Do you buy extended warranties? Personally, I have a mixed record.
I use Apple (Nasdaq: AAPL) computers and have bought several extended warranty contracts. My last Apple laptop needed its motherboard replaced three times due to faulty manufacturing. In this case, the extended warranty more than paid for itself. I recently declined the extended warranty package on a GE (NYSE: GE) electric range that I bought from Home Depot (NYSE: HD). I am still not sure I made the right decision on that one.
A recent article from Consumer Reports makes me feel a little better about my decisions. Because of a 43% average failure rate in its laptops over the first couple of years, combined with Apple's less-than-satisfactory warranty, the article recommended purchasing Apple's extended warranty. With only an 11% failure rate with electric ranges over the first three to four years, I was better off ignoring the repeated mailings from GE reminding me that my regular warranty had expired. Still after many years as a consumer, it seems like a guessing game as to when it's favorable to purchase an extended warranty and when it's not.
For the manufacturer, this lack of information creates a selling opportunity. (And it also creates opportunities for retailers like Best Buy (NYSE: BBY), especially on newer, high-dollar products.) As Consumer Reports suggests, selling an extended warranty contract can be more lucrative than selling the product itself. It's no wonder you see manufacturers with razor-thin profit margins, like Dell (Nasdaq: DELL), turn to extended service contracts to bolster the bottom line. Warranty Week, which was interviewed for the original piece, expanded on the Consumer Reports article, highlighting what I believe to be the conflict between the manufacturer's short-term gains selling extended warranty contracts and the creation of long-term brand value.
Warranty Week discussed how German consumers have greater access to the reliability data of consumer products. Furthermore, in many European countries -- including Germany -- there are minimum two-year warranties for consumer products. As it turns out, the better-informed German consumer purchases fewer extended warranty contracts than the U.S. consumer. This ultimately says that if a consumer focuses on a reliable product with a sufficient warranty, there is little need to purchase an extended warranty.
Suffice it to say that without knowing the quality of the product, a consumer is more likely to purchase an extended warranty. However, it's knowing the quality of the product that creates the value of the brand. And without the brand, there would be no sales.
As an investor, I hope companies like Dell, Apple, and Sony (NYSE: SNE) realize that maintaining brand value is more important for creating shareholder value than reaching for short-term gains at the cost of that brand value. As a consumer, that's why I told the Honda (NYSE: HMC) salesman I didn't need an extended warranty; I was buying a Honda.
For related Foolishness:
Home Depot and Dell are both
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Fool contributor Matthew Crews welcomes your feedback -- really! He has a financial position in Dell, but not any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
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