Market View: End of Year 1 (Part 2)
The analysis refers to WOCs and WASCs a fair amount. For those less familiar with the market, WOC refers to a Water-only Company and WASC refers to a Water and Sewerage Company (each referring to the wholesaler, in essence). Retail companies that arose from WOCs tend to offer both water and sewerage services now but their starting point was the 'inherited' position of only providing water to their customers, while sewerage was provided by another retailer. Even WASCs have this relationship in areas where their network overlaps with another company but it is most evident in the WOC portfolios.
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:
Year 1 Review, to end of March 2018
On a personal note, I would like to offer my congratulations to those of you in the market and to MOSL and CGI in particular for ensuring that this month is indeed the one year anniversary. When I was part of the Capita bid for CMOS we had a plan and a solution we believed in, of course. But we also had a duty to understand the level of risk and the challenges ahead. So from that perspective, I was impressed with how progress was maintained through the key stages of Market Entry Assurance, shadow operations and market opening itself. Sure, there were some thorny times but it is an extraordinary achievement, especially to those who have seen many major changes in the energy sector beset with significant delay over the years.
Just some small matters like data to get on with now, right?
Anyway, this article builds on our first review of Year 1 and I hope you find this an interesting perspective. The analysis focuses on switching - accepting of course that is not the whole story of value in the market. Furthermore, it looks at individual services switching (SPIDs), which again is only one perspective.
The 'Head to Head' Matrix
One broad assumption you can make with a degree of confidence is who the original Retailer was at "D-1", based on who the associated retailer was in each of the wholesaler areas. That means, therefore, that you can build a matrix of what has been gained by whom and from whom. Yes, there are exceptions but these are low in number and you can gauge the accuracy of the technique pretty well.
Why does this matter? We think a very detailed understanding about what is driving customer behaviours is key to developing services and packages that resonate well with customers. This ought to drive innovation and help reach the under-represented groups (especially SMEs). A more detailed assessment on the market data sets (like in our INSIGHT reports) can do more, obviously. Plus other exercises like those conducted by Ofwat and CCWater will ensure that the voices of customers can be heard in a more direct fashion.
The analysis excludes the small wholesale areas and identifies 122k of the 123k switches. The method means that what looks like a company winning from itself is in fact winning back from another company (and which perhaps explains most of the 'missing' 1k), but the overall accuracy is strong. [Note: most of the Wave-Wave interactions are transfers between Northumbrian and Anglian, rather than win backs].
Follow any former WOC and you will see how the majority of their interactions (in either direction) are centred on their former WASC counterparts. Often the interaction favours the water provider, mainly as an historical function of them usually having the customer interface and billing for both services (even if in some cases this changed leading up to market opening). You can also see this in the Pennon-Water Plus relationship (for example), because the data suggests that South Staffs areas tend to favour Pennon, the parent group for South Staffs (WOC) and South West Water (WASC).
The one former WASC that bucks that "water wins" trend is Business Stream and it is notable that Southern Water (whose portfolio it acquired before market opening) was an exception in that it would bill its own sewerage services and hence had a longstanding relationship with customers in its area. I'm sure Business Stream brings its own capabilities and reputation to that dynamic as well but it's net position is strong against most of the former WOCs it competes against. Indeed, the one exception - SES Business - happens to be one of the few former WOCs to make significant national gains.
Overall, this dynamic appears stronger than suggested in MOSL's switching behaviours chart, though we can see a number of reasons for why that may be the case. It does look to explain some of the reason why there appears a bias to the south east in terms of switching volumes. Sure, London is going to have an effect but there is a high concentration of WOCs in this area relative to other parts of the country also.
The head-to-head wheel looks at how companies tend to do directly against each other using the net positions from the above analysis. It is based on comparing the current position with the logical starting point at market opening, assuming sites were with the wholesaler's associated retailer. Figures are rounded to the nearest 50 to avoid giving a sense of false accuracy (given that there is around a 1% error overall).
It is important to keep in mind the overall population sizes. Castle and Water Plus are the largest two retailers, so it is no surprise that they would be the ones defending the most sites against new entrants and other retailers (especially those with which they share heritage boundaries - and hence customers).
The analysis method means that new entrants cannot lose customers, even if we see that they have in some cases from the detailed statistics. Given that, new entrants are always going to look positive so we have instead grouped them by new entrant retailers and self-supply (and titled "Others" in the chart). The one exception is Everflow, which we have called out separately because of their very high gain rate. Retailers (or groups) are shown clockwise in decreasing net position order, starting with Everflow in roughly the "1 o'clock" position.
When you consider the head-to-head tendencies between companies, a natural hierarchy emerges. For example, Business Stream only loses out to SES Business and new entrants in head-to-heads and beats all others below it in the hierarchy. That principle is true for all positions in the following ladder: the retailer in question tends to lose to each retailer (or group) above but tends to beat each retailer below.
So who is impressing us most from all of that?
OK, so you may just have to visualise the trophies and black tie dinner for yourselves but these are the retailers we'd call out as our teams of the year:
(Champions and Consolidators in the Brodick Retailer Grid)
Pennon has had a solid year throughout, in part driven by good sewerage conversion in South Staffs and Cambridge areas. The same is true for Water Plus: despite being the largest retailer and "there to be shot at", they have made good national gains, while holding their portfolio pretty well. In the last month, however, Wave have made good gains, including flipping the balance between them and Water Plus in head-to-head terms. We expect strong things from Wave as they start to forge their brand, with their CMA approval coming some months after market opening.
But in this group our nod goes to Business Stream: they appear to have established their brand with the former Southern Water customers very quickly and made good progress in converting sewerage-only to dual service while also making significant gains on national contracts, not least in the recent public sector auction.
One to watch for Year 2: You could make a case for any of the large companies but we have 2 in mind, given that Yorkshire is an exceptional case. It has a significant share of the market and any sale would have a major impact, whether that is by acquisition from within the sector or an opportunity for a major new entrant to hit the ground running. Also, Wave, for its strong end to the year and to see how the unified brand plays out.
A fairly straightforward one here: SES Business. Being a former WOC carries an inherent vulnerability, with all your customer base sharing a relationship with another retailer. SES Business has shown the upside of that scenario, demonstrating a consistent ability to sign up the sewerage service, while also starting to make gains outside their heartland.
One to watch for Year 2: Perhaps that depends on how long you consider the likes of Everflow and Clear Business Water to be new entrants (we'll take the easy route and say two years). It will be interesting to see how SES Business builds on this year but our one to watch is Water Choice. They still have a sizeable portfolio advantage over SES Business and Everflow and it will be interesting to see what that differential looks like in 12 months' time.
We could make a strong case for any of the 4 companies that we highlight in the main blog post: The Water Retail Company, Waterscan, Clear Business Water or Everflow. We have gone with the latter because of their rapid growth rate. Sure, we cannot see what compromises may have been needed to achieve that but for a single new entrant to claim around 15% of all new gains is quite extraordinary. Whether you are positive or negative about the number of switches overall in year 1, we have no doubt that Everflow has moved a sizeable number of businesses to the market and that the overall switch count would have been lower without them.
One to watch for Year 2: Again, those four will be worthy of focus in year 2 but some of the other new entrants will start to make inroads into the market, for sure. Plus we may see yet more new entrants, whether completely new startups or established businesses transferring from other markets. So this category will always be an interesting one to observe. But to pick one, we will go with Waterscan. We are keen to see whether (and how) they are able to extend their self-supply stable and what impact that community has.
And our overall winner?
SES Business: We are impressed by their apparent conversion rate to dual service and think that adding around 50% to their SPID portfolio is quite a remarkable feat. They are clearly making good ground beyond the Sutton and East Surrey area, though they are one of the few brands to still retain their geographical roots in their name, albeit in acronym form. There are many others that will rightly consider that they have had successful years but for us, SES Business is the standout performer, even if it may not be the leader on many specific measures.
A final thought
How our INSIGHT can help you: OK, so there are some broad assumptions here based on the public data but we can be far more nuanced with what is happening in the wider market and for your organisation in particular. So if you would like us to help you tell your teams a rich story of the first year in the market or to help build a plan for a successful year 2, get in touch. We can tailor the depth and range of our analysis quite easily.
Thank you for your time.