Castle Water has made some aggressive land grabs in the English and Scottish water retail markets. Could its conquests be its undoing, asks Lois Vallely.

Castle Water has made no secret of its quest for acquisitive growth in the non-domestic water retail markets of both Scotland and England.

The company’s latest buy is its Scottish peer Cobalt Water – purchased for an undisclosed sum this week. The acquisition adds Cobalt’s circa 7,600 Scottish supply points to Castle’s 11,500 Scottish supply points. While 19,100 may not be a huge chunk of the Scottish market, the deal will allow Castle to “accelerate its growth in Scotland”, chief executive John Reynolds tells Utility Week.

Although Cobalt will now lose its brand identity – essentially becoming “Castle Water Scotland” – its offices will remain open. Current managing director Scott Macleod will become managing director – Scotland, and commercial director Hugh Brown will become sales director – Scotland. And, Reynolds says, its employee-base will grow.

The deal, then, looks set to benefit both parties. “We’ve known Cobalt for quite a while, and we think that they are very capable,” says Reynolds. “I think they saw the sense in being part of a larger group that wants to stay with that culture of an independent retailer. We wanted to expand our capability within Scotland further. It’s a fit where there are some significant strategic advantages but no redundancies.”

“We’ve got some specialist areas of activity such as farms and charities which will continue to be looked after by the same people,” he explains. “The invoicing, where we’ve got complex consolidated invoicing, will carry on with the same group of people, because they’re doing the consolidated invoicing for customers in England as well.

“What you end up with is actually a slightly different kind of segmentation than just regional between Scotland and England. The split becomes customers who are national across England and Scotland, and the customers who are just Scottish in some areas.”

Conquering the market

Cobalt Water is not Castle’s first purchase. The company wasted no time in acquiring the business customer-base of the first company to exit the English non-household market – Portsmouth Water – at the beginning of 2016 for £2.9 million. The deal not only allowed Castle to quickly become an active market participant south of the border, it also played to Portsmouth’s advantage.

Portsmouth’s business customers made up just 5 per cent of its overall customer base, with retail revenue representing just 1.6 per cent. This, managing director Neville Smith said, meant that “huge investment” would have been needed in order to be successful in the new market. It was a bridge too far.

But though Castle Water’s acquisition of Portsmouth alerted the market to its bullish ambitions in England, few expected its next, more eyebrow-raising, move. In July last year, it successfully struck a deal with Thames Water to buy its extensive business customer base for £99 million.

This stunning acquisition took Castle’s customer base from circa 30,000 to around 330,000 overnight and made it the second-largest retailer in the English market. For Thames, the deal, allowed the company to “concentrate on its core regional household business”, former chief executive Martin Baggs told Utility Week.

Since the market opened at the beginning of April, Castle has also enjoyed gentler organic growth, attracting customers from across “all the different sectors of the market”, Reynolds says. “We’ve picked up customers in SMEs, public sector, large manufacturing and large multi-sites. We’ve been active in multi-regions and across all the different segments in the market.”

Is big beautiful?

The market is still in its early stages and we will not know how customers view retailers until the first complaints data is published by the Consumer Council for Water and Ofwat. However, other players have identified difficulties for any company, across sectors, trying to “be huge and act small”.

Speaking to Utility Week for a forthcoming interview, Helen Gillett, managing director of Affinity for Business, set out her belief that variety is key to a well-functioning market, but: “There is a value in knowing your region, knowing the customers in there, sharing the economy, sharing an objective around that economic growth…I don’t know that big is beautiful.”

Meanwhile, examples from other sectors show that rapid growth can come at a cost. As companies scale up, they often struggle to maintain service and can all too easily become divorced from customer experience.

You only have to look at Citizens Advice’s performance data for the energy suppliers – where companies such as Scottish Power and Npower generally score low – to conclude that big isn’t necessarily beautiful.

At fellow big six supplier Eon – which performs relatively strongly in complaints handling leagues and satisfaction indexes – former chief executive Tony Cocker recently told Utility Week it is a constant struggle to maintain “empathy” and not to become “faceless”.

Meanwhile, independent Extra Energy, which has been the complaints laggard for a number of quarters, said the reason for its poor complaints record is that it “failed to anticipate just how attractive our low prices would be to householders, and unfortunately we didn’t put customer service resource in place quickly enough”.

Start-ups, such as Uber, which have experienced rapid growth in other sectors have seen their initial shiny reputations tarnish with growth. One article, in Business Insider UK, has suggested the tech firm projects an image which is “careless, self-obsessed, sexist and profiteering, aloof and uncaring”.

So, should Castle Water bring an end to its acquisitive campaign to conquer the English and Scottish water retail markets? Reynolds shows no inclination to make peace. Castle will “continue to evaluate large opportunities” in both Scotland and England, he insists.

Helen Gillett’s interview with Utility Week will be available soon.