The high street has provided many tales of woe this year. We Britons are apparently not as willing to spend our hard-earned cash as we used to be, given the squeeze on real incomes. In theory, this thriftiness should benefit the price comparison websites (PCW) – companies whose entire business model is centred around our desire to save money. In fact, last year Malcolm Morgan, an analyst at broker Peel Hunt, described the PCW market as “counter cyclical” and therefore likely to do well in a time of consumer downturn.
But the sun has not been shining on PCWs in 2017. GoCompare’s (GOCO) recent half-year numbers contained a note of caution after less-than-spectacular revenue growth. ZPG (ZPG) has revealed flat revenues from uSwitch, its specialist energy, broadband and mobile phone comparison site. Profits nearly halved at Admiral’s (ADM) Confused.com in the first half, due to extra costs from a major marketing campaign. And profit woes at Moneysupermarket.com (MONY) recently gave the group’s shares their worst day on the stock market in three years.
In fact, it seems the only site still celebrating the good times is the ever-popular Comparethemarket.com, owned by private group BGL. Revenues rose 13 per cent at the site in the year to June 2017, with growth reported across all the group’s product areas. And yet, the family-owned company has repeatedly pushed back its London initial public offering, with management recently revealing that it won’t join the market until mid-2018. It seems unlikely that decision was made on the basis of the FY2017 performance, but it may be that the subdued wider market has discouraged BGL from listing.
So are recent difficulties merely a blip in the growth trajectory of an exciting sector, or has momentum faltered for good?
Gio Compario-sized costs
For most financial products, demand for cheap rates and easy switching are still as high as when PCWs first launched just over 20 years ago. In fact, a 2016 Competition and Markets Authority (CMA) study found that among the 10 largest insurers, nearly a quarter of premiums were sold via PCWs. These trends have been reflected by top-line numbers from many of the largest PCWs: Moneysupermarket.com and GoCompare.com have both reported double-digit compound annual revenue growth rates in the past eight years.
But the cost of advertising – which has long been the thorn in the side of PCWs – recently stepped up a gear. Historically, these companies forked out for TV marketing campaigns which were generally successful in raising the profile of both individual companies and the entire digital comparison market. For example, between 2008 (when the first ‘Compare the Meerkat’ advert was launched) and 2012, Comparethemarket’s valuation more than doubled.
But the global marketing space is changing. Today, companies are far more reliant on Google than Gio Compario (GoCompare’s opera singing salesman), Brian (Confused.com’s robot) or Skeletor (Moneysupermarket’s new front man) to attract new customers. As a result, many of the PCWs have sacrificed a slice of their marketing spend to pay Google.
But this is creating a margin problem. Advertising on Google is done via a pay-per-click model and the companies that shell out the most get allocated the premium slots on Google’s search page. Today, with more people shopping for insurance on their phones, those positions have become like gold dust – the smaller mobile phone screen only shows the first couple of hits and so it is more important than ever for PCWs to be near the top. But as the companies have to pay Google every time a customer clicks through onto their site via one of these ads, this is a far less efficient way of making money. The rise in the proportion of customers generated this way chopped three percentage points from Moneysupermarket’s gross margins in the first half.
To make matters worse, many of the customers who click through on their phone don’t complete their purchase at the first time of asking. This means that often PCWs will pay Google multiple times for attracting a customer, only to get one – or sometimes no – purchases from them.
Out of energy
New contracts sold through a PCW earn commission. During the good times, this revenue model worked well: consumers want low prices, PCWs show the consumer the lowest prices available, suppliers want the customers and so will pay the PCW for drawing them in. However, it does mean that the websites are reliant on the insurers, energy suppliers or credit card providers to offer deals that encourage people to switch. Without incentives to change contracts, PCWs will struggle to attract customers and thus make money by commission.
This is what has happened in the energy market in the past few months. Here the big providers – such as British Gas, Eon and Npower – are not competing for customers as vigorously as they were in 2016, due to the potential upheaval in energy prices. A company is unlikely to spend time and money attracting new customers on a low-price tariff when, if a price cap is imposed, their rate is likely to change.
For Moneysupermarket, the problem has been exacerbated by the fact that it successfully conducted a number of collective switches in 2016. MoneySavingExpert – a Moneysupermarket.com owned site – ran a monthly collective switch called the Energy Bill Buster which negotiated British Gas’s cheapest tariff in four years, saving customers on standard rates an average of £357. Without demand for such collective switching the group’s home services division reported a 33 per cent drop in revenue in the first half of the 2017 financial year.
Regulatory traps
Amid all these challenges, PCWs have also faced scrutiny from regulators following complaints that they could be saving consumers more money. In September 2016, the CMA launched a probe to assess the arrangements between the sites and the companies that sell products through them and examine how to improve the benefits to consumers.
Although the full report is due to be published at the end of this month, March 2017 saw the regulator's initial view, which looked to favour the PCWs, based on research findings that users of PCWs reported a high level of "trust and satisfaction".
The survey found that 85 per cent of internet users have used a site at some point, with most saying they have used more than one of them to shop around. And although only 11 per cent believed that they had been shown all the possible deals on offer, most people were still happy with the sites that they had used. Still, there remain areas of concern including transparency and anti-competitive practices have been identified by the regulator.
But even a comfortable final outcome from the review would not leave the market bereft of regulatory challenges. The continued calls for an energy price cap could yet impose more pressure on these sites' energy divisions, particularly if the proposal for an Ofgem-run PCW gathers momentum.
Meanwhile, the changes to data protection laws due to hit Europe early next year are likely to have an impact on any company that holds or uses personal data. While it is unclear the extent to which these changes will impact the PCW market, this is yet another red flag.
