Is This the Biggest Scam in Retail?

This article was updated on November 10, 2014.

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 Consumer Reports' only "big reveal." 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.

Last year, 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 in July 2013. Richardson inched up one notch in the 2014 survey, however, replaced in last place by a plummeting Sears  (NASDAQ: SHLD  ) .

Follow the money
85% of large-appliance shoppers surveyed by CR say they were encouraged to buy an extended warranty. But why do these retailers continue to push extended warranties even at the risk of alienating their consumers?

It's not hard to figure out. As a general rule, extended warranties generate 50% or better gross margins for the stores that sell them. In contrast, S&P Capital IQ data show that Sears last year grossed only 24% on its overall sales. 50% gross profit also compares awfully well to the 22% gross margin at Best Buy (NYSE: BBY  )  -- or even hhgregg's (NYSE: HGG  ) 28% gross. 

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.

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's 2013 analysis, "most repairs do not occur during the limited time period covered by the extended warranty."

Good news
The good news, though, is that in many cases at least you can get the same peace of mind from an extended warranty (even if you never get to use it) by simply buying with a credit card. Most products you buy, after all, come with a manufacturer's warranty built right in. And depending on the card you use to buy an item, MasterCard (NYSE: MA  ) or Visa (NYSE: V  ) , for example, will often automatically double the length of any manufacturer's warranty, adding as much as a year to your warranty period free of charge.

Even if most extended warranties aren't worth the cost, a warranty awarded free by the manufacturer, or by your credit card company, most certainly is.

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