Electric dreams turn into retail nightmare

The collapse of the UK’s third-largest electrical retailer, PowerHouse, has come at a crucial time in the development of electrical retailing, as sales come under pressure from a decline in consumer confidence, and the Competition Commission is expected to unveil new rules on the marketing of revenue-generating extended warranties this month, following an investigation.

The UK market is dominated by a handful of powerful chains. Dixons Group is the biggest player with 1,111 stores across its Dixons, Currys, PC World and The Link brands. It produced a turnover of &£5.8bn for the year to May 3, up 18 per cent on the previous year, and a pre-tax profit including goodwill and exceptional items of &£279m, down from &£282.3m in the same period. Kesa Electricals-owned Comet Group, which recently demerged from retail group Kingfisher, is the second largest with 259 outlets and a turnover of &£1.4bn for the year to February 3 (&£1.3bn for 2001-2002) and a pre-tax profit of &£43.3m (&£38.4m).

PowerHouse, a company formed by a management buyout of the retail arms of the regional electricity companies Southern Electric, Eastern Group and Midlands Electricity, was in third place with 232 outlets and a turnover of &£319m for 2001-2002 according to Mintel, prior to going into administrative receivership. It had suffered a series of setbacks, including a warehouse fire which destroyed a large amount of stock, the failure of its credit check system during Christmas, and poor sales during that crucial trading season.

But the crunch time for the company came in August when its credit insurers withdrew their support, leaving suppliers without cover for the goods they delivered to stores. After going into administrative receivership, 93 stores are expected to be closed with the loss of 800 jobs.

According to Mintel, there was an overall decline in consumer spending on electrical goods in 2002, but it claims this was mainly due to an 8.2 per cent fall in sales of major household electrical goods from &£4.2bn in 2001 to &£3.7bn last year. A lack of innovation in this sector means that consumers only replace items when they break down, leading to an average replacement cycle of seven years.

In the brown goods market, where technological development is more rapid, sales grew 1.9 per cent to &£20bn in 2002, but this was dwarfed by the 6.5 per cent growth in the segment the previous year. Rhys Williams, a retail analyst at Seymour Pierce, describes the state of the electrical market as “indifferent” with particular segments, such as PCs, affected by weakened sales.

However, there is little doubt within the industry that all three of the major electrical retail groups are expected to see a decline in sales of extended warranties following the negative publicity generated by the Competition Commission’s investigation, which began in March.

Sales of extended warranties are worth about &£800m annually and analysts estimate that they account for between 30 and 50 per cent of profits for the Dixons Group and Comet.

The Consumers Association accuses the industry of being dishonest about the need for an extended warranty, as purchases may already be covered by a manufacturer’s warranty, consumers’ own household insurance or the Sale of Goods Act, which requires that products are in a fit state to be sold. It also claims that consumers are often pressured into buying extended warranties by salespeople who claim products are not as reliable as they used to be.

A spokesman for the Dixons Group says that the group has co-operated fully with the inquiry and is in favour of the first proposal from the commission, which includes providing consumers with improved point-of-purchase literature and extending the cooling-off period. The commission also announced a second proposal, which forbids retailers from selling warranties on the day a product is sold. The latter would have a more severe effect on revenues.

One industry insider says that there is no doubt about the impact that the investigation into extended warranties has had on PowerHouse and on the industry as a whole. “There will be a decline in sales of extended warranties. But only time will reveal the extent of the impact. It will be imperative that the market leaders create more profit from elsewhere. If money can’t be made on the warranties it will have to be recouped on the electricals.”

Given that the brown goods market is driven as much by cost as by new product development, it is unlikely that there will be a hike in the price to consumers of low-cost products such as portable TVs or DVD players, which are increasingly sold in non-specialist outlets.

The industry insider believes that PowerHouse will be unique in falling victim to this increased competition from non-specialist electrical retailers. He thinks that these retailers will continue to handle low-cost, low-margin items while the electrical retailers will drive growth through higher-value innovative products aimed at aspirational buyers. The same approach will apply to the white goods market, where electrical retailers will concentrate on building the high-ticket end of the market with design-led appliances and fitted kitchens, rather than volume.

Although trading conditions are likely to become increasingly tough with the expected introduction of rules relating to the marketing of extended warranties, and more competition on pricing owing to the greater variety of retailers entering the market, there is little possibility of any new electrical chain emerging to challenge the dominance of the Dixons Group or Comet.