Shrinking margins bleed businesses

London: Should the plug be pulled on Comet? That is the question investors will doubtless be asking themselves this week as the short-circuiting electricals chain reports a slide into the red.

With analysts anticipating a loss of at least £10 million (Dh58.6 million), the UK specialist, which is acting as a drag on its French owner Kesa, is not alone in its misery. A slew of grim trading updates from rivals such as Argos and Tesco points to a market in meltdown as the squeeze on household incomes sees demand for TVs and gadgets shrink.

Recently Best Buy Eu-ope, a new entrant promising to shake up the UK market with its US-style service culture, admitted it had lost £62 million in its first year of trading. Analysts say it is hard to see where Comet can go next.

It has already used many of the big ideas in the retail handbook, including store refurbishments and customer service initiatives, yet has failed to replicate the success of its French sister chain, Darty. "If like-for-like sales keep falling, the losses will get worse," says Arden analyst Nick Bubb.

"There has been a market downturn but where we are in the cycle is not clear. Comet will probably have to sweat it out and hope Best Buy closes."

The credit crunch has set in train a dramatic reckoning for the high street, with wilting demand testing traditional retail models to breaking point. Kesa has parachuted in a new boss, Bob Darke, to lead the Comet turnaround but with like-for-likes down nearly 14 per cent at last count he will need a plan fast.

Four years ago the loss-making retailer was turning a profit of £43 million on sales of £1.7 billion. The fortunes of its arch-rival, the Dixons group, have also fallen. It will report profits of £85 million on Thursday, but was making more than £200 million then.

Big-ticket items

In a recent update Argos said sales of TVs fell 20 per cent in the spring, leading analysts to question the dynamics of a sector in which such pitiful profits are made from sales of £22 billion.

Philip Dorgan, a Panmure analyst, says it is "bloody tough out there" because of consumers' reluctance to splash out on big-ticket items. Comet and the UK chain of Dixons carry a negative value of "hundreds of millions" of pounds for their listed parents, he says. "Electricals has the lowest profit margins in retail, bar discount food retailing."

Supermarkets are all devoting lots of space to the category, he adds, but "everybody is losing money. It's a very strange model".

With rising competition from supermarkets, Best Buy's attempt to crack the UK presented the struggling incumbents with a headache. And the joint venture between Carphone Warehouse and the US chain has not gone to plan.

When it first set out, there was talk of 80-100 megastores. Three years on, only ten stores have opened, with insiders claiming sales have fallen far short of targets.

Delayed decision

Much to analysts' dismay, Carphone said last week that it had delayed a decision on further openings until the autumn, but few could doubt the wisdom of slowing investment in such a climate.

UK consumer electronics sales have been hard hit as shoppers have cut back on discretionary purchases in the face of rising petrol prices and government austerity measures. Petrol prices are now 30 per cent higher than this time last year, with a tank of petrol costing roughly £15 more.

— Guardian News & Media Ltd