Strategic Review Of The UK Water Industry – A New Study By Frost & Sullivan
The water industry in England and Wales is currently facing what is perhaps its most challenging transitionary period since privatisation. A year after the implementation of the Competition Act and the average price cuts of 12.3 percent in March and April 2000 respectively, the industry's third review period (2000 to 2005) is likely to herald a major change in the structure of the marketplace.
The implementation of the Competition Act awarded stronger legal powers to the industry regulator, the Office of Water Services (Ofwat) and Office of Fair Trading (OFT) to remove barriers to competition. For most of the water companies, this will require a major upheaval of corporate strategies if suppliers are to witness business success while also meeting Ofwat's efficiency targets.
The Competition Act has triggered a shift away from the monopolistic status of the market, with customers eager to reap the benefits of a competitive market.
Regulatory forces and the pricing review will have serious repercussions for almost all corporate functions within the water companies and will affect the structure and value of the market, as well as the investment patterns and corporate strategies. New market entrants will need to specifically address customers' demands for cost savings and service improvements, while incumbent utilities must reorganise themselves to develop and retain a competitive edge in an open water market.
These are just some of the conclusions drawn in a new study by Frost & Sullivan, the international marketing consulting company, presenting a strategic analysis of the £7 billion UK water industry. The findings discuss investment patterns, market opportunities, industry challenges, corporate strategies and competitive restructuring, as well as providing a review of suppliers' implementation of competitive strategies.
Underpinned by the prospect of cost reductions and improvements in action-orientated customer services, as well as imaginative and customer-facing tariff structures, customers embrace the principle of intensifying competition in the water market. "Having traditionally been tied to the services of the incumbent local water supplier," explains John Raspin, Research Manager at Frost & Sullivan, "customers also want the increased negotiating power that competition will theoretically bring."
"Furthermore, customers want suppliers to take the initiative and the overwhelming majority of participants in the survey have expressed their openness to direct approaches by new suppliers. They are looking for more radical use of special agreements, innovative tariff design, long-term systems planning and a more proactive approach to quality issues," Mr Raspin continues.
Frost & Sullivan's study reveals that overall awareness of the state of competition in the water industry is currently surprisingly low among industrial customers. Indeed, in spite of the fact that large users have theoretically been free to change supplier for 12 months now, the actual number of new supply contracts to have been won remains low. Furthermore, less than 40 percent of all customers to have been interviewed have yet considered changing their supplier. A surprisingly high proportion of those that have not considered switching did not even know that any level of competition exists in the water industry.
"Those proactive suppliers that see competition as an opportunity to snatch market share from competitors are likely to take the early lead, while risk-averse players may see opportunities slip away from them," Mr Raspin points out. "Moreover, with the market inevitably poised to restructure itself somewhat, the most successful companies will be those that can restructure themselves most effectively to address the challenges, especially with regard to cost management and raising capital," he continues.
However, Frost & Sullivan believes that as competitive models are optimised, the advent of an openly competitive marketplace will grant both incumbent water suppliers and new entrants an opportunity to grow their businesses in a way that has hitherto been prevented by the regulatory regime.
The successful players will be those that can deliver low cost, high quality services, with customers benefiting from greater choice, better services and lower prices. As these customers become increasingly aware of the opportunities to change water supplier away from the incumbent company, they are demanding cost-effective tailored solutions with added-value services.
However, the study points to a prevailing uncertainty amongst suppliers and customers that is bringing a multitude of challenges that are delaying the rate at which customers can benefit from competition.
The rate at which these challenges can be overcome will separate the leaders from the followers, the study concludes.
Frost & Sullivan is an international marketing consulting company that monitors a comprehensive spectrum of water treatment industries for trends, market measurements and strategies. This ongoing research is utilised to complement a series of research publications to support industry participants with customised consulting needs. Free executive summaries of all Frost & Sullivan reports are available to the press.
Report Code: 3761, Publication Date: May 2001
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Tel. +44 (0) 20 7343 8376 (kristina.menzefricke@fs-europe.com)
