Despite his half century in the electrical retailing industry, Dixons chairman Stanley Kalms could be forgiven for feeling just a little overburdened.
He faces an inquiry by the Office Fair Trading (OFT), into Dixons’ pricing of personal computers.
Peter Mandelson has sent a letter to the OFT voicing concerns about Dixons’ pricing policies following an attack by Craig Barrett, chief executive of Intel, the world’s largest microchip manufacturer. He accused Dixons of eroding personal computer sales in the UK by charging high prices (See Box).
This follows damaging publicity about extended warranties – policies which ensure bought goods against breakdown. The OFT report two years ago found that retailers were abusing their power when selling warranties and they were ordered to give greater information at the point of sale about warranties.
But perhaps most significantly, Dixons, along with other electrical retailers, now faces formidable competition from the supermarkets. This week Somerfield announced that it is to sell low priced CDs and stereos in the run-up to Christmas. Earlier this year, Tesco and Asda started selling personal computers and supermarkets are already selling home electrical products at pile ’em high, sell ’em cheap prices.
This is a significant threat to Dixons and others in the electrical retailing business such as the Kingfisher-owned Comet. Dixons’ and Comet’s advertising is predominantly based on price. Consumers seeing goods in their local supermarket at prices much lower than the ones advertised by Dixons and Currys will question how attractive their prices really are.
“The problem is that after the extended warranty publicity, people don’t really like Dixons. And I don’t know if they trust them,” says one agency source.
Another source says: “They offer goods at what seem like cheap prices but what you don’t realise is that you need to get add-ons or pay for delivery and tuning of things like TV sets.”
Problems for Dixons are exacerbated by the fact that the supermarkets are now keener than ever to portray an image of value.
Charles Dunstone, managing director of the Carphone Warehouse says that Dixons and others are experiencing a good deal of short-term pain as a result of this.
“I think this (supermarkets selling electrical products) is a smoke screen. It’s not critical to their (the supermarkets’) business and I think it is in their interests to explore areas where they can give the customer the impression of value.”
A number of observers including Dunstone also question whether the “rip-off” tag which has been associated with Dixons and other electrical retailers is entirely justified. He argues that much of the blame can be laid at the door of the manufacturers.
“Dixons is taking quite a lot of the blame for pricing issues, but it is manufacturers which try to supply at high prices,” he says. “Dixons is doing things by the book, working directly with the manufacturers, while the supermarkets are buying on the grey market. The problem is that unlike the supermarkets, Dixons needs continuity of supply for a greater number of outlets, whereas the supermarkets can be more flexible and can buy speculatively.”
This is a view echoed by Clive Vaughan, research manager at retail consultants, Verdict.
“We have to look at the evidence. Even though Dixons is the market leader in the UK it is not making huge profits and it has lost lots of shops. If you look at the profit it makes on turnover, it does not appear to be making excessively high margins. “
The Dixons group which consists of Dixons, Currys, PC World and The Link made 219m pre tax profit in the year 1997/8 on turnover of 2.77bn, an eight per cent return.
But while these are significant figures reflecting what is undoubtedly a powerful player in the UK with just over 900 outlets across its different brands, compared to its most important supplier Sony, Dixons has relatively little power. This must come into play at the negotiating table.
Roy Maconochie, retail analyst at Henderson Crosthwaite, says: “A UK player compared to a world multinational such as Sony is peanuts. Electrical retailers cannot exert buying power in the same way as say a Sainsbury’s or Tesco can.”
“We don’t actually understand why the electrical retailing sector gets such a hiding from the Government. We do have some sympathy with Dixons,” says Verdict’s Vaughan.
Vaughan argues that one of the main reasons goods are priced more cheaply in the US compared to the UK is because retailers have more power and are thus able to drive prices down.
He says that were supermarkets to get involved in selling electrical goods over the long term, they might well come up against the same problems as Dixons. That is, as UK focused retailers they would be hard pushed to negotiate on prices set by suppliers such as Sony.
Ironically, while Kalms is fronting a high profile campaign against the UK introduction of the euro, some observers think that Europe could provide the key to cheaper prices for retailers. If the UK-based chain were to expand across Europe and increases its bargaining power, this could drive prices down.
“As the euro comes in, the balance will change,” says Maconochie. “Kingfisher for example now has a six per cent market share across Europe and owns the Darty chain in France.” As it expands, he argues, the going will get tougher for Dixons.
Dixons may have to re-examine its advertising strategy and move away from a purely price-led proposition across all its brands. It has already started to do this with its recent TV advertising campaign for its Currys chain. A spokeswoman for Dixons says: “With Currys we are looking to emphasise range rather than price and are now using the catchline “The choice for you.”. We are very keen to re-emphasise value but choice and range is also important.”
Some argue that Dixons will always be able to take advantage of its high street dominance. They also point out that it stands to capitalise on the launch of digital and increasing electronic convergence.
One former cable TV marketing director says: “If you are able to get distribution through Dixons, that gives you a retail presence on every high street, as well as joint press advertising. This is something that cable TV has never had and is one of the reasons for its poor performance.”
In reviewing its strategy, Dixons must be considering ways of strengthening its negotiating position and countering price-led competition by enhancing its service provision. To this end, expansion into Europe and brand-led rather than price-led ads may not be far off.
But even if Dixons is not found guilty of overcharging for the PCs it sells and no OFT investigation materialises, the damage has already been done to shoppers’ perceptions of its prices.
How PC is Dixons?
Dixons’ high street dominance has long been a bugbear for the computer industry, but one which now threatens the whole sector with an OFT enquiry.
Since Intel chief executive Craig Barrett raised concerns over Dixons role in maintaining the high price of PCs in the UK, the computer industry has remained reluctant to speak openly about the issue.
Yet the matter of PC pricing was raised last July with the then consumer affairs minister Nigel Griffiths by Fujitsu Computer. Zo Tompkins, public relations manager for Fujitsu says: “We are very keen to see UK pricing come in line with European pricing.”
Industry insiders claim that the Dixons group has more than 50 per cent of high street sales. But a spokeswoman for Dixons says: “On Dataquest figures we have a 14 per cent share of the high street market and a 7 per cent share of the PC market as a whole.” The average margin for the Dixons group on PC sales is less than ten per cent.
Dixons Group chief executive John Clare has written to Peter Mandelson, the Secretary of State for Trade and Industry, and to John Bridgeman, the director-general of Fair Trading, welcoming any OFT investigation.
He says that the role of component suppliers, such as Intel should be considered, as well as the impact of VAT on the purchase price of PCs.
A spokesman for the Dixons Group adds: “The point is that components make up a huge part of the cost of a PC, if the component is expensive it will have an impact on the cost of a PC.”
Pete Day, principal consultant of Woking-based INTECO Corporation says: “By the middle of the year the UK price of new PCs had fallen to a level where they were on a par with France, but prices in Germany still remain around 25 per cent lower.”
He adds: “Overall specifications in the UK are higher, but not enough to justify the price difference compared to, say, Germany.”
Industry insiders point out that tax rates in Germany are only one to three per cent lower than the UK. But they also claim that German retailers operate on tight margins and have a tendency to sell low-priced unbranded home PC’s.
Although Dixons dominates the high street, more consumers are also turning to the direct channel using the likes of mail-order company Time, which has its own retail showrooms, and Dell, which sells through the Internet.
Brian McBride, Dell’s vice-president for the UK and Ireland, says: “I think this is the most competitive market in Europe and there are plenty of ways consumers can buy PCs.”
Industry insiders claim Dixons’ margins on its cheaper own-label ranges tend to be substantially less than those for the higher-priced branded computers such as Compaq and Packard Bell.
Paolo Puppoli, an analyst at IT research company Dataquest Europe says: “I think that Dixons’ reasons for coming out with cheaper models are partly to do with the influence of alternative channels and also to open up the market to new users.”
He believes that Dixons will also come under pressure from suppliers to reduce its margins on branded goods in order to stop any potential loss of their market share.
The industry claims that prices cannot be compared like-for-like with those on the continent because UK consumers demand that software and printers are bundled into the final price.
Dixons plays a part in setting high street prices, but the group is coming under increasing pressure from alternative channels to offer consumers cheaper products. With falling PC prices the OFT may find that by the time it completes its enquiries, the consumer already has benefited from a readjustment in market forces.