Bottom Line: Warranty shock

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The Independent Online
INVESTORS should already be aware of the importance of extended warranty sales to the profits of electrical retailers - after all, analysts have been banging on about it for years. If the Office of Fair Trading does choose to investigate, however, customers could be about to find out, too. That was enough to send Dixons shares down 16p to 212p and Kingfisher's down 16.5p to 706.5p.

Both groups deny customers are being ripped off. They say the 70 per cent margins some analysts claim they make on the business fail to take account of overheads, like shop space and sales assistants, required to sell them. But these overheads are needed to sell the equipment, whether or not the customer opts for an extended guarantee. The cost of claims apart (and history suggests these are remarkably low) the warranty premium is virtually pure profit.

OFT investigation or not, that revenue will not disappear completely. But the adverse publicity about warranties could make some more reluctant to buy. And premiums could fall sharply if retailers are forced to make it clear that, invariably more cheaply, guarantees are also available from product manufacturers. Retailers may argue that their warranties offer a more comprehensive service; cash-strapped customers may be rather less convinced.

Threat of investigation simply adds to the list of reasons for not buying Dixons shares. Kingfisher, with its wider spread of businesses, is less at risk. But it could make it even harder for the electricity companies to earn a decent return from unregulated businesses.