Outlook: Dixons fever

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THERE WERE two striking features about Dixons' results yesterday. One was the continued soaraway success of the group's Freeserve Internet service provider. The other was price deflation. The latter is beginning to strike home across a huge range of product areas. But nowhere is it more evident than in electrical goods.

Take personal computers. A couple of years ago a decent, high specification PC would have set you back a good pounds 1,800. Last year it would have cost around pounds 1,200, and you would probably have got more features, more software and possibly a free printer thrown in. Now you can pick up a reasonable PC for pounds 500 from some supermarkets.

There are several reasons for this. One is the Asian crisis, which has led to plunging prices for components such as chips. Another is rising volumes. As PC sales grow, the increased volume leads to economies of scale and lower prices. A third reason is increased competition on the high street. Dixons may have 20 per cent of the UK market, but competition is rising from the supermarkets and from direct sellers such as Tiny and Time, which have set up their own retail chains.

Most retailers regard price deflation as a bete noire, but for Dixons there may be benefits. One is that as PC penetration grows, it means that Dixons and others are likely to enjoy higher sales of peripherals and software. Another is that it seems unlikely that Dixons will pass on the full benefits of product price deflation to consumers immediately. So there is at least the potential to widen margins.

Dixons would dispute this, of course, saying that competition in the market is far too tough to allow such practices to go unpunished. But it was only a couple of months ago, remember, that Intel, the chip maker, blamed Dixons for using its market dominance to overcharge for PCs. That prompted Peter Mandelson (remember him?) to get involved, and there is now an OFT investigation into PC prices.

Not that Dixons' shareholders will be complaining. On the back of the company's Freeserve success and the launch of digital television, its shares have soared by almost 80 per cent since October. Certain "conehead" technology analysts even believe we could be looking at the next Yahoo!. A nice thought, although Dixons might have a little way to go yet before its brand name commands quite that kind of global recognition.

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