High-priced warranties keeping Dixons in profit

NEARLY all the profits made by Dixons Group last year, and nearly all it is expected to make this year, came from the sale of extended warranties on its electrical products - an extra that has been described by the Consumers' Association as 'a waste of money'.

Research by Tony Shiret, retailing analyst at BZW, indicates that Dixons made pounds 70m from extended warranties in 1990-1, compared with pre-tax profits of only pounds 70.3m. This year, the UK's largest electrical retailer is expected to make pounds 75m from warranties, while the profits for the group as a whole are only expected to rise to pounds 80m.

A comparison of the costs of extending a manufacturer's warranty from one to three years, conducted last week, shows that warranties sold by Dixons, and its sister company Currys, are more expensive by as much as two-and-a-half times. For instance, the warranty on a 26-inch colour television at Dixons was pounds 155, while at rival Comet it was pounds 59.99.

The extended warranty on a pounds 500 camcorder was pounds 115 at Dixons but pounds 69.50 at Techno Camera, and the warranty on a fridge-freezer was pounds 115 at Currys and pounds 44.50 at Rumbelows.

David Attwood, of the Consumers' Association's Which? magazine, said: 'In most cases, you will save money by not buying the extended warranty.'

John Clare, managing director of Dixons, denied the warranties were too expensive. 'Warranties are insurance policies,' he said, 'and you have to look at what you are getting in the small print. You cannot compare the prices.'

However, shop assistants at both Techno Camera and Comet insisted their warranties were better than Dixons'.

Mr Shiret estimated that Dixons sells pounds 100m worth of warranties. It pays about pounds 5m to Cornhill Insurance, its partner in the warranty business, but its warranties are handled through its own insurance company in the Isle of Man.

Dixons' 1991/2 accounts show provisions of pounds 75m to cover warranties, though about pounds 20m of this relates to the group's US business, Silo.

The other pounds 55m covers more than one year's claims, according to Robert Shrager, the group's finance director. Assuming this amount covers two years' claims, this leaves pounds 27.5m of claims in pounds 100m of business. After deducting Cornhill's share, this would leave a gross margin of 67.5 per cent.

Mr Shrager, while not confirming any of these figures, said there are overheads in the shops which should be deducted from the warranty profits for a correct estimate of how much money is being made.

Mr Shiret argues however that because there is no need to warehouse or distribute warranties, and because they are sold only when an electrical item has already been sold, there is little marginal cost on these sales. He contends that the pounds 70m a year made from warranties is pure profit.

(Photograph omitted)