Executive Summary
The UK energy market is privatized. It is dominated by the “Big Six” players (Pym 2013). British Gas is the largest energy supplier in the UK energy market. The rate at which electricity is distributed across the UK is almost same for all the players. There is no product or price differentiation in the market, and hence, the probability of customers switching between service providers is minimal or almost none (National Grid, 2014). This makes the market less competitive. The players offering better products and better services receive no added advantage over others. British Gas has a robust supply chain and diversified portfolio. It has the ability to offer gas at a lower price than its competitors. It also has a growing renewable energy production portfolio. The overall renewable energy market is growing at a higher rate than the gas market (Tweed 2013). This will help in the overarching growth of the company if it continues to grow as a renewable energy manufacturer through its wind farms and solar energy solutions. Price differentiation, expansion in the renewable energy production and low carbon technology products will provide a long term and sustainable growth for British Gas.
Company Background
British Gas is the largest energy and home services provider in the United Kingdom market. It is owned by the company Centrica which supplies gas and electricity services to almost 20 million people across the United Kingdom under the brand names of British Gas and Scottish Gas. After the gas market in the UK was privatized by the Margaret Thatcher government in 1986, British Gas Plc. was listed as a private company in the London stock exchange (Pym 2013). Subsequently, the electricity market was also privatized in the country. In 1997, after the demerger of British Gas Plc., three companies were formed; British Gas (owned by Centrica), BG Group and Transco. Centrica retained the brand name even after taking control of British Gas. Centrica is allowed to use the brand name only in the United Kingdom. From 1997 onwards, British Gas and Centrica tried to diversify into other businesses like credit card, retail telephone business and drain unblocking service (British Gas 2013). However, it became clear to them by 2003-2004 that diversification was reducing the operational efficiency and profit margin of the company. From then on, Centrica concentrated only on the power sector. The current strategy of the company is to grow horizontally and vertically in the power market. They are already doing vertical expansion by getting into gas exploration and energy production (British Gas 2013).
Situation Analysis
PESTLE
Politics plays an important role in the energy market. As per the European Union directive, the contribution of renewable sources of energy to the total energy contribution should be 20% by 2020 (Tweed 2013). Currently, the percentage of renewable energy contribution in the UK market is 11.3% in 2013 (Centrica 2014). As per the Rio Summit, this sector will experience a lot of public and private investments in the coming years. Renewable energy sector like tidal waves, nuclear energy and wind power will also enjoy favorable policy decisions from the government and may even enjoy tax exemptions. The main problem with the UK market is that the energy market policies are not uniform across England, Scotland, Ireland and Wales (Tweed 2013).
Economically, one of the biggest hurdles faced by the energy market is the lack of investment. The overall energy demand is on the rise and the same goes for the renewable energy too. The low carbon emission norms require the energy companies to upgrade the current power generation plants and transmission process. However, energy companies like Centrica, Npower, SSE and E.ON claim that the government as well as private investments in the energy sector is not adequate enough to build new capacities and upgrade the existing ones (Tweed 2013).
Technology is changing fast in the energy market. Currently, the largest energy demand in the UK is met by British Gas, and apart from gas and nuclear energy, only 11.3% is met by other sources (Centrica 2014). The percentage of contribution by other sources is likely to go up in the future. Especially, the green and renewable sources like wind, tidal wave, solar energy and hydro power will see a substantial growth in the future market.
The social acceptance of the renewable energy is on the rise with some of the retail and business customers paying in excess to obtain energy from the renewable sources. Besides, as the cost of renewable sources of energy is coming down, it has more potential for growth.
SWOT
The main strength of British Gas is its brand name and a huge and existing customer base. British Gas is the number one company in terms of its retail customers in the United Kingdom. In the UK energy market, the customers do not switch to other service providers very often, and hence, the customer base is safe with British Gas. Moreover, British gas has a diversified portfolio being in the business of gas, electricity, boilers, central heating, plumbing and heating, renewable energy and home appliance services (British Gas 2013). It is ready to grow vertically and horizontally.
The main weakness of British Gas is the penalties it has incurred from the UK government for the violation of several regulations in the UK energy market. Also, upon diversifying into multiple businesses, the overall performance of the company has gone down. Especially, the operating income has plummeted significantly. In fact, British Gas ran some of the businesses so poorly that they were spun off altogether from the Centrica stable (British Gas 2013).
British Gas is expanding internally, and that is creating a plethora of new opportunities for the company. Also, the renewable energy market is growing very fast, and the low carbon emission energy technologies are being used now more than ever. The overall energy market is also growing in the UK. The per capita consumption as well as the total number of customers is also on the rise.
The uncertainty in the economic condition in Europe is one of the main threats facing the energy business. The increased input costs are eating into the profit of British Gas (Centrica 2014). Additionally, the volatility in the price of the natural gas, the main raw material for British Gas, makes the business highly uncertain.
Competitor Analysis
The energy market in the UK is dominated by 6 players, known as the “Big Six”, including British Gas, Scottish Power, SSE, RWE Npower, E.ON and EDF. These six companies control 95% of the UK energy supply market (Pym 2013). In fact, Ofgem, the regulatory body of the UK energy market, thinks that these 6 big players have entered collusion among themselves to keep the market out of competition. To probe further into the issue, Ofgem is doing investigation to find out if these energy companies fix energy prices (Ofgem 2013). It is to be taken into account that the energy price has always been on the rise in the last few years, and the energy prices are also fairly similar among all the players. Besides, there is very little movement of customer base from one company to another. The gas market is relatively stable, and the customer base is also relatively stable. The only thing changing is the upstream of the energy chain. The energy sources are changing. Natural gas is growing at a slow rate. The growth of other sources of energy like solar energy, tidal power and nuclear energy is significantly high. The competition in those areas being less as of now, British Gas can cash in on the market with the required technology before the emergence of other competitors (Parsons 2013).
Segmentation: Targeting and Positioning
UK Energy Segments
The UK has seen some significant demographic changes in the recent decades. As per the data from “Population Trends”, it seems that the population growth rate has reduced considerably in the last two decades. The number of marriages per 1,000 people has declined from over 53 in 1990 to below 30 in 2005 (Druckman and Johnson 2009). Marriage is becoming less of an economic necessity for women. They can run a separate household on their own as the average income of women in the UK has gone up substantially. The divorce rate has not gone up and remained almost same over the last 4 decades at 13 per thousand married couples per year (Druckman and Johnson 2009). This shows that the number of single person families or single mothers has gone up substantially. This also means that there will be an increasing trend in the number of retail customers for the energy segment.
Geographically, the UK energy market is very different. Firstly, all the countries in the UK have different energy policies in place for power generation and production. For example, England is the biggest market still dominated by gas. Wales and Scotland have a big plan of using more renewable sources of energy in the future. Ireland has a huge advantage over others in terms of tidal energy sources, wishing to become 100% renewable energy country by 2050 (Tweed 2013).
There is a huge disparity in energy consumption among rich and poor. The average per capita electricity consumption for people over £75,000 annual earning is almost double than that of people below it (Druckman and Johnson 2009). The electricity consumption is on the rise in the cities and specifically, in city suburbs. The number of apartments as well as single family homes is increasing. This is fueling the growth in the number of retail customers.
Target Market
The retail business is growing in the UK. Instead of focusing on the existing customer base, British Gas should try to tap new customers to increase its growth. The number of single women and single moms is on the rise, and a campaign targeting at them will help the company acquire these new customers. British Gas has made a huge contract with Qatar Gas to purchase liquefied gas at a low rate for the next 5 years (British Gas 2013). British Gas can use this cost advantage to provide gas at a lower rate than its competitors to help its growth.
There is an increasing trend of the renewable energy growth. Currently, the renewable source of energy contributes 11.3% of the total energy production. By 2020, it is estimated that 20% of the total energy will be supplied using renewable sources. By 2050, the total renewable energy contribution to the total energy production is estimated to be 50% of the total power generation (Ofgem 2013). This provides an opportunity for British Gas which already has some knowledge in that business segment. It already operates wind farms at Lynn and Inner Downing offshore. It also has a plan to build wind plants at Lincs, Docking Shoal and Race Bank. This will provide a huge advantage to British Gas over its competitors in entering the market of the renewable sources of energy.
Finally, Centrica should focus on other low carbon sources like solar energy. Solar energy has a capacity to meet a significant percentage of the UK energy demand. Centrica should get into that market. Solar products and services and the customers willing to shift to solar power are on the rise. Although the market is small currently, in the next 5-6 years, it will get a significant pie of the energy market.
Positioning
British Gas should position itself as the greenest power company in the UK. It already uses liquefied natural gas, wind power and solar energy. Also, it owns the low carbon micro generation technology. This, if marketed properly, will position British Gas as the most green energy supplier in the UK. It will help British Gas procure good deals from the government as the UK government is also trying to increase the share of low carbon sources. This will not only heal the strained relationship between British Gas and regulators but will also create a green image for the company, attracting more retail customers.
Objectives
The main objective of British Gas is to remain as the number one energy supplier in the UK domestic market. The objectives for the company are as below:
- Revenue growth of 10% per year for next 6 years.
- Increase market share of the gas market by 5% from the current level of 55% to 60%.
- Become the market leader in UK market in production of Renewable energy by 2020.
- Increase the solar generation capacity by 200% by 2020.
- Increase the wind generation capacity by 100% by 2016.
- Power cut and gas supply outage should be less than 1% in all areas it operates.
- Reduce production and procurement (raw material) cost by 10% in next three years through better long term contracts and production process improvements.
Market Strategy
Energy is an industry where all 7Ps are relevant. British gas has products and services that it sells to its customers.
Product differentiation for a sustainable period of time in the energy market is not possible. The end product is the gas or electricity used by the customers. There is almost no way these energy products can be differentiated.
Price is one differentiation factor in the energy market. A lower price always attracts a lot of customers. However, there is no significant price difference between the leading energy companies in the UK market. British Gas has a great raw material deal with Qatar Gas (Centrica 2014). It can leverage that low priced gas procurement to reduce the energy price. It will definitely help British Gas in increasing its customer base. However, such move has the potential to trigger a price war in the energy market that may end up eating away all the profits.
British Gas can use its already established brand name for product and price promotions. It may attempt branding exercise to establish the British Gas brand as the most reliable and green provider of energy in the UK.
People in the whole supply chain are very important. Energy market requires many players to be working in tandem for fruitful results. British Gas should create an environment of collaboration with power generators, gas suppliers, distributors and retail customers for a seamless and uninterrupted power supply for sustainable growth (Parsons 2013).
Physical evidences like less power outage, matching demand and no interruption are some of the parameters that can be highlighted to the retail customer base to distinguish British Gas from others.
Partners are important in the energy market. Especially, as British Gas is slowly increasing its renewable market portfolio, it should seek new partners in that domain (British Gas 2013).
Marketing Programs
British Gas can market its products on the basis of three parameters. Firstly, it can create a marketing campaign based on the price differential from its competitors in the gas market. This campaign should primarily focus on the price and how much savings a customer may realize by switching to British Gas from other energy suppliers.
British Gas can also create a marketing campaign on reliability to showcase the parameters like power outage and serviceability being better than other companies. This marketing campaign also should focus on quality parameters and numbers.
Finally, the company should launch a marketing campaign for brand building. British Gas needs to be portrayed as the most reliable and green energy service provider in the UK.
Controlling and Implementation Plan
The Gas and electricity market is growing slowly in UK. As the population increases and the economy come out of recession, the growth rate will increase. The marketing campaign to establish the British Gas brand as a green and quality supplier in the UK market will provide dividend slowly as most of the other players are also highly competitive. British gas will spend money in marketing and other processes to achieve a sustainable growth. However it should have control plan to see if the plans are on track for its long term growth plans.
- Budgeting: British Gas first need to decide what percentage of money it nees to spend in different marketing activities. It should be very clear about print advertising, travel expenses, trade shows, cost of market research are internal personnel costs. All of these costs should be monitored closely to minimize spending and maximize the effectiveness.
- Market Share: Market share figures are clear indicator of a company’s performance. It gives a very good indication of how the company is doing as a whole. Regular monitoring of market share data for the company as well as competitors will provide good feedback to the management about the growth and expansion plans. This will also make sure the if market share is decreasing then that is detected immediately and proper action is taken immediately.
- Revenue: Overall sales should be monitored. However, for long term growth British gas should also monitor the addition of new customers in its portfolio. Addition of new customers is a great indicator of how the brand image of the company is perceived in the market.
Conclusion
British Gas is the largest energy supplier in the UK energy market in terms of customer base. It has over 11 million customers across gas and electricity domains. However, the UK energy market being dominated by the “Big Six”, the price of energy is comparable with almost no switching of existing customers from one player to another (Pym 2013). To increase its market share, British Gas can use the low price strategy. However, that may not be successful in the long run as that may start a fierce cost battle. British Gas can increase the market share by focusing on the renewable sources of energy. As power generation from renewable sources is on the rise, it will automatically translate into an increased market share for British Gas. British Gas can also target potential new customers to fuel its growth as it is easier to attract new customers than stealing customers from other energy suppliers.
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