COMMENT: British Gas could ditch its awkward customers
'Shareholders should look hard at the justification for keeping this monolithic business intact. The parts may be worth more than the whole'
Wednesday 25 October 1995
The customer is always right, of course, but in this case British Gas has a perfectly simple way out of its public relations difficulty - get rid of the troublesome domestic customers altogether. Instead, the company could better serve its shareholders by concentrating on gas production, international expansion and the safe and cash-rich monopoly business of transmission.
This is not a fanciful notion. Indeed, it has already been and gone in the last few years, and looks like coming back again. A Monopolies Commission report in 1993 recommended divestment of the supply side of British Gas by 1998, which caused a storm of protest from Cedric Brown.
The Government overruled the commission and backed Mr Brown, but in return demanded that the introduction of competition to the domestic supply business be brought forward several years, to next year, when a pilot programme begins.
But the issue has not gone away. It has become clear that Richard Giordano, the chairman, sees the rejection out of hand of the monopolies recommendation to divest as a mistake. (He arrived after the event.)
Other gas suppliers, currently competing with British Gas in the commercial market, are convinced that selling the domestic supply side of British Gas will be put back on the agenda. Clare Spottiswoode, the gas regulator, finds nothing wrong with the idea, if the right buyer can be found. A split would make her job easier, since the relationship between the supplier of the gas and the organisation that transmits it around the countryside - the owner of the gas grid - would then truly be at arm's length.
British Gas has had approaches by energy businesses interested in acquiring parts of its regional gas supply network. An approach does not equal a negotiation, let alone an offer, and Mr Brown, gas enthusiast man and boy, is unlikely to want anything to do with the idea. Indeed, for British Gas to sell an isolated part of the supply business would be to shoot itself in the foot. In an era of deregulation, when any supplier can move into another's area, there is no point in helping competitors acquire billing systems that make them more effective predators. It makes sense to sell all or nothing.
To find a buyer for the whole supply business may not be easy as competition increases, as it undoubtedly will in the wake of gas supply deals such as that announced between Seeboard and Amoco on Monday - a partnership aimed at encroaching on British Gas markets. Demerger rather than a trade sale might be a better answer, though it would be hard to promote the attractions of an independent supply business in the City until the marketplace has settled down and it is clear how many new competitors are entering the fray. Either way, British Gas shareholders should look hard at the justification for keeping this monolithic business intact. The parts may be worth more than the whole.
A harsh message for manufacturers
What on earth has happened to manufacturers this year that has caused the biggest fall in their confidence since the exchange rate mechanism fiasco? After all, for most of the year the economy has been growing above trend, exports have been buoyant and companies' coffers are full of cash.
The Confederation of British Industry says it is all due to the slower growth of orders. Domestic orders have actually fallen a bit in the latest quarter and export orders have slowed from the record a year ago. Perhaps manufacturers should look to the example of services, where output growth has remained above trend - up more than 3 per cent in the year to the third quarter. The reason is that in many services prices have been flat or falling.
Manufacturers have certainly not passed on all of the increases in the cost of imported raw materials they faced earlier this year. But they have increased output prices, even though rises in labour costs - which are a much bigger part of the total - have been negligible. The fall in the pound has cloaked substantial increases in export prices.
The pace at which firms are raising domestic prices has slowed. Yet they are still hoping to achieve much bigger price increases during the next four months, despite their failure to push through their expected price rises in earlier months. The market is sending a message to manufacturers that hope to raise prices: it cannot be done without hitting orders and output.
There is more to the manufacturing slowdown than this price effect, since interest rate increases have achieved their aim of slowing the demand side as well. But where there is sustained, non-inflationary growth it is a fact that higher prices will also be penalised by lower demand.
The Pru won't find it easy to be a bank
The insurance industry has moved far more slowly into banking than the banks have moved the other way into insurance. One simple reason for this, which enthusiasts for Prudential's move into direct banking by telephone should remember, is that banking is capital-intensive and the clearing banks are generally much bigger and have a lot more capital than insurers.
This capital intensity is not because of the machinery and equipment - indeed telephone banking has got rid of the need for branches and cut some of the entry costs for newcomers - but because of the scale of the funds that central banks insist must be dedicated to supporting the basic business of banking. A big clearing bank must put up at least pounds 8 of its own capital to back every pounds 100 of lending, to ensure there is money available to pay depositors if loans go sour. A smaller start-up banking operation such as the Pru's may well have to find twice as much before the supervisors will let it loose on the public. That capital is expensive to service.
The Pru's immediate ambition seems to be to persuade customers for its maturing investment products to keep their money in the organisation by depositing it with the in-house bank. Whether customers will prefer to trust their savings to a little bank, even with the Pru's brand name, rather than a big clearer or building society is open to question. Short- term deposits are fickle and chase the best rates advertised in the Saturday personal finance columns.
Even if that works, for the Pru to move onwards to become a serious lending bank - with all the risks that brings - is of another order of difficulty altogether. The Pru's initiative is an interesting new development in the financial services marketing war. But the company has certainly not stumbled on the insurance industry's answer to Direct Line, Royal Bank of Scotland's devastating onslaught on the insurance markets.
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