Business Economic Notes 11
Electrical Retailers
These notes are issued to Inspectors of Taxes to assist them in examining accounts. They are intended to provide a general background to the trade, with some explanation of its most important features. Business Economic Notes are not intended to provide an exhaustive or definitive picture of any particular trade or profession.
Contents
2. Wholesale and retail structure
Electrical fittings and sundries
Specialist independent wholesalers
General wholesale distributors
(brown/white goods)
Other wholesale distributors
(brown/white goods)
Independent co-operatives
Electrical accessory retailers
Domestic appliance shops
Home entertainment retailers
In-car entertainment
Electric tools
Other retail specialists
6. Retailing guidelines and the retra code
Source of supply
Life of video tapes
Tape depreciation
Sale of rental tapes
1. General |
A recently published statistical report showed that electrical retailing achieved sales of over six billion pounds in 1986, representing an average annual growth of around thirteen percent over the last ten years.
Despite increasing competition from multiples, department stores, and electricity boards, the independent retailer appears to have maintained a strong position in the market place, with 24 percent of the overall sales achieved in 1986.
Competitive price cutting and the overall pattern of unit price reductions on new technology innovations such as colour televisions, video records, video cameras, computers, microwave ovens and so on, has had a major influence on the trade. As a whole, over the period 1978 to 1985, retail prices have increased by only thirteen percent, as compared to sixty seven percent for the total retail sector.
As a result, and despite the increase in overall turnover, lower gross profit margins have caused a steady erosion of the independents' net profit margins. These have declined from eleven to just over five percent during the last eleven years.
2. Wholesale and retail structure |
Electrical goods covers the whole range of wholesale and retail of electrical products and associated equipment. These include electrical appliances, contracting equipment (wiring, switches, sockets), lighting equipment, batteries, audio and video tapes and so on.
Domestic appliances are termed as either white or brown goods in the trade. White goods comprise kitchen equipment such as cookers, refrigerators, freezers and so on whilst brown goods includes all audio and video equipment.
The historical division between brown and white goods goes back to the time when all cookers were finished in white enamel and radios in brown bakelite.
3. Wholesale network |
Electrical fittings and sundries
Wholesalers who specialise in the supply of electrical contracting equipment to the trade and retail deal in
- bakelite goods (switches, sockets, and so on)
- conduits
- lighting bulbs, tubes
- cable
- switch gear
- ancillary equipment, including light fittings
Trading operations can range from the one man business to the large wholesalers operating from extensive premises.
The pricing structure of wholesalers is usually based on a trade pricing catalogue, such as Lukins. The catalogue which is updated monthly gives a basic list price for every item likely to be stocked by the wholesaler.
Traders using this service, receive monthly price amendments to update the catalogue.
Discounts to trade customers are common, based on the type of item sold and volume of sales.
Wholesalers normally receive annual rebates from manufacturing suppliers, based on the level of annual purchases.
Specialist independent wholesalers
Specialist independent wholesalers specialise in supplying a particular range of goods, for example
- domestic and car light bulbs
- light fittings
- car electrical accessories
- security equipment
General wholesale distributors
(brown/white goods)
Most brown goods manufacturers nowadays deal directly with retail outlets, appointing authorised dealers and creating their own retail networks. White goods manufactures are also, to a limited extent, following this trend and creating their own networks.
In consequence, there has been a marked reduction over the last decade in the number of wholesale distributors.
The wholesale distributor is however still an essential source of supply for the small retailer, who will be unable to obtain small quantities of individual items of stock direct from manufacturers.
Other wholesale distributors
(brown/white goods)
In addition to the general wholesale distributors, there are other wholesale distributors who specialise in particular types of equipment or act as distributing agents for an overseas dealer, supplier or manufacturer.
They might also specialise in different aspects of the trade, such as dealing with exports, specialised equipment or in supplying particular sections of demand, such as hotels, county councils and so on.
Independent co-operatives
Independent buying houses or groups, have evolved primarily to link-up independent retailers and advance their collective buying power to buy in at the best possible terms and match the multiple retailer. Co-operative buying started some time in the 1950's, when some dealers started to join together to place larger orders, with the aim of achieving better discounts and more certain deliveries. Gradually these groups developed into formal non-profit making companies in their own right. There are now independent co-operative groups throughout the UK, one of the largest being Combined Independent Holding (CIH), which services some 800 retailers, controlling around 1500 shops.
4. Retail network |
A survey in 1986 showed that independent retailers took a 24 percent share of the market as against
- multiples, department stores and co-operatives 50%
- electricity boards 10%
- other retail outlets
(not predominantly electrical) 10%
The independent retail network is made up of a number of general and specialist outlets with a further range of support specialists such as
- spares and service outlets
- aerial installation
- audio/videos
- disc and tape supplies
Electrical accessory retailers
Electrical retailers dealing in accessories mainly service the DIY retailing sector. These outlets are usually run by professional electricians, who also undertake appliance repair work and/or domestic electrical contracting work.
Basically they will retail all electrical sundries, such as
- switches, sockets, plugs, cables
- bulbs, neon tubes, light fittings
- small appliances (kettles, heaters and so on)
- alarm systems security locks
- other miscellaneous accessories
Domestic appliance shops
Despite competition from the multiples, there are still some independent retailers such as domestic appliance shops specialising in the sale of white goods. Usually a spares and repair service is also provided.
A number of such retailers have now moved into the specialist kitchen market, dealing with supply and installation of exclusive continental kitchen packages.
Home entertainment retailers
Home entertainment retailers sell brown goods and accessories, and some also deal in micro computers and software.
These retailers normally specialise in one ore more particular brand products as authorised dealers and will also provide a back-up maintenance and repair service, although increasingly, manufacturers now undertake all repair work, especially guarantee work, themselves.
The larger retailers tend to aim at a quick turnover from extensive stocks, selling at competitive prices. Smaller shops have a much slower turnover of stock, and sell higher value items with correspondingly higher profit margins.
In-car entertainment
In-car entertainment is an expanding area for specialists. Retailers supply and fit all types of motor car sound systems, with a bias towards one particular brand, especially if they are appointed dealers or concessionaires.
Where goods are supplied and fitted, the retail will usually make an inclusive fitting charge, either for the whole system or per item, rather than a variable labour charge.
Electric tools
There is now a growing trend towards shops specialising wholly in retailing a comprehensive range of electrical tools and accessories for the gardener, handyman and professional tradesman.
Goods are displayed in attractive self service type layouts, so that all equipment can be seen and handled by the customer, with minimal staff interference.
Such shops are proving a popular outlet as against the traditional hardware or general DIY outlets.
Other retail specialists
Other retailers may also specialise wholly or substantially in one or more of the following items
- floor care equipment
- home laundry
- domestic and commercial refrigeration
- small appliances
- free standing heating appliances
- telephone and cellphone equipment
- videography (home video equipment)
- CB equipment (Citizens Band radio)
- satellite television receiving equipment and installation services
- electric musical instruments
- micro computers - hardware and software
5. Profitability and trends |
The Department of Trade retail survey showed that over the last seven years, retailers have maintained an overall gross profit margin of around 30%.
The statistics are, of course, based on the whole retail network including large multiples and the electricity boards, who usually work on lower profit margins. They also include the retailers of musical goods, who usually work on higher profit margins. The statistics are therefore not entirely representative of the independent electrical retailer, who, depending on the type of goods sold and product mix, will be expected to achieve a gross profit margin in the 10 to 25% range, or more, if he is a specialist retailer of packaged kitchens.
Despite the fact that independent retailers hold a 24% share of the retail market, they are still very much at the mercy of the large manufacturer, who continues to supply products to large buyers at much lower prices than those charged to the average dealer.
Some manufacturers have begun to realise that by putting all their eggs into one basket they are now at the mercy of large buyers. These buyers now have the power to dictate terms and seeks substantial discounts on 'in-house' branded products, which are sold in competition to the manufacturers named products. In consequence, the manufacturers are gradually turning back to the independent specialist dealer and adopting sensible pricing policies to ensure retailers' margins are protected. Some also ensure that if any prices are reduced, retailers will receive appropriate compensation for old stock-in-hand.
These are the exception rather than the rule and more retailers are joining co-operative buying organisations in order to match their combined buying power with the multiples.
Electrical equipment, especially audio/video equipment, is continually subject to changes and innovations and retailers need to keep a sharp eye on the state of the art and ensure their stock represents the latest available equipment. The continual updating of equipment does provide scope for generating sales, though usually at discounted prices. Profit margins on such sale items may be lower, but quite often the retailer will be able to acquire special purchase deals from the manufacturer, who may be anxious to off-load surplus out-dated equipment.
6. Retailing guidelines and the retra code |
Members of RETRA (Radio Electrical and Television Retailers Association) together with those of two other organisations, AMDEA (Association of Manufacturers of Domestic Appliances) and the Electricity Council, voluntarily abide by individual codes of conduct, jointly agreed, covering all aspects of manufacturing and retailing.
The 'Retra' code, covering the independent retailer membership, basically provides for the following
- quick and efficient servicing and repairs
- guarantee on repairs
- provision of estimates and information on minimum charges
- better safeguards on purchase of electrical goods with standard twelve month guarantee on most goods
With regard to repairs and servicing, the 'Retra' code provides for a three and fifteen day rule. Simple jobs to be undertaken within three days, more complex jobs, requiring extra work or spares, within fifteen days. If any repairs, under guarantee, cannot be completed within fifteen days, the retailer is obliged to lend the customer a similar item or extend the guarantee period.
With regard to sale of goods, the code provides that
- all prices should be marked clearly and discounts, if any, explained in unambiguous terms
- if any deposits are taken on goods ordered, refunds will be offered, if the goods are not delivered on time
- full information about how to install and use a produce will be given
- most new goods will be guaranteed for a minimum period of twelve months, even if the manufacturer's guarantee is shorter, and the terms of the guarantee will be clearly set out
7. Television licence records |
Disposal of all new or second-hand TVs, whether by sale, hire purchase or rental, have to be notified to the National Television Licensing Records Office, not later than 28 days after disposal.
The Post Office provides a duplicate book for this purpose (BRL1192 - Notification and record forms). The details to be recorded are
- customer's name and address
- type of set (for example, black and white or colour)
- type of disposal
8. Repair work |
Most electrical goods are guaranteed by the manufacturer for a period of at least twelve months and, of course, retailers belonging to 'Retra' are obliged to offer guarantees on most goods (parts and labour) for a period of twelve months, even if the manufacturer's guarantee period is shorter.
Overall about 60% of repairs after the end of the guarantee period are carried out by manufacturers or service organisations, sometimes under either extended guarantees or maintenance contracts, especially in relation to white goods.
An essential ingredient in the success of an independent retailer is the facility to provide a fast and efficient servicing and repair service. This may either be carried out on-site, depending on the facilities available or contracted out to a repair specialist.
Cost of work done by the retailer in respect of goods covered by a manufacturer's guarantee is in most cases claimed back in full from the manufacturer. However there appears to be certain disadvantages in some guarantee systems, in that
- retailers are seldom able to claim the full retail costs of parts used in guarantee work
- retailers lose out on the labour content, because manufacturers seldom recognise the full cost and quite often retailers do not claim for all service and repair calls
- retails are not able to claim any administration charges, as it is not recognised by manufacturers as a genuine expense
Some manufacturers have now opted to sell products with guarantee options. If the guarantee option is taken up (for which a small nominal fee of one to two percent of the basic trade price is charge) repairs are done by national service organisations rather than by the retailer. If not, the retailer is then wholly responsible for any personal guarantees given to the customer.
9. Rental |
Apart from the national specialist TV and video rental chains, there is also a fairly strong independent sector. The independents compete with the nationals by offering a local and more personal service and usually a better choice of brand names.
Generally, there has been a significant decline in the rental business. Statistics show that in 1983 43% of colour TVs were rented as against 72% in 1973.
Outright purchase has become more popular following the removal of credit restrictions and, in addition, there is increasing awareness by customers of the economic advantage of purchasing either by cash or credit, rather than renting.
There is also a fairly healthy demand for renting second-hand colour TVs and video tape recorders. Traders usually obtain such equipment from larger rental firms disposing of their old equipment. Sets are reconditioned often with cannibalised parts and then hired out at bargain rentals.
Independent retailers usually overcome the problems of financing purchase of equipment by one of two methods
- block discounting, this is where rental agreements are sold to a finance company and capital used to fund purchase of equipment
- purchase direct from manufacturers on extended credit terms
Basically, the rental proposition is fairly straightforward. Rental companies all offer essentially the same contractual arrangements to a hirer and contracts involve undertaking to pay a specified rental for a minimum period, usually twelve months. (The control of hiring order requires an advance payment of six months rental for televisions which are less than two years old.)
After the initial twelve month period, the contract can be terminated by either party giving one month's notice. The contract usually allows the company to change the amount of the rental on renewal.
The rental company undertakes to maintain the set in good working order and all repairs and servicing are provided free of charge, on demand.
In 1978, according to a Price Commission report, the average call out rate varied between two and two and a half times per set per annum. In the last decade, the reliability of colour TV's has improved considerably and frequency of call out is now considerably lower and on average about one per set per annum.
Customers are usually liable for loss or damage and are advised or required by the contract to have rental equipment insured at their own cost.
Trade surveys quote the average gross profit rate from rentals as 48.6%. This does however include the large rental multiples and will not have any direct application or relevance to the independent or small rental company.
10. Video tape rental |
Rental of pre-recorded tapes is normally independent of the traditional electrical retailer, although some may offer tape rental by way of a lucrative sideline.
Tape rental is run on a 'library' basis. Customers are normally required to become members of the library. Membership is usually free, although there are some who charge a nominal annual membership fee.
Tapes are hired on a 24 hour cycle, with differential band rates, depending on the popularity of the tape. Varying surcharges are made for tapes returned late and discounts may be given for weekend or bulk hire, for example, reduced rental if over five tapes hired out, and so on.
Source of supply
Tape libraries will either be stocked with leased tapes or purchased tapes, usually depending on the size of the library.
Leasing companies usually put together a rental package offering various leasing options. For example, for a rental of £50 a week, a retailer may be offered a package consisting of 50 films comprising 30 standards plus 20 new releases.
The retailer will be offered at 100% or partial exchange facility during the lease period at intervals of usually four weeks plus a selection of specified number of new releases.
The length of the lease period may vary from one month to 30 weeks or longer.
After a specified period, the retailer may be offered the choice of purchasing any or a selected number of the rental tapes at a discounted price. The usual practice being to allow a rental allowance depending on age of tape against the full market cost.
Life of video tapes
Assuming the tape is of average quality, it is normally expected to last a minimum of 50 and probably 100 playings before 'drop out' (spots on the screen) becomes objectionable. As an average guide, the general assumption has been that tapes have a serviceable life of around 24 months, but more recently there have been some reports that tape quality has generally improved increasing the number of playings and extending the useful life to around 36 months. If tapes are leased, damaged or worn tapes are replaced free of charge, the replacement tape coming in on the rental scale, where the replaced tape left off.
Tape depreciation
It is difficult to lay down rigid guidelines of depreciated values as this will to a large extent be affected by patterns of usage.
However it is reasonable to assume, if a pattern of life expectancy has been established, that depreciation will be higher in the first half of a tapes life, then tapering down to a 'nominal' value in the latter period.
As an example, the depreciated value of tapes might be as follows, assuming an average cost of £30
- new to three months £18 to £23 (Depn. 30%)
- three to six months £12 to £16 (Depn. 50%)
- six to twelve months £8 to £11 (Depn. 65%)
- twelve to eighteen months £5 to £8 (Depn. 80%)
- over eighteen months £3 to £1 (Depn. 85%)
Sale of rental tapes
Retailers will from time to time dispose of ex-rental tapes with minimal drop-out at bargain prices or will scrub pre-recorded tapes and sell them as blank tapes.
Glossary |
The following is a brief list of some of the latest innovations in audio/video equipment
AV integration |
Integrated TV, video and sound systems being developed to coincide with introduction of stereo TV. These systems will be CD video and audio format or VHS-super, the successor to the present VHS system, but with superior reproduction and reverse play facility. |
Back to back |
Unique tape recording system stacks one tape in front of another and both share the same motor and capstan to give accurate sound dubbing. |
Camcorders |
Fully automatic VHS format record only video cameras. |
CD |
Compact disc. Either an audio or video disc. |
CD-I |
The I standards for Interactive and is designed to produce both audio and video signals. CD-I has the capability of being used for video-games, visual encyclopaedia or in miniature form to provide on-board navigational information. One CD-I disc can store information of all major and minor roads in Great Britain. |
DAT |
(Digital audio tape). This is a new cassette record/playback system, with a reproduction quality on a part with compact discs. |
FST |
Flat screen television. |
Fast text |
An enhancement to teletext receivers which speeds up the text searching facility. |
P-I-P |
Stands for picture-in-picture. Enables the viewer to watch one channel and also to monitor a programme on another channel, the picture coming up in a small square on the screen PIP and other on-screen programming innovations are available with CTVs and VTRs. |
Produced by the Inland Revenue
July 1988
© Crown Copyright 1988
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