Profits kept low in electricals

IT IS difficult to make money in the electricals retailing sector because of an outmoded adversarial approach to negotiations between the big retailers, such as Dixons and Comet, and their suppliers, writes John Willcock.

In other retail sectors suppliers and sellers have worked together over the years to develop mutually benefical relationships. But electrical suppliers and sellers have kept their distance, and this has kept margins down, according to Verdict Research, a commercial research company.

The head-to-head clash between Dixons and Comet has also kept a downward pressure on prices, says Verdict. Electricals manufacturing is an international business involving powerful brands, but overcapacity exists in the UK, which is exploited by Dixons and Comet.

Verdict says that such a duopoly is 'unhealthy' and it welcomes the growing competition from the regional electricity companies, such as Norweb and Scottish Power.

The Office of Fair Trading has launched its investigation into warranties not because of allegations of overcharging, according to Verdict, but because retailers have been pushing their own guarantee schemes ahead of the suppliers' own services.

Verdict says: 'We believe the investigation will highlight the ridiculous imbalance between gross margins on product (under 30 per cent) and warranties (over 40 per cent).

'To provide comprehensive warranties retailers need to employ an in- house repair/service operation or a third-party contractor. This costs money and consumers cannot expect this service for free. On the other hand we would argue that there is a strong case for gradually raising gross margins on product and realigning prices on warranties to produce a better balanced profits stream.'