As a spectator and adviser, the decade ahead looks exciting, but there will be surprising twists and turns along the way. Energy suppliers – especially old-timers – are on a nerve-racking journey with an, as yet, unpredictable destination. However, one thing is for certain: there is huge opportunity for retailers of all shapes and sizes if they can discover what they want to be as an organisation in the future and adapt now to make it happen.
The current situation for energy players is overwhelming. As recently as 2012 the UK’s “Big Six” had a combined market share of 99%; this has now fallen to 72%. And there will soon be a “Big Five” - with E.ON merging with Npower, whilst the “challenger” Ovo is set to buy SSE to become the second biggest supplier. That’s not to say the challengers are all cleaning up; about 15 new suppliers have exited the market in the past two years.
Figure: UK’s energy retail market: number of suppliers and Big 6 market share
The new government price cap is squeezing margins and stifling investment. Third parties like price comparison websites continue to chip away at what’s left of margins and this is likely to accelerate as auto-switching becomes more prevalent and next-day switching becomes the norm. Meanwhile, the rise of electric vehicles and smart technology is bringing new players into the market. The Oil Majors are muscling in, realising that EVs signal the death knell for their forecourt revenues if they don’t move into electricity supply. What’s more, customer expectations are changing in an increasingly digital and decentralised world. So, where does this leave energy retailers?
Incumbent suppliers are struggling to survive
The original Big Six are seeing customer numbers and share prices plummet. Their operating models, systems and ways of working are often at odds with our agile, technologically-supercharged age. Brand loyalty is dwindling, and they are struggling to cross-sell to leverage their large customer bases. Without significant change, they are at risk of extinction in their current form. With this in mind, this is what’s needed to make it into the next era of energy retailing: engendering a genuinely customer-led, efficiency-focused culture and halving cost to serve by becoming automated by design and self-serve by default. It also means carving a new role in the energy transition as electric vehicles, local generation and flexible consumption become ubiquitous. Radical change is hard, but imperative if they are to survive – let alone thrive.
The Mid-Tier can’t afford to stick to the same start-up operating models
The Mid-Tiers on the other hand - with 1-4% of market share each - need to keep adapting if they are to grow profitably. Failure to transform organisational structures and operating models is a common oversight, as workforces and customer bases grow in scale and complexity. The pertinent questions for them are: can you scale efficiently, particularly as you roll out smart meters? Can you optimise your margin across different customer segments? Can you prevent debt along the way? And what role will you play in the future market, beyond commodity supply?
Growth mode for the Challengers is only useful if scale is sustainable
And then there are the Challengers, who have more nimble business models – allowing them to bring different offerings to the table, rapidly. But, as the newcomers enjoy fairly immediate prosperity, many can’t handle the speed of growth – and become victims of their own (short-lived) success. As well as maintaining financial stability and efficiency, the key challenge for them is learning how to stand out from the crowd. Differentiation will be their lifeline, and this can be achieved through clever brand propositioning and channel strategy.
So, the picture looks bleak for some and yet, threat can be turned into opportunity. Across the market, there’s never been a more pivotal time to recognise the need to radically adapt to succeed in the future.
In our next article, Rebecca Teasdale will explore the need for suppliers to be truly bold with their vision in setting a course for the decade ahead. Follow us to make sure you don’t miss it.