What is retail competition?

My original expectation had been that competition would be about the larger users wanting a little bit extra off their bill. I have already come clean and admitted that I got this wrong. Clearly, there are some customers for whom price is the most important factor – but the most interesting result of offering a choice to non-household customers is the extent to which retailers, including the former Scottish Water, have found the freedom and ability to segment and understand customer needs and subsequently tailor and provide new services. In some cases this is advice on water efficiency, in others it is the management of drainage, in yet others it is dealing with discharges to our environment.

Large businesses and the public sector are likely to need help if they are to operate in a more environmentally friendly manner. There is little doubting the commitment of many of our largest businesses, but this just makes it all the more important that they can access the sort of support they might need to achieve their ambitions. Assisting these businesses is proving to be the core competence of the new retailers in any new competition framework. Indeed, if Business Stream’s experience is anything to go by, it could be a potentially meaningful source of the green jobs, for which our politicians aspire.

Business Stream already appears to be able to add meaningfully to its retail gross margin by offering these additional services. And it should not be forgotten how important providing services such as consolidated billing are to the retention of existing customers!

Why is freeing up customer-facing activity so important? There are four reasons that I could suggest:

  • It requires the potential conflict between water efficiency and effective asset utilisation to be addressed explicitly.
  • The fear of losing or the chance of winning customers strengthens the level of engagement with the customer base, resulting in more innovative service propositions.
  • The creation of a profit centre from what was, traditionally, purely a cost centre will likely reduce costs in an area that anything other than very invasive regulation could not reach.
  • The marginal extra revenue and profit available from providing these value added services is not likely, at least initially, to be important viewed from the perspective of the vertically integrated utility. However, from the perspective of the retailer, revenue from these sources is likely to be very material – being both a source of growth into the future and a source of much higher margin business than the core activity of water and sewerage retail.

Retail is therefore about the meeting of customers’ needs – needs that customers may not yet have identified for themselves. It should be the goal of the water retailer to find ways that will support water customers in using less water and in being more environmentally- friendly. Such an outcome is likely to be far more important to many businesses and the economy and environment more generally than a small reduction in the tariff.

About Alan

Alan Sutherland

I’ve been Chief Executive of the Water Industry Commission for Scotland since its establishment in July 2005. Prior to that I was the Water Industry Commissioner for Scotland having been appointed to that role by Scottish Ministers in November 1999. In 1998 and 1999 I was a managing director of Wolverine CIS Ltd, a division of Wolverine World Wide. Prior to that I worked in strategic consultancy with Bain and Company and in the investment banking industry with Robert Fleming and Company.