Big discounts stop Contact Energy's exodus of customers

Monday 12th September 2011

The most generous discounts available to electricity consumers have stopped the exodus of customers from Contact Energy, but at a cost estimated by market observers to be around $14 million a year.

Highly placed industry sources have told BusinessDesk they estimate that is the cost of Contact’s new 22% discount off normal tariffs for people who receive and pay their power bills online.

Contact previously offered a 12% discount and had pursued a strategy of price leadership in the sector for more than a decade before last month’s decision to offer deep discounts after losing some 15,000 customers in the first two months of an Electricity Authority campaign encouraging consumers to compare power prices.

While Contact’s listed tariffs are still higher than many competitors’ before the discount, the 22% reduction available for online customers has transformed Contact’s competitiveness on the Consumer’s Institute Powerswitch website.

Latest figures from the Electricity Authority show Contact still lost a net 413 customers in the month of August, but that was a huge improvement on the average 7,679 customers lost in each of the previous two months. Contact has lost around 13% of its total customer base since it peaked in September 2008.

Industry observers have been amazed by the Contact offer, which is being actively extended to its existing customer base and extensively advertised, ensuring that uptake is likely to be high for the offer, which is believed to leave Contact with very little, if any, profit margin on its electricity sales.

Contact has already indicated it sees customer retention as a key goal at present, and expects electricity tariffs to continue climbing in future years, while two years of relatively low wholesale market spot prices are unlikely to be maintained.

Low spot prices have been one reason other, often smaller electricity retailers have been able to offer highly competitive tariffs in recent times.

At the time of its profit announcement last month, Contact’s chief executive Dennis Barnes said the company expected a 3% impact on mass market revenue, and that the 20% of customers already eligible for the discount would rise to 40% as they switched to online billing and payment. It has declined to put an estimate on the cost of its strategy reversal.

Contact shares were down 1.5% to $5.34 in early morning trading on the NZX.

The biggest customer losses in August went to MightyRiverPower, which runs the Mercury retail electricity brand, which lost 3,008 customers, more than the previous two months’ losses combined. TrustPower, which like Contact has always been at the high end of published tariffs, lost 814 customers.

The biggest winners were Genesis Energy, up 947, and Meridian, up 2,998. Both totals include the companies’ online brands, Energy on Line and Powershop respectively.

(BusinessDesk)

BusinessDesk.co.nz

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