The Monopolies & Mergers Commission’s investigation into price fixing in the 14bn electrical goods market is one of the longest, largest and most expensive the body has undertaken. Since the investigation began in April 1995, it has been delayed, reviewed and stretched out to the two-year maximum allowed by law.
The final report was submitted to the Department of Trade & Industry the day before the general election, and it will be a good six to eight weeks before President of the Board of Trade Margaret Beckett will read the report and authorise its publication.
The MMC is looking into the way electrical goods, from washing machines to television sets, cost the same whether they are sold through multiples such as Comet or Dixons or through small independent outlets. Is this the fault of the manufacturers for fixing prices or retailers for operating a cartel?
As the industry awaits the MMC findings, Verdict Research has published its own report exonerating retailers from setting prices between themselves. Rather it is the suppliers which are forcing price uniformity onto the market according to “Verdict on electrical retailers”, which states: “Suppliers and manufacturers have an unusually high degree of influence on the market in order to stabilise and maintain control of prices. This enables them to protect their existing profit levels and the integrity of their brands.”
A spokesman from a leading electrical goods manufacturer has one reply to this: “If only we could…” He says that if there were any profits for the suppliers to protect, Verdict might have a point. But he complains of wafer thin margins which have existed in the UK electrical market since the late Seventies – among the 18 manufacturing companies being investigated by the MMC, profit margins are estimated to be less than 0.5 per cent.
One industry insider pinpoints the price war of the late Seventies as the moment when uniformity started creeping into the pricing of electrical goods. This price war, he claims, was initiated by the high street multiples attempting to gain market share from the independents. But its effect has been to cut margins to the bone for both retailers and manufacturers and the industry has never recovered from it.
He complains that no one is able to put value back into the market because of the downward spiral. Worse, this could adversely affect new product development in the UK, as manufacturers stand to make little gain from products which make little profit.
But Verdict analyst Clive Vaughan responds: “Is it credible that retailers and manufacturers conspire to rig a market so that no one makes any money? I’m sceptical – the market is dominated by manufacturers, although they may have wafer thin margins in the UK.”
Either way, electrical retailing in the UK is in a parlous state, with store numbers falling to 9,610 from 13,704 ten years ago. The shake out of the sector continues. Last year, the number of total specialist stores declined six per cent according to Verdict, and chains such as Colorvision, Escom, Norweb and Powerstore disappeared altogether.
Manufacturers argue that this is evidence of price competition in the market, and that the big chains are using price against the smaller ones. The classic criticism of retailers is that if you ring up five of the multiples and ask them how much a Sony colour TV costs, they will all give you a price of 599. But a Sony spokesman points out that these are the advertised, recommended retail prices and the stores all have their own lowest price promises which will lead to price uniformity. If you actually go into the shop you may well be able to beat the price down or get the TV more cheaply with a deal: for instance if you buy a video player as well.
The arguments between retailers and manufacturers have become ever more detailed and complex in the course of the MMC investigation. It will have to decide who is to blame, if anyone, and what can be done.
Verdict argues that if the MMC decides to encourage more price competition, this would benefit the multiples, as they would have the buying clout to offer discounts. The result would be that more smaller chains and independents would go to the wall, so concentrating retailing in fewer hands. The multiples would then be tempted to put up their prices.
There may be little the Commission can do to encourage competition. It is already illegal for manufacturers to refuse to supply retailers which want to discount. As Verdict concludes: “Whether the MMC is able to impose and enforce a different relationship between retailers and their suppliers remains to be seen.”