MONEY COMMENT
Extended Warranties Under Investigation

By Jane Mack (TMFJane)
February 28, 2003

It's been a long time coming but finally the Competition Commission has come up with a plan of action to investigate the sale of extended warranties on domestic electrical goods. This morning they published a copy of a (very, very, very) lengthy letter they have sent to retailers, insurers and manufacturers setting out the issues they want to investigate.

It was last July that the Office of Fair Trading referred the matter to the Commission after publishing a report saying that they were a bit concerned about the monopoly certain retailers had over the market and pointing out that some of them had been singularly unhelpful in providing the information necessary to collate their report.

The OFT doesn't have the power to order retailers to provide facts and figures on how many extended warranties they sell nor how much profit is made from them. But the Competition Commission does! It estimates the annual sales of extended warranties on domestic appliances to be worth in the region of £800 million and they want to find out whether any companies have a monopoly and if they are exploiting it against the public interest.

The Commission says that because consumers tend to buy at point of sale, they take what's on offer (perhaps under pressure from the sales team) and don't shop around which, in turn, may mean retailers don't have to worry about offering competitively priced extended warranties. There's also little or no information about whether the products they buy are likely to break down so consumers are hardly in a position to make an informed decision about whether a warranty is necessary.

The Commission is also concerned that retailers may be using the profits from the sale of extended warranties to lower the price of electrical goods below what they would otherwise have been. If this is so it means that those who buy warranties (about 20% of purchasers) are subsidising those who don't which is hardly fair.

You'll not be surprised to learn that the retailers and insurance companies they're particularly interested in are household names:  Dixons (LSE: DXNS), Comet, Powerhouse, Argos, Littlewoods, MFI (LSE: MFI), Cornhill, Landmark, Pinnacle, London General. The Commission points out that Dixons Group appears to supply at least 25% of the market both by number and value although they add that they are not drawing any conclusions from that at the moment.

(You may recall that we wrote about Dixons only a couple of weeks ago when their new chief executive wrote to the Consumer's Association complaining about their latest report which said extended warranties were a waste of money).

The Commission is due to report by 1st July. I look forward to reading their conclusions!

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