Outlook: Built-in obsolescence puts warranty inquiry past sell-by date

Londis battle

How often has your washing machine packed up in the two years it has taken the competition authorities to decide you were unfairly sold an extended break down warranty? The wheels of bureaucracy grind mighty slow and, not for the first time, the problem identified at the outset of an inquiry is not the same one that exists when ministers finally get around to inventing a remedy. Most products have obsolescence built into them, even weighty tomes from the Competition Commission.

Yes, extended warranties can be a rip-off, and, no, there isn't much competition in the way they are sold to customers at the point of purchase. But while the Commission has been investigating the problem (for the second time in the past decade), the supermarkets have crept in and eaten the lunch of the likes of Dixons and Comet, the high street retailers who rely most heavily on extended warranties to keep generating profits. In the case of Powerhouse, more than its lunch went missing.

For those customers who buy a £3,000 plasma television and want the comfort of knowing that when the wall bracket snaps and the screen implodes a friendly Dixons engineer will be around in the morning, there is an extended warranty.

Granted, at £679 for three years, it is not cheap, but a plasma telly is a tricky piece of kit.

For those who do not want to spend that kind of money, there are the "seasonal goods" aisles of most major supermarkets where a cut-price TV and virtually any other electrical good can be loaded on to the trolley without the hassle of a salesman trying to foist extended warranties on to passing shoppers. The same supermarket will then sell you a bunch of rocket which cost a few pence to harvest for £1.50. No prizes for guessing who makes a bigger net margin, Tesco or Dixons.

The measures announced yesterday by Patricia Hewitt, the Secretary of State for Trade and Industry, in order to reform the sale of extended warranties will probably bite into the profits of the electrical retailers although not by as much as has the aggressive behaviour of the supermarket majors?

It could have been a lot worse had the five-strong panel of commissioners followed the advice of its dissenting member, Christopher Clarke, and banned the sale of extended warranties outright at the point of purchase. Out of shop, out of mind. How many consumers would buy a warranty as an after thought?

As it is, most of the reforms are not too onerous - an outcome that was reflected accordingly in rising share prices across the sector yesterday. The better retailers already display the cost of warranties alongside their DVDs and tumble dryers while the requirement to extend the cooling off period from 14 days to 45 days may not have that great an impact. Anyone who decides afterwards that the warranty is not worth the paper it is written on, will probably have sent it back in the first two weeks anyway.

Likewise, the requirement to let consumers know they can buy warranties elsewhere does not mean they will act on the advice.

Even now, this is not the end of the saga. Ms Hewitt has promised that if the electrical retailers are still making excess profits from warranties in two years time she will set the Office of Fair Trading onto them. In the meantime, who is going to investigate the price of rocket?

Londis battle

The takeover battle for control of the Londis chain of convenience stores is hardly in the Safeway league but in terms of excitement, it promises to be a Christmas cracker.

In one corner is the Irish food distributor Musgrave, which already owns the Budgens chain and has made a £40m offer for Londis. In the other corner is Bill Grimsey's Big Food Group, the owner of Iceland and the cash-and-carry chain Booker, which has also bid, er, £40m.

Who you want to win comes down to whether you are a shareholder in Londis or one of its four executive directors.

If Musgrave prevails, then the Londis chief executive Graham White and his three fellow executives will walk away with £20m by exercising their share options over 51 per cent of the company, leaving the 1,956 shopkeepers who own Londis to divide up the remaining £20m.

If Big Food wins the day, then the management will only get their hands on £600,000 of the sale proceeds with the rest going to the Londis shopkeepers, provided Mr Grimsey can persuade Mr White and his colleagues not to exercise their option.

The Londis directors began by telling Mr Grimsey to get lost. Yesterday, after he had gone over their heads with a public offer direct to the shareholders, they were suddenly not so sure and agreed to adjourn the extraordinary meeting to vote through the Musgrave deal, scheduled for 30 December, in order to allow other bidders to examine the books. Crucially, however, they will only entertain bids which are "directly comparable" which presumably means ones which enable the directors to cash in.

Rarely can a takeover battle have exposed such a gulf in interests between the owners and the managers of a business. The difference in the value of the two offers to a Londis retailer is £10,000, which would pay for a winter cruise in some tropical clime. The difference in value for the four executives is £19.6m, which is enough to retire on.

The Musgrave offer always looked like a pretty cynical piece of timing. Although they had been discussing their approach with the management for four months, Londis retailers were being given just three weeks, including Christmas, to decide whether to approve it. Some shareholders are still too busy running their shops to realise that a bid has been made, let alone vote on it.

Should it come to a showdown, Mr Grimsey has to muster the support of 25 per cent of shareholders voting at an extraordinary general meeting in order to block any deal which would allow the directors to walk off with their £20m.

Mr White and his colleagues argue that they deserve their money for having rescued a near bankrupt company and increasing its value to £40m. They also say the Londis shareholders will do jolly well since they will each get £10,000 for shares which originally cost £50. Not quite in the same league, of course, as the £7m in compensation the four directors have already pocketed for giving up their five-year rolling contracts.

For what it is worth, the Musgrave offer has been recommended by the four independent directors, who also happen to be Londis shopkeepers They are not, however, "independent" in the Higgsian sense. One of them, the chairman Peter Williams, has been on the board for 25 years, is paid £60,000 a year and introduced the chief executive to the company. The other three will walk away with £75,000 each for the work they have put in on the bid which is seven times more than their fellow retailers.

All those dull but worthy issues such as synergies, buying power and shared management values have rather fallen by the wayside in the face of Mr Grimsey's full-frontal attack on the greed of the Londis directors.

With a following wind, Mr Grimsey should be able to muster enough votes to see off Musgrave should it come to a vote. But, for his offer to succeed, the management must agree to talk turkey. Everything has its price and somewhere out there is a figure everyone can live with.

m.harrison@independent.co.uk