The English Water Market - 2018
MOSL - the Market Operator for the competitive non-household water market in England - published its latest market figures last week, covering December 2018.
I thought I'd take the opportunity to look at what has been happening through the calendar year... I'll take a deeper look at trends & activity in April, as the market turns two years' old. This article is based on SPIDs (Supply Point IDs), where most sites have one for water and one for waste - with their being 2.7million overall.
As usual, the source data used in this article comes from what MOSL publishes each month, which can be found here:
Why focus on switching?
In short, because switching changes the status quo and looking at that points to current and future trajectories. Plus overall market shares are slow moving.
The chart below shows the current market shares of various retailer segments, based on whether retailers are new entrant or incumbents. Here, I am differentiating new entrants between those on a "growth from zero" strategy (e.g. Everflow) from those that bought into the market through acquisition and are building on that organically (e.g. Business Stream).
For the incumbents, I differentiate between large and small based on whether they have over 4% of market share or not, usually a function of whether the associated wholesaler is water-only ("WOC", small) or both water and waste ("WASC", large). Some incumbents have merged also: where this happens, I treat them as one company (i.e. Wave as 1 retailer, not the 3 listed in the data), keeping consistency with the cases where MOSL already consolidates constituent parts.
The combined market share for the two 'incumbent' categories has only decreased by 0.8% (large incumbents down from 69.3%; small incumbents up from 3.4%) since market opening. The pre-competition position was completed by the acquisitive new entrants, whose market share has since fallen from 27.3% (depending on how you handle one post-market opening M&A case).
In aggregate, a decline in legacy market share (whether through incumbency or M&A) is inevitable: new business has to come from somewhere, after all. But of course the experiences of individual companies can buck or accentuate that trend. Even if there were no new entrants, some increase in small incumbents relative to large ones was expected. Why? Because of what I call "WOC jeopardy" and those small retailers tend to be formerly part of water-only companies.
Historically, many WOCs were billing for both water & waste on behalf of the local sewerage provider, at least until the run up to market opening. There is risk for these former WOC companies, given that they share a customer relationship with their sewerage counterparts, but this prior relationship makes this is a favourable cross-sell opportunity. Conversion of this dual-supplier to single-supplier arrangement has been a strong driver behind switching in the market and improving the service mix is crucial, I think, to the long-term viability of these former WOCs. (Conversely, I think being a water-only new entranthas no long-run viability at all).
Which groups are gaining?
If that chart tells us where we have got to on the market shares since market opening, what changed in 2018? Firstly, let's look month-by-month at who is accounting for the switches.
Large incumbents (5 Retailers; 1 not acquiring, other than through 'win back')
Having significant market share plays well with certain customer groups and large incumbents are responsible for a sizeable portion of the gains. The two peaks in January and March can each be attributed to large seeming outliers - for Pennon and Water Plus, respectively - suggesting the take-on of large multi-site accounts. Otherwise, levels are broadly consistent on a per company basis, though lower in the second half of the year to a small extent. Wave is the only one of this group for which its yearly gains exceed its losses.
Small incumbents (11 Retailers; 9 not acquiring)
The two active retailers in this group are improving the balance of their portfolios, increasing their portions of sewerage SPIDs (Affinity for Business: now 8% Sewerage; SES Business Water: 34%). Not all of this portfolio growth has come through switching* but even so, small incumbents are doing proportionally better than their larger counterparts, in terms of translating their market shares into gain shares, partly due to the upside of that WOC jeopardy.
The other retailers in this group represent a small fraction of SPIDs; in essence, they are managing their regulatory obligations rather than seeking to grow their customer bases.
* Due to timing, there is always a slight disconnect between portfolio and switching values but portfolio can also increase through sites coming into the market, whether through data cleaning, new developments or change of use (and, conversely, market share can decrease for similar reasons). This can be seen where portfolio growth far outstrips net switching gains over time, consistently.
New Entrants - Acquisition & Growth (2 Retailers)
Having bought significant market share, these retailers share much in common with the large incumbents. As such, they have on one hand the credibility that comes with a sizeable customer base and, on the other, the challenge of having to defend that base. So, like the large incumbents, they account for a big share of both gains and losses.
There is volatility and it is fairly easy to detect the timing of likely large contract wins. Both Castle and Business Stream won public sector contracts early in the year, which will create episodic increases as those sites cut-over. The spikes late in the year are mostly down to Business Stream successes - the next few months will illuminate whether this is a new norm in overall activity or through more large contract examples..
Castle's figures include those of Water Choice, which it acquired during the year. The Water Choice gains to that point were largely from Castle to create a dual-service relationship but the acquisition achieves that same outcome, just without the need for the switch, explaining some of the tail off thereafter.
New Entrants - Growth from Zero (15 Retailers; 4 not acquiring in 2018)
This group has taken a significant share of the gains throughout the period. Indeed, gain shares are reasonably constant, with the larger cohort having a smoothing effect on any exaggeration that large multi-site contracts can have (while national accounts are perhaps less likely to sign to this group overall in any case).
There are 4 companies that did not gain customers in 2018, plus there are others in the pipeline but not yet registering SPID. Of the 11 that are gaining, 5 signed their first customers during 2018 and all 11 are showing positive momentum. In pure count terms, Everflow and Clear Business Water continue to add the most of the new entrant group, with Everflow now holding a greater market share than all small incumbents.
New Entrants - Self-supply (5 Retailers that have taken on their SPIDs)
Self-supply take-on is by its nature episodic, with a peak of switches on first migration. We see small numbers on a monthly basis for the portfolio businesses (e.g. pubs, coffee shops and hotels that may buy, sell or lease new outlets) but in the main, they follow a "one and done" cycle. Most of the current self-suppliers were already active in the market and had migrated in 2017, with Blackpool Council being the most recent to adopt its SPIDs.
There are a number of self-supply companies yet to take on their SPIDs or that are going through the licensing process.
So how vibrant is the market?
We can see above how much each segment is contributing to the switching but how many companies are active within those segments? The chart below shows how many (or rather how few) retailers it takes to reach 4 levels of coverage: 50%, 80%, 95% and 100%.
50% coverage is achieved by two or three retailers consistently. In practice, this tends to be Everflow and one or two of Wave, Business Stream and Clear Business Water.
In true Pareto style, the 80% mark tends to be achieved by around 20% of the active retailers (discounting the incumbents that are not looking to gain customers), mostly made of large incumbents.
Beyond that, we can see that there is a long tail in terms of a number of retailers adding a small share of the gains. There is a clear uptick in overall retailer numbers in the second half of the year as we see some of the new entrants begin to gain traction.
Momentum suggests that the number of customers being signed up by these new entrants is likely to increase, though with such a large section of the market yet to switch at all, that does not need to be to the detriment of other retailer gains, necessarily. Instead, this developing community may start to drive an overall increase, especially as other market conditions become more favourable, whether within the market structures (such as on credit arrangements) or through improved efficiency (for example, through automation of key industry tasks).