Calortex Sees New Strategy as Key in New U.K. Market

Neil Larnbert

as is growing in importance in Europe’s G energy mix because of huge availability of supply and its environmental benefits. Today, European gas use is about 13.3 trillion cubic feet per year, but by 1999 availability will jump by 3.2 trillion cubic feet. New projects are coming on-stream in Algeria, Russia, Norway, and Brit- ain. The eyes of Europe are turned toward the United Kingdom, which is in the final phases of moving to a competitive gas market: the first nation in Europe to take this significant step.

The eyes of Europe are turned toward the United

Kingdom, which is in the final phases of moving to a

competitive gas market . . .

Some European analysts believe that even- tually, deregulation could lead to a single gas market stretching from the extremes of the former Soviet Union-Turkmenistan and Kazakhstan-to the western fringes of Europe- Portugal and Ireland. Further, the European Union is expected to call for gas deregulation among member countries, with each of them setting its own timetable.

While there is continued speculation about the future of natural gas deregulation, the battle is on to gain market share among the United Kingdom’s 19 million household gas customers. Calortex, a joint venture between Calor and Texaco, is gaining ground with customers that have decided to switch from British Gas, the

Neil Lambert is commercial director for Calortex, Swindon, England.

former monopoly, as its household supplier. We believe that the success of Calortex is a combina- tion of very strong brand recognition, an aggres- sive marketing campaign that has been taken directly to the consumer’s doorstep, and an exemplary record of openness and fairness. To appreciate fully what is occurring in the United Kingdom, we need to look back briefly into gas deregulation history.

Regulation for Competition Opening the natural gas market to compe-

tition dates back to the British Act of 1986, which privatized the monopoly supplier, British Gas. The Act gave other potential suppliers the right to use the pipeline network, and large industrial users consuming more than 25,000 therms of gas a day could buy gas from any supplier. The next big step came in 1992, when non-industrial consumers of more than 2,500 therms a day acquired the right to buy gas from any supplier, allowing restaurants, small offices, and schools into the market.

An explosion of trade followed. From April 1996, the market below 2,500 therms opened to competition allowing households to buy gas from any supplier. The Gas Act of 1995 provided the framework for the development of a fully competitive market. It divided market partici- pants into three categories-transporters, ship- pers, and suppliers-and called for licenses in each category. TransCo, as owner and operator of the National Transportation System (NTS), the pipeline grid, holds a public gas transporter’s license. Its dealings with shippers and suppliers are regulated by another document, the Net- work Code. The Office of Gas Supply, or Ofgas, administers the Code.

Among the Code’s most important provi-

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sions is that users of the NTS must ensure that gas leaving the system and going to customers is balanced by inputs-these are deliveries to the NTS at coastal landing points, known as “beach terminals.” Under the current rules-the so-called hard-landing system-this balancing must be done daily. Before the Code was in force, TransCo, a supplier of last resort, was responsible for ensuring that there was suffi- cient gas in the system.

The residential gas market was seen as the plum, but one

marked by uncertainty.

Initially, the so-called soft-landing phase required shippers to balance monthly what they took out and put into the system. Since Septem- ber 1, 1996, shippers must balance daily. This is the main difference between the “hard” and “soft” landing in force from March 1 until now, under which penalties have been applied monthly, to allow participants ample time to correct imbalances.

Failure is subject to a fine based on the average of prices for seven days around the day in question. To create price transparency and generate prices at which imbalance penalties can be charged, a new electronic market- called the “flexibility mechanism”-was cre- ated. This is a screen-based market, on which shippers that are long can bid to sell gas to TransCo. They also can buy gas from the system if they fear going short. TransCo balances its own position by accepting buy or sell bids as posted on the flexibility mechanism’s screens. TransCo has an obligation to accept the most competitive bids.

From the flexibility mechanism, TransCo derives a System Average Price (SAPhthe average price at which gas trades on the sys- tem-and a System Marginal Price (SMP)-the most extreme price of a single transaction. Imbalances are charged at the S A P if they are relatively small, and at the SMP for more serious lapses. Ofgas has approved a TransCo proposal to allow minor imbalances of up to 7,500 therms to go unpunished.

The Market Opens The opening of the retail gas market created

a fierce marketing battle among 14 competitors, most of them Regional Electric Companies. Texaco opted for a joint venture with Calor Gas, the United Kingdom’s largest supplier of LPG, with 62 years in the business. When the market for small commercial consumers started to de- regulate, Calor decided to enter to diversify its business markets. Texaco entered the market at about the same time, in May 1994.

The residential gas market was seen as the plum, but one marked by uncertainty. The joint venture was a marriage of strengths. Calor has strong brand identity among consumers. Texaco is an internationally respected brand with expe- rience in oil and gas, and, unlike Calor, has access to gas fields. A 50-50 joint venture was completed on July 31, 1995. The partnership with Calor is consistent with Texaco’s marketing strategy of “thinking globally and marketing locally,” and also gives Texaco an opportunity to use what it learns in other markets around the world.

In the first phase trial area, consisting of three counties, a half million consumers were given the opportunity to select their gas suppli- ers. Calortex did not know what would win over consumers. It was a totally new experience, virtually ground zero. Calortex used every chan- nel to reach the consumer-advertising, telemarketing, handouts, direct mail, local pre- sentations at clubs, and knocking on doors. Calortex was as imaginative as possible, and assessed each channel according to its cost effectiveness and how successful each was in getting new contracts.

Calortex did not know what would win over consumers. It was a totally new experience,

virtually ground zero.

Soon it was apparent that we were getting more contracts “door to door” than from any other method. It is also the most cost-effective way to run a campaign for the consumer’s trust, confidence, and business. Calortex outsources virtually all its sales force. The company ap- points agents on an exclusive-territory basis, with performance results built into the contract. The contract also requires very strict codes of behavior. Calortex is absolutely resolute in

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applying and enforcing the company’s code of conduct-the most stringent that exists in the industry-to outside contracts.

The code is straightforward. Calortex’s agents must be highly professional. There can be no misrepresentation. Harassment of consumers is strictly prohibited. Additionally, there can be no discrimination-“cherry picking”-among classes of customers. Ofgas and the Gas Con- sumers Council-an independent body set up by the government to look after consumers’ interestmversee Calortex. Independent stud- ies have also praised Calortex, such as one by the Centre for Sustainable Energy, an indepen- dent consumer group.

The Centre surveyed 96 families on public assistance. Their report noted the widespread confusion about the process of gas deregulation and switching suppliers. The reports also quoted interviewees who pointed out that Calortex representatives are friendly and stand out be- cause of the depth of information that they provide.

The results speak for themselves. Phases one and two of the deregulation trial have given some 2 million customers a choice of gas suppliers. Part of the market has been open for 18 months and the rest less than one year. Twenty-six percent of the 2 million customers chose to switch from British Gas to other suppli- ers. Calortex has contracts with 26 percent of those that switched.

. . . we were getting more contracts “door to door” than

from any other method.

Contract terms are crucial, regardless of the marketing approach. Because Calortex has kept its costs low, primarily through outsourcing at all levels of customer service and operations, it offers a price saving of 20 percent, fixing prices for one year when the contract is signed. The annual fixed price assures consumers that Calortex is in the market for the long term. What is more, the company continues to promote the brand aggressively.

On November 1,1997, a timetable began to bring gas deregulation to the whole of the United Kingdom. It began in Scotland in the Northeast, where the choice of supplier will be

given to an additional 2.6 million customers. Then beginning in February 1998, various areas in the United Kingdom will be deregulated in increments of about 2.5 million customers until the end of June. The process is planned to be completed when London consumers are in- cluded at the end of June 1998.

The process is planned to be completed when London

consumers are included at the end of June 1998.

Calortex Strategy From a standing start, Calortex is the clear

leader among the new independent companies. To meet the growing demand and the prospects for continued regional and national roll-out, Calortex has relocated its offices to Swindon, in the same building as other Texaco operations. The staff numbers only about 150-purposely lean to ensure that overhead remains low, helping Calortex to offer consumers highly favorable contract terms.

The Swindon operation represents a grow- ing management center with many of the key functions-such as call center expertise, data entry, and billing-outsourced to ensure effi- ciency and lower costs. When the entire nation is opened to competition, the battle plan is to win the confidence and business of customers. The year after the national roll-out is complete is when customer numbers are expected to change dramatically. By the end of 1998, Calortex wants 1 million satisfied domestic customers. The target would place Calortex in the premier position among new suppliers. To reach this goal will take strong marketing, competitive pricing, and above all, outstand- ing service.

By the end of October 1997, Calortex agents had knocked on 6 million doors. That is how we intend to win over the consumers between now and June 1998. We have found that the vast majority of people appreciate the opportunity to discuss gas deregulation issues face-to-face.

Half the battle is in attracting new customers to Calortex, the other half is keeping customers. Calortex’s retention rate is among the best in the industry. The company is putting substantial thought and investment into building brand

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loyalty. The best way to achieve that is to provide absolutely reliable service at a competi- tive price. You have to give customers what they want. Texaco and Calor are blessed with strong brand identities, reputations for quality, and outstanding customer service. Calortex has also been a very strong supporter of community action, supporting the National Association for Prevention of Cruelty to Children and other charities.

As the market systematically opens to greater choice, the test is to keep consumers in the fold-continuing to push the level of service higher and higher. There is still much to learn from the United Kingdom’s experience. How- ever, our experience thus far confirms what we have learned about today’s consumers. We need to innovate-to constantly search for strategies that cater to a new breed of busy consumers.

People have very little time-they want value and they want fast service, without running all over town to get it. Corporate downsizing has resulted in fewer workers doing more work. The relentless push by businesses to be more cost effective and productive means longer working hours and less leisure time. Add to this the demands of child rearing and a social life, and it is plain why consumers appreciate one-stop shopping for quality products and services. What is more, all this is taking place in a virtual world and at the pace of instant communications.

Sensing a need, building a product or a service, and meeting that goal is the difference between success and failure. The issue is this: If a company’s success is founded solely on qual- ity, and prices are generally equal, what do you do to compete? The answer is differentiating yourself by establishing a corporate culture dedicated to consumer caring, concern, and superior service.

Someone constantly needs to be asking the question: “Why are we doing what we are doing?” The answer cannot be: “That is the way we have always done it.” If we face the market- ing world with the right attitude, then we necessarily need to be willing to change- quickly and often dramatically. We must under- stand people’s habits-how they live their lives, as well as their expectations, desires, and atti- tudes. In effect, our goal is to create a customer mind-set that stretches beyond the product itself.

The main lesson in the United Kingdom is that Calortex is not in the gas business, although gas is our product. Calortex is in the people business-the consumer business-offering a means to make life more comfortable while saving money. The challenge in the United Kingdom is just beginning. However, we firmly believe that Calortex has the people, the strat- egy, and the service in place to be a leader in the marketplace in the years to come.

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