Sick of rotten service? See it as a Buy signal
Matthew Vincent constructs a fast-rising share portfolio of companies that treat their customers appallingly he customer is always right,' said the 19th-century American retail pioneer Marshall Field — and shoppers at his Chicago store became so enamoured of their omnipotence, and of his assistants' assistance, that they spent enough to make him the wealthiest businessman in the city. His retail innovations — unconditional refunds and consistent pricing — soon inspired imitators. In Philadelphia, John Wanamaker replicated the model and elevated shoppers at his Grand Depot to the rank of royalty with his derivative decree that The customer is king" A new era of customer service was ushered in that, over the ensuing 100 years, saw stock flying off the shelves, and stock prices flying high.
But in the 21st century, the business model seems to have changed Companies that persevered with oldfashioned values have seen their stock fall — as investors in Marks & Spencer and British Airways have found. At the same time, companies with the worst reputations for customer service have been among the best performers on the stock market — as shareholders, if not customers, in Centrica, Carphone Warehouse, Ryanair, First Group and NTL will appreciate. If the customer is king, then the chief executive is now Oliver Cromwell. The attitude to customers may be cavalier, but the management pragmatism is decidedly roundhead.
British Gas owner Centrica is arguably the clearest example. Last month, the company was named 'worst energy supplier' for the second year in a row, in a customer survey by Uswitch.com. This followed a record number of complaints about the company to the consumer body Energywatch. Between October 2006 and March 2007, there were 21,427 complaints about British Gas compared with only 7,644 about all the other UK energy suppliers put together. According to Karl Brookes of Energywatch: 'What consumers find unforgivable is the failure of British Gas to offer help and the high standards of customer service that consumers deserve.' What was Centrica's response? Grudgingly to admit some 'teething problems', but also to dismiss the Uswitch survey as 'misleading'. How could they afford to do this? Because their shares have risen 38 per cent in the past 12 months, compared with a 16 per cent rise in the FTSE-100, and they're tipped to rise even higher. With 900,000 new customers switching back from the frying pan to the British Gas fire, Centrica is tipped as a 'buy' by Merrill Lynch, Goldman Sachs, UBS, Evolution and — dare I say it — Investors Chronicle.
Carphone Warehouse, it seems, can also stand the heat. Last November, the telecoms ombudsman Otelo reported increased complaints about Carphone's TalkTalk phone and broadband service. Customers told of delays, poor service and sheer frustration at not being able to get a connection. Carphone chief Charles Dunstone hit on a novel way to humour them: a blog that could only be read if you had an internet connection. At the same time Ofcom, the telecoms regulator, said that increasing competition had led to cases of unfair selling, the most common being 'slamming', in which customers were persuaded to switch suppliers without realising it. Slamming down the phone is a better option, but the stock market likes the sales patter. In April, Dunstone told analysts: 'We've dragged ourselves up to the same bad level as the rest of the industry.' Four analysts promptly reiterated their 'buy' recommendations. Over five years, the shares have risen nearly 300 per cent and outperformed the FTSE-100 by 250 per cent.
Ryanair tops polls for complaints, too. Figures from the European Consumer Centre showed it was the most complained-about airline flying into Ireland last year, with 22 times more dissatisfied passengers than BA. So it wasn't surprising that the company was called before the Commons Transport Select Committee in April to respond to complaints about customers' experiences. Jeffrey Donaldson MP read a passenger's letter describing low-cost flights as 'very unpleasant, a good proportion of people use foul language and are generally awful'. But nor was it surprising that Ryanair's equally outspoken chief executive, Michael O'Leary, refused to appear. Now, claims the Guardian, Gordon Brown's government may legislate to force Ryanair to operate a proper online complaints service. It's unlikely that Mr O'Leary will be replying to any emails, though. Earlier this year, he reported third-quarter net profits up 30 per cent to £31.6 million On the back of this performance, his shares are up 62 per cent in 12 months, despite a recent warning of fewer aircraft seats being filled.
South West Trains offers a travel experience that is little better, according to its passengers, but makes no pretence of being low cost. Its new 450-class carriages 'are cramped and uncomfortable', say users of the www.no450.com website. Last week, when South West Trains' owner, Stagecoach, increased 'off peak' ticket prices by 20 per cent and the rail regulator took no action, customer watchdog Passenger Watch threatened to fight the increases in the High Court. FirstGroup, which operates First Great Western, has faced more direct protests. In January, 2,000 angry commuters printed fake tickets renaming the company Worst Late Western. But the operators' shares have risen as fast as their 'super-saver' fares. Stagecoach shares are up nearly 17 per cent in 12 months, and FirstGroup's by 70 per cent. Stagecoach may even win the East Coast Mainline franchise with Virgin.
With all its existing rail and airline businesses, Virgin is one company that you'd think would avoid further customer aggravation: when Sir Richard Branson announced that his mobile phone business was merging with Britain's most complained-about cable TV company, NTL, to be rebranded Virgin Media, he looked like a glutton for punishment. NTL's customer service was so poor that subscribers set up a website called nthell.co.uk to express their frustrations. But in the US, according to the FT, shareholders 'took a rosy view of the company' when it floated on Nasdaq in 2004, and have since chased its shares up 80 per cent.
So do customers no longer matter? To find out, I back-tested two portfolios. The 'Customer is always wrong' portfolio comprised Centrica, Carphone Warehouse, Ryanair, FirstGroup and Virgin Media. The 'Customer is always right' portfolio comprised competitors with the better customer service ratings: Scottish & Southern Energy, BT, British Airways, Sea Containers (GNER), and BSkyB. Over the past five years, the 'Customer is always wrong' outperformed by 148 per cent to 38 per cent. See what I mean?
It seems that today's companies take their inspiration not from Marshall Field but from a different 19th-century figure: Oscar Wilde's pessimist. They know the price of everything and the value of nothing.
= = Matthew Vincent edits Investors Chronicle.
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