Shocks in store for electricals

The electrical retailing industry is set to face a further round of restructuring as already-squeezed margins come under further pressure, according to Verdict, the retail consultants.

Profit margins on warranties, the guarantees sold on electrical goods, are also likely to fall as greater competition is forced on retailers by the Office of Fair Trading.

A number of banks appear increasingly attracted by the warranties market: "The net result will be increased competition and lower prices," the Verdict report predicted yesterday.

"[We] calculate that warranties can contribute up to 4 per cent of gross profit margin. Any reduction in this figure will have a significant impact in a market where retailers' profits are already wafer-thin."

Verdict's findings come as Dixons, the leading electrical store group that owns Currys and PC World, extended its lead in the sector to 16.7 of market share in 1995.

Comet, the second-placed retailer owned by the Kingfisher group, succeeded in arresting the decline it faced in 1994, raising its share of the market to about 5.4 per cent, followed by Norweb at 2.5 per cent.

However, Verdict predicted a potential takeover battle between Comet and Scottish Power for Norweb's 68 stores, put up for sale last month.

"If Comet was to acquire Norweb, its number two position in the market would be consolidated. If Scottish Power won the battle, it would become number two and put a serious dent in Kingfisher's ambitions in the electricals market," the report argued.

Aside from the OFT report into warranty sales, retailers face continuing investigations by the Monopolies and Mergers Commission into their relationship with suppliers.

Despite significant gaps in market share between top players in the market, most directly comparable products are sold at the same price by all leading retailers.

Verdict claims that the wide variations in market share should produce massive scale advantages, with superior buying terms for market leaders.

Not all the problems are caused by retailers: "The supply side of the business is characterised by a large global number of manufacturers with well-developed brands in which they have invested heavily," the report added.

"This is not one of the markets where the retailers exert all the power. Verdict believes that manufacturers are in a position to influence prices to a degree that is rare in today's retail market and that this may contribute to what is a rigid gross profit margin structure."

While Dixons in particular has benefited from relatively inelastic price competition, should it choose to mount a price war it could do so, forcing some of the less competitive retailers out of business.

Hidden subsidies by regional electricity companies of their own stores are also expected to decline following the deregulation of the electricity market in 1998.

Despite current expansion by several key players, further rationalisation is expected as more high street outlets close in favour of larger out- of-town retail outlets.

The entry of Escom, the German computer firm, into the high street with its takeover of many Rumbelows sites, is not expected to reverse this process. The company competes on the low cost of its computers, but many potential buyers may be as attracted by its rivals' brand names.

Market shares

1993 1994 1995

% % %

Dixons Group

15.5 15.3 16.7

Comet

5.8 5.2 5.4

Norweb

2.5 2.4 2.5

Scottish Power

1.3 2.0 2.3

Escom

n/a n/a 1.5

PowerStore

n/a 0.3 1.1