Three PROW electrical goods retailers have agreed to make limited changes to the way they sell extended warranties to avoid a full-blown UK competition investigation.
Dixons, Comet and Argos will contribute to a new website comparing the features of warranties sold in different stores, and bankroll independent “mystery shopper” exercises to check that shoppers are being given accurate sales advice.
In addition, Dixons has agreed to disclose clearly the annual cost of its “pay-as-you-go” warranties, amid concern that they can be expensive if held for long periods.
The store chains agreed to the changes, announced on Tuesday, to appease the Office of Fair Trading, which started investigating the £1bn-a-year market last April.
The pro-consumer group Which? has repeatedly questioned the value of some extended warranties, which typically cover the cost of repairing or replacing a gadget outside its manufacturer’s warranty period.
About two-thirds of such policies were sold by electrical goods retailers when a gadget was purchased, the OFT found, making it difficult for independent providers of cover to win business.
Other factors that helped merit a referral to the Competition Commission for in-depth investigation were were the limited shopping around by customers and a lack of information on the reliability of electrical goods and repair costs, the OFT said.
However, the undertakings agreed with the main companies in the sector would remove this threat.
The extended warranty market has been investigated on several occasions by UK competition authorities.
Describing the probe into the sale of extended warranties as “one of the longest-running sagas in UK retailing”, Nick Bubb, an independent retail analyst, described the outcome as “fairly feeble”. The impact on major retailers would be minimal, he said.
Selling extended warranties is an important part of the business model of electrical retail groups. Although it accounts for a small proportion of overall sales revenues, the activity is highly profitable, and supplements the wafer-thin profit margins on electrical hardware.
“The sale of warranties isn’t as profitable as it used to be, but it’s still pretty high margin,” said Mr Bubb. “Consumers want to buy peace of mind, but the fact is, electrical appliances don’t break down as often as people think.”
Ann Pope, director in the OFT’s goods and consumer group, said: “We remain concerned that, despite recent improvements, this market does not work as well as it could for consumers.
“We welcome the retailers’ initiative in offering undertakings and we now want to hear from consumers and others whether they think these will lead to improvements.”
The OFT said Dixons was the main supplier of pay-as-you-go extended warranties, under which customers purchase a rolling contract involving regular payments. They are not offered by Comet and Argos.
Dixons’ customers generally paid significantly more for a pay-as-you-go warranty than they would have if they had opted for a fixed-term arrangement of the same duration, the OFT said.
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