boston Consulting Group's classic market grid.
We've tweaked the Grid a little recently. Firstly, we've changed the "chasm" point between the top and bottom segments, landing on 4% after modelling the likely market shares after 3-5 years. We've also introduced a "mini chasm" in the bottom half to better differentiate between those just starting out and those really moving away (or towards) zero at perhaps a greater rate. We opted against having two strata in the top segments, not least because when considered on a UK-wide basis, Business Stream's position strengthens further (and we do have a UK-wide version). We've also softened the wording of the title for the "C" category.
Watch out for the different vertical scales in the segments - we still think this is better than using a logarithmic scale but what we gain in being able to differentiate smaller retailers comes at the price of potential distortion. Just be mindful of it, that's all.
Combined SPID and Volume view
In this version, SPID gains and losses are the main focus but it includes the volume data. That way, you can see whether gains and losses tend to be more or less significant by either unit. For example, you may consider that the new entrant gains tend to be more marked in volume terms than by SPID, which suggests a higher level of engagement with larger consumers and a certain amount of cherry picking.
This approach can help with understanding the relationship between SPID counts and volumes. If you take that a stage further and look at average consumption levels per SPID you start to see some clear contrasts in the experiences of some of the new entrants (whereas incumbents' portfolios tend to be far more blended because of the size and diversity of their customer bases).
Let's take a look at 4 models:
Generalist (non-segmentation) retail
Water efficiency (on a retail basis)
Water efficiency (as managed self-supply)
The chart below shows the average consumptions for many of the retailers with a large enough portfolio by both SPID and volume to make a reasonable measurement (for this chart, we've excluded Dwr Cymru, which has a small number of extremely high consumers but does not acquire customers in the market).
First, let's explain the chart. Average consumption per customer is shown for all of the listed companies. The values for incumbents are fairly similar, with their large inherited portfolios having a significant smoothing effect. For incumbents, we reverse engineer from their switching figures to determine what their approximate average was at market opening and the average of both their losses and gains. Losses and gains tend to be higher than the initial position, reaffirming what we see elsewhere that market activity is skewed towards higher consumers, generally. In part, that is because of a "push" approach by retailers to gain those customers; in part it is a "pull" from those customers to initiate the switch. Lower consumers are less likely to be "pull" initiators and hence are going to be under-represented regardless of how much retailers are pushing for their business.
Generalist (non-segmentation) retail - Everflow
Everflow has made rapid progress in raising its market share. The average consumption of their customer base is similar to the typical 'gain' average of the large companies - a correlation that suggests that they have a balanced approach in terms of which customer segments they are chasing (when you adjust for the more discerning, like Business Stream and Water2Business). The averages achieved by other companies may therefore be a good indicator of the potential of a generalist approach, though we may see changes in what consumers are expecting as other models gain more traction. It may yet be that Everflow has enjoyed something of a first mover advantage from putting together a compelling proposition in the early days of the market.
Water efficiency (on a retail basis) - The Water Retail Company
Of course, there are many companies offering water efficiency services but one company giving it a very specific and deep focus is The Water Retail Company. Their very high average consumption rate gives a clear sign of their target market. The high usage is one they'll aim to help their customers bring down, sure, but it also gives them enough headroom to drive the highly intensive support that is needed for this kind of service. This segment will always have many suitors and expertise is going to be of paramount importance. It will be interesting to see how these approaches scale.
Water efficiency (as managed self-supply) - Waterscan
Another model on the water efficiency space has been for self-supply, all of which have gone with Waterscan as their industry partner thus far, with more to follow. The average consumption levels are lower than those of The Water Retail Company's customers - both at single company and all self-suppliers levels - but that tends to be because the companies that have adopted this model so far combine their high usage with a high number of sites, such as hotels, pubs or coffee shops. When Coca-Cola takes on its own portfolio, its huge water usage will be concentrated within a small number of sites. The differentiation between these water efficiency models will come down to preferences for how to interact with the market and the nature of the relationship between the business and its agent (whether retailer or self-supply contractor).
Multi-utility offering - Clear Business Water
The company with the lowest average consumption levels in the chart is Clear Business Water. That may look like a negative but the Clear operating model is a multi-utility offering and as such it stands to reason that (i) the value of the contracts comes from all the services they offer a given customer and (ii) the community they serve are perhaps less likely to be large water consumers and more about the "3 Hs": hygiene, hydration and heat. Clear Business Water has made steady gains, especially in the last few months, so it appears to be an offering that resonates with a certain community. And if that happens to be a community that is under-represented elsewhere - SMEs - then so much the better for customer and retailer.
Studies outside of the data - mainly by Ofwat and CCWater - suggest a need to increase awareness of the market, especially amongst SMEs. There's work to do then, clearly. But from the market activity we see thus far, there are signs of confidence in the market with some very interesting stories emerging. The market has challenges to address to get things working more effectively but a number of companies - incumbents and new entrants - are making real progress and Year 2 stands to be a very interesting one. Perhaps we'll see some M&A activity and more new entrants, while the current companies looking at novel ways to make their mark. But the foundations are there for an effective market - and we think the proof of that is clear.