Putting together a portfolio of complementing businesses to succeed in today’s competitive market is much like choosing the right ingredients for a salad. And no doubt many of Europe’s utilities will be watching to see whether the addition of Thames Water to RWE’s portfolio turns out to be a suitable ingredient in the “salad” being created by the German utility.
Market liberalization has seen power prices slashed in Germany and RWE’s profits reduced accordingly. Like other utilities in Europe, the company is having to be more creative in finding revenues elsewhere. The purchase of the UK water company is seen by some as part of RWE’s strategy to become a leading European multi-utility one big enough to challenge the likes of Suez Lyonnaise des Eaux. In the past, RWE has made no secret of its plans to be a major European multi-utility, achieving growth through the integrated marketing and sale of gas and electricity.
But while the gas and electricity businesses have natural synergies, an electric utility’s expansion into the other utilities such as telecomms and water is something which needs more careful consideration. At first glance, one wonders whether purchasing a water company with
However, the most significant part of the deal is that for RWE, the purchase signifies a subtle shift in the company’s strategy. “The water business is unlikely to face the same level of deregulation as we have faced in the electricity and gas business,” said Strabetaurg. The thinking is that expansion in its water business will bring back a level of revenue stability that has been eroded by the deregulation of the electricity and gas markets.” Further, the purchase represents a move which leverages its four core businesses (electricity, gas, water and waste management) in a more customer focussed approach. Strabetaurg added: “It is not a question of how big we are, it is more a question of the portfolio and how the different businesses fit together. The goal is not necessarily to buy assets but is more about gaining customers.”
An increased number of customers allows it to minimize costs while offering additional services. Thames Water has 12 million customers in the UK and another 12 million worldwide. Added to RWE’s existing 11 million customers, this gives the German utility 35 million water customers globally. This increase in customer base means the potential for greater revenue through cross-selling to customers who want more than one utility.
Putting the customer at the centre of company strategy is something which has been done to great effect by the likes of GE. GE has a term which it calls ‘meta-market’. This puts the customer at the centre and looks at every cost that customer incurs. It then looks at what percentage of that customer cost can become its revenue. Its purchase last year of Glegg Water was an excellent example of increasing its customer base by adding the right company to the mix (see PEi November 1999, page 42).
But recognising the right ingredients is not always easy which leads me to recount an incident involving my colleague, Dan. (To save embarrassment I have not used his last name).
At last year’s Power-Gen in Frankfurt, we had the pleasure of attending a Siemens boat trip and a buffet-style meal. After a splendid main course, it was time for dessert. Dan opted for the fruit salad and proceeded to top it off with some fresh cream. I contemplated following Dan’s lead. But on closer inspection, I realised that the ‘fruit salad’ was in fact a normal salad in a vinaigrette solution; and that the ‘black grapes’ were actually olives. My warning to Dan came too late.
So my advice on creating the right mix? Sniff out the right deals and add your ingredients to your portfolio carefully. Confusing your olives with your grapes can leave a bad taste in your mouth. Just ask Dan.