Posted: July 13, 2007
This year, American shoppers will spend an estimated $6 billion on extended warranties for electronic goods. There are no reliable statistics as to how much automobile and truck buyers will spend on warranties, but I am sure it is also in the billions. Personally, I have never heard of a warranty deal that I like.
I recently purchased a television from Best Buy, a company that is in my portfolio of stock investments. I was asked by the young salesman if I wished to purchase an extended warranty on the TV. I asked the salesman if he believed that the product I was buying was a sound investment. Of course, his response was to be very supportive of my purchase. Then I asked him why I would want to buy a warranty for my new TV if he was so confident that the product was reliable. After a bit of stammering, he admitted that his supervisors encourage their sales people to promote warranties on electronic devices. That was all I needed to hear to do a little research.
In its recently-disclosed annual report, Best Buy Co. Inc. stated that it collected $790 million in commissions from the sale of extended warranties on items from big-screen TVs and computers. The company earned $1.38 billion last year, so the commissions on the warranties added up to more than half of the retailer's earnings for the year. On the other hand, extended warranty sales as a percentage of revenue fell 12 percent during the last fiscal year. Maybe consumers are getting a bit wiser.
I try to buy a new vehicle every five years. Each time, I am asked if I wish to upgrade from the regular product guarantee to spend more to purchase an extended warranty. I always go back to the same thing I said to the Best Buy salesman: "If you are confident in your product, why do I have to spend more now to make sure that I will not have to pay more in case something goes wrong with my new vehicle within the next five years? "
The issue about my Best Buy shopping experience that bothered me the most was that the price for the four-year extended warranty was equal to about one fourth of the cost to buy the TV. Why would I spend an additional $300 on a television when I know that it will likely be outdated in less than 10 years?
I know I will probably purchase electronic products from Best Buy in the future, but I still sold my 40 shares of Best Buy stock this week with the belief that shoppers are starting to realize that most extended warranties are a sham.