Electricals `cannot cut prices'

Margins leave no room for reductions, says report criticising ministers' ban on RRPs

GOVERNMENT attempts to ban price-fixing in electrical goods will fail to cut prices because retailers' profit margins are already wafer-thin, the country's leading authority on retailing says today.

A report on the sector by Verdict, the retail consultancy, shows the majority of electrical retailers are taking profit margins of less than 5 per cent. Some margins were as narrow as 0.1 per cent, leaving no scope for price cuts.

The Department of Trade and Industry last week said it would ban the use of recommended retail prices on televisions, hi-fis, computers and other electrical goods from 1 September. The move followed a recommendation last July from the Monopolies and Mergers Commission, which found prices were uniform across the country.

"Verdict does not understand why the highly competitive electricals market has been singled out for this DTI sledgehammer," the authors said. "There are other areas of consumer spending - such as cars - which seem far more deserving of such regulation."

Some industry observers have predicted the move will lead to the price of electrical goods being cut by up to 20 per cent. But Clive Vaughan, one of the authors of the report, said: "If retailers are operating a cartel then it is a singularly ineffective one. In a monopoly or cartel situation you would expect lots of feather-bedded companies making great profits. [But] the electricals sector is very competitive."

Only Dixons, which commands more than 20 per cent of the market, makes a margin higher than 7 per cent. Argos has a profit margin of 6.6 per cent while stores such as Tempo make only 3.7 per cent.

Retailers would only slash their prices if they sold enough goods - when few were in a position to do so. "Will people buy more fridges if the price is cut? Verdict thinks not. A discount format can only work if it has very low operating costs and huge sales volumes."

The consultancy said the MMC had found uniform prices because of competition rather than a cartel. The strength of competition was shown by the number of retailers that had disappeared over the past five years, it said.

Since 1993, there has been rapid consolidation in the electricals retail sector. Casualties have included Powerstore, Colorvision and Clydesdale.

Dixons, which owns Curry's and PC World, has grown its share of the market from 15 to 20 per cent. Comet, the second largest retailer, has 6 per cent.

Customers are flocking away from the high street to out-of-town electrical superstores, which now make up 35 per cent of the market.

Retailers such as Tempo, Scottish Power and Powerhouse were beginning to challenge the leaders, opening at least 10 new stores a year, the report said.

Sales in 1997 were buoyed by a jump in spending as customers spent windfalls from building society flotations. Spending rose by 9 per cent to pounds 15.6bn while volumes jumped by 13 per cent.

However, sales since January have flattened out as the economy slowed down.