'It is a unique challenge,' says British Gas' recently appointed top marketer, Amanda Mackenzie, describing the task of trying to protect the 54% market share of the UK's biggest energy company while introducing the biggest price hikes in its history.
Rarely does an industry get such a public beating as the utilities market is currently receiving. The negativity emanating from the national press about energy price rises has made positive brand associations almost impossible.
Despite this baptism of fire, Mackenzie has a clear strategy and believes that the only way forward is for the company to rely on its brand heritage and customer loyalty.
'There are not many markets where you have to manage the price rises that we have, but then again there are not many markets where wholesale prices rise by 63% like they did last year,' she says.
Unlike most commodity markets, wholesale gas prices rise as soon as demand increases, so British Gas' situation is symptomatic of a problem faced by the entire energy industry. With UK consumers using more gas and electricity then ever before and with gas stocks dwindling, every supplier has had no choice but to enforce steep price hikes in the past 18 months.
British Gas announced at the end of February an increase of 22% on all its gas bills, which came into effect at the start of March; just days later, Powergen confirmed that it was increasing prices by 24% - a record so far. Npower is expected to announce its own increase in coming months.
Far from the price-rise phenomenon peaking, this is just the beginning and analysts are warning that consumers will continue to be hit in the pocket for at least the next two years until alternative gas supplies are found.
The problem is that Britain is running out of gas. The once-plentiful North Sea supplies are depleted and have left Britain more reliant on importing gas from Europe. Suppliers are already forced to import more than 10% of gas, according to British Gas, and this is set to spiral to 75% within four years. As European gas prices rocket in response to growing demand, suppliers are being forced to look farther afield to countries such as Russia, Norway and the Middle East for alternative supplies, though it is a more costly route.
New methods of bringing gas into Britain are being explored and implemented, including the construction of several liquid natural gas pipelines around the country, and Centrica, British Gas' owner, is investing £12bn to ensure that the nation's gas shortage is temporary.
However, as Mackenzie admits, consumers are less concerned about gas supplies than price rises, despite the fact that it directly affects their bills. Most people take it for granted that there will always be enough gas and electricity, so the challenge of educating customers about the difficulty of the situation is tough.
'As the incumbent, we have to focus on everything else we are offering; the added value we can provide to make sure consumers stay with us,' says Mackenzie.
One benefit available to British Gas customers is price-capping, which encourages them to freeze the cost of their gas until either 2009 or 2010, to ensure they don't get hit by further rises in their bills. It was not the first utility brand to do this but has been the most successful, thanks in large part to a multimillion-pound ad campaign, which has seen it sign up nearly 2m customers in less than a year.
The 'Price Protection Promise' was long overdue, as prior to its launch last year, British Gas had seen more than 1.2m customers switch supplier following hefty price rises. A number of its rivals have since followed suit, and no doubt it will be a key battleground as brands seek to acquire and retain customers.
As well as having to contend with spiralling wholesale gas prices, the industry is also undertaking its most cut-throat competitive advertising since privatisation 10 years ago. Npower, which is owned by German utility giant RWE, has led the way and for the past 18 months has been running an anti-British Gas campaign in a bid to poach its customers.
Kevin Peake, Npower's top UK marketer, says the fact that British Gas has been forced to implement higher-than-average price rises is a 'fantastic opportunity' for the brand. 'Most of the other suppliers have been anonymous in marketing terms,' he says. 'Powergen has virtually left British Gas alone and EDF ran one ad as a token gesture, so in terms of brand power, we are viewed as the second-biggest player in the market and we want to capitalise on that.'
In the past few months, the company has been trying to get its sales and marketing staff to adapt a challenger brand mentality and as Peake says, become the 'Virgin Atlantic' of the energy industry. 'We are aiming to take on British Gas in the same way that Virgin did with British Airways,' he explains. 'Our advertising is, and will continue to be, provocative, but it is done with a smile on our face.'
Npower, which plans to double its marketing budget from £10m to £20m to put its challenger brand strategy in place, will run extensive press activity using its Orb brand characters that will be 'more reactive' to changes in the industry. According to Peake, it is also planning to run high-profile marketing to build on its current campaign, which questions where British Gas' customers have deserted to.
'The key is to protect the consumer,' says Peake. 'We have to do this because prices are rising, so our marketing message is focused on value and peace of mind to reinforce the message that you can save money by switching from British Gas to us.'
Npower is not the only company seeking to take advantage.
Powergen, owned by E.ON, RWE's German rival, recently launched its first anti-British Gas advertising and, according to Helen Merrick, its head of brand strategy and communications, while it is not changing its marketing strategy, it is planning to be more proactive in such activity.
At the end of last year, with the battle for British Gas customers spilling over into ad copy, the Advertising Standards Authority (ASA) upheld several complaints from British Gas' rivals about its advertising .The low point for the supplier came in October, when the ASA ruled that an ad warning that customers who left it would not have access to its engineers was in breach of regulations as it used 'an undue appeal to fear'.
Advertising in the spotlight
British Gas and the ASA held a summit to discuss the situation and Mackenzie has made assurances that procedures will be tightened and it will do its best not to run misleading ads. 'We have done all sorts of things internally to ensure our advertising will not mislead,' she says. 'It is frustrating because a lot of the complaints are from our competitors and not consumers, but you have to respect that.'
Npower was behind many of the complaints last year and Peake insists that there will be no let-up this year.
With newspapers running utility ads on a daily basis and with the current climate of price rises, it is not surprising that the switching market is still active. According to Ofgem's latest market report, more than 300,000 consumers are switching supplier on a monthly basis. Unsurprisingly, the report also found that price is the most significant factor, which is why the majority of consumers who have switched are now on dual-fuel deals, which offer reduced prices for taking both gas and electricity from one supplier.
Tim Woolfenden, product strategy manager of utility comparison service uSwitch, says that the market has gained momentum in the past two years, fuelled by the price rises. 'There has been a two- or threefold interest in comparisons on our website,' he says. 'Consumers are not willing to accept the price rises and are learning that they can save money by switching.'
As well as focusing on price, consumers are becoming more conscious of environmental issues, and analysts believe that green products and innovation will be vital for long-term growth of suppliers. With energy at such a premium, the focus is on energy efficiency, especially for more vulnerable consumers.
In the past few weeks,British Gas has sent an energy efficiency questionnaire to its entire customer base and the other suppliers are also encouraging their customers to be more energy-aware. Npower and several of its rivals already have their own green products and are planning marketing initiatives to support them this year.
Nevertheless, Woolfenden says that while focusing on energy efficiency is a big issue for suppliers, consumers are still primarily driven by price. 'The government has said that 1m consumers could be driven to fuel poverty because of the price rises,' he says. 'So suppliers have to offer as competitive products as possible across all areas.'
Privatisation of the industry in 1986 was intended to drive down prices and increase consumer choice. But while the price of energy is still cheaper and there is more consumer choice than ever before, recent consolidation moves by Europe's utility giants including RWE and E.ON have put the spotlight on the competitive nature of the market.
Last month, the European Commission warned that the dominant status of several companies in the market was leading to gas supplies being held back, which has in turn led to the desperate price situation in Britain.
The commission has now launched an investigation into the market.
Industry observers believe that, if anything, the situation is likely to get worse because unlike Britain, Europe as a whole has not been liberalised and is dominated by a number of major players that also have plans to increase their presence here.
This means that smaller suppliers are being squeezed out of the market and although Centrica is a major player in Britain, it is tiny in global terms and has itself become an acquisition target in the past few months.
So the chances of new players coming into the market - one of the key reasons for privatisation - are limited.
Ironically, the emergence of energy super powers in Europe goes against the very spirit of privatisation in Britain, but with the country perilously short of gas supplies, there is little the consumer, the suppliers or even the government can do about it, which could mean even more hikes in the future and an even more difficult task for companies to convince consumers they should be their supplier of choice.
ENERGY BILLS - RECENT RISES Powergen Gas 24% Electric 18% British Gas Gas 22% Electricity 22% Npower Gas 15% Electric 14% Scottish & Southern Gas 14% Electric 12%
CASE STUDY - BRITISH GAS
British Gas spent nearly £40m on advertising in the past 12 months and it is this massive budget that marketing chief Amanda Mackenzie is hoping will help maintain its dominance in the gas market.
Industry sources estimate that it has already spent more than £10m promoting its price-freeze pledges and there is no doubt that British Gas management believes advertising is key to getting it through the current hard times.
Mackenzie says trust is critical to retaining customers. She believes its added benefits, including its dual-fuel offers and direct-debit discounts, will help it win over customers.
'We have to keep the big picture in mind, while also being more tactical,' she says. 'We are an all-round good-value energy company and our marketing will reflect that.'
Mackenzie's predecessor, Nick Smith, introduced a £50m brand campaign more than two years ago to encourage customers to reappraise British Gas.
Although its slogan from the original campaign 'Doing the right thing' continues to feature in its advertising, Mackenzie admits that she is reviewing the future direction of the brand.
British Gas is increasingly featuring its flame-characters in its advertising, which are similar to rival Npower's Orbs. Mackenzie says that the characters are crucial to emphasise the emotional element of energy and adds that 'they resonate well with our customers'.
Product innovation will also be key to British Gas, as it is keen to capitalise on the already-impressive take-up of its price protection promises as part of its focus on added benefits.
'Of course we have to fight our competitors on price but what is critical for us is that the benefits of being with British Gas far outweigh it,' concludes MacKenzie.
FACT FILE - NATIONAL MARKET SHARES (%) JUNE 04 DEC 04 JUNE 05 Gas Electric Gas Electric Gas Electric British Gas 59 24 57 23 53 22 Powergen 12 21 13 21 14 21 SSE 8 15 8 15 9 16 Npower 9 15 9 15 9 15 Scottish Power 7 12 8 13 9 13 EDF Energy 5 14 5 13 5 13 Source: Electricity distribution companies/domestic gas suppliers