Best Buy Co., Inc. (BBY), Sears Holdings Corporation (SHLD): Is This the Biggest Scam in Retail?

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The results are in and Consumer Reports has named America’s top appliance retailer. (Hint: It’s Abt Electronics). But the winner’s identity isn’t the only thing coming out this month. In the course of describing what makes a retailer good or bad, CR also managed to “out” one of the biggest scams in retail: the extended warranty.

According to CR, you see, the level of a retailer’s customer “service heavily influenced how satisfied subscribers were with major-appliance stores overall.” Companies like Abt, which earned top marks for service, tended to perform well in the rankings. In contrast, companies that seemed more interested in milking their customers for every penny they were worth fared less well.

CR singled out one retailer in particular, P.C. Richard & Son, for opprobrium for being “among the pushiest” when pressuring customers to buy extended warranties. Not coincidentally, the company ranked dead last in the field of nine retailers ranked. Indianapolis-based hhgregg, Inc. (NYSE:HGG) and Abt neighbor Sears Holdings Corporation (NASDAQ:SHLD), which ranked Nos. 6 & 7, respectively, were also said to be “more likely than other retailers to push added coverage.”

Follow the money
Why do these retailers continue to push extended warranties even at the risk of alienating their consumers? It’s not hard to figure out. On average, extended warranties tend to generate 50% or better gross margins for the stores that sell them. That compares awfully well to, say, the 26% that Sears Holdings Corporation (NASDAQ:SHLD) grosses on its sales overall last year, or the even worse 23% gross margin at Best Buy Co., Inc. (NYSE:BBY).

Simply put, selling extended warranties can be more profitable for these companies than selling the actual products the warranties cover! And yet, while retailers love them, these warranties aren’t always a good deal for you.

Best Buy Co., Inc.Credit: Best Buy Co., Inc. (NYSE:BBY)

Citing its own “extensive research” over years of study, and tens of thousands of Consumer Reports members surveyed, CR points out that, on average, the cost of repairing a purchased appliance that breaks down rarely exceeds the cost of buying an extended warranty for the item.

Timing is everything
What’s more, if you do buy an extended warranty on an appliance, you may very well end up paying to repair it anyway. The companies don’t just pick warranty periods out of a hat, you know. They know, on average, how often an appliance will break and how long it will take to break — and they tailor their warranties to make sure the warranty’s run out before the break happens.

Result: According to CR, “most repairs do not occur during the limited time period covered by the extended warranty.”

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