Consulting Services for the Independent Retailer

THE PROS AND CONS OF LAYAWAYS

By James Grandillo, Sr. Retail Consultant

Remember layaways? I do. Most retail stores back in the day had layaway programs. They were set up in a variety of ways, but essentially they all worked like this:

1. You select an item you wish to own;

2. You immediately remit a certain percentage of the purchase price as DOWN PAYMENT;

3. You make several incremental payments until the item is fully paid for;

4. Then and only then do you take delivery of the item in question.

Sounds easy, doesn’t it? On the surface it is easy. Back in the days before paying by credit card was the norm customers unable to pay immediately in full liked layaway because they could “hold” an in-stock item (guaranteeing it would be available when they wanted it) and pay for it gradually. Stores liked layaway because, with a layaway program, the customer with less cash resources could be more easily persuaded to purchase a product they could not afford to pay for in full at time of purchase.

Seems like everybody wins. Customers unable to pay in full paid gradually over time. The retailers got some small cash flow and – usually – a good assurance that the item in question would actually be delivered at some later date. However, what appears simple on the surface is usually very complicated just below…

Smaller stores with limited staff found that administering a layaway program could be a nightmare. In the fuzzy pre-computer days before 1985 keeping track of who owes how much and when payments are due was an enormous effort. People did not always pay on time or at all. Some customers would renege on their commitment and ask for their payments to be returned. Stores found that layaways tied up their inventory and, inevitably, inventories would rise. Often customers chose the layaway option to tie up goods that were usually new to the store and potentially “hot” items as well…items that were destined to move quickly. Companies with tight cash flow had to pay for the goods within 30 days but they might not receive payment from the customer for 90 days or more.

However, as credit became looser and “instant gratification” became the norm, the need for the layaway option in retail stores diminished. With interest rates low and consumer optimism high, banks fell all over themselves to offer plastic cards to anyone who would apply for them. In addition, in the 80’s there emerged the dreaded NO! NO! NO! advertising and promotion strategy that our industry embraced in a death grip that continues to this day. So the message was clear:

1. Credit was easily available through bank-supported credit cards;

2. We will offer you easy financing terms with NO money down and NO interest for X months (although this meant either higher prices to the consumer or lower margins to the retailer: someone had to pay for this money!);

3. You can have it ALL and you can have it NOW!

A heady wine, indeed. Like sailors on leave consumers waving their plastic lined up to buy.

And for those people whose personal financial situation made them a poor risk for the credit card companies or the banks (around 38% of all consumers cannot obtain a credit card even today), the meteoric growth of the Rent-to-Own industry provided instant gratification and ownership for millions of people with the following message: We will NOT run a credit check on you. EVERYONE with a bonafide job will be granted the right to purchase here on time.

In this intoxicating climate who needed layaway?

The world of 2008-9 is not the world of 1985. (Have you noticed fewer credit card offers in your mailbox of late?) All banks have tightened up. Retailers have a more difficult time obtaining credit lines to purchase inventory. Consumers whose wallets once bulged with a dozen credit cards are now slicing them into little pieces and letting them sleep with the fishes. In addition, many people have maxed out their personal credit and can barely make their minimums each month. Our national addiction to instant gratification and easy credit terms is still very, very strong, but in some people it has been replaced with a hyper-sensitivity to anything that threatens our future security: a growing number of consumers are gradually becoming Anti-Credit.

This bodes poorly for companies who have built their entire business empire on the Charge It and Have it NOW! mentality. Many of them – notably the larger, more strategic chain stores, are beginning to re-think their prior aversion to layaway – because, properly administered, a layaway program provides the consumer with options to going further into debt to have the things they need. It might be useful for the retail home furnishings industries to dust off their old layaway programs and see if they may have new meaning in today’s difficult business climate.

Kmart, Sears, Target, and others have streamlined their layaway programs and are advertising them aggressively to the consumer. They are doing so to capture the attention of the careful consumer. Cautious consumers like layaway because of the discipline it requires, for most programs demand regular payments and the layaway term itself is brief – typically, rarely longer than 90 days. A new breed of “frugalista” is emerging, and they LOVE layaway, because it is suddenly very NOW to be careful with your finances.

From one perspective, layaways allow the retailer to penetrate/capture a market segment that normally would be lost to them. Those without credit cards or a high enough credit rating cannot purchase anything in this country without using hard cash or going to the rent-to-own companies – and they will pay substantially more money for goods in the long run if they do. If a retailer is willing to provide the administration necessary to keep the program under control, a layaway process will help this customer obtain the things they want and need.

But the pitfalls are great. Inventory is “locked” up and immovable. Many layaway items are ultimately cancelled as customers find more urgent places to invest their money -meaning the retailer has held onto the goods for months and suddenly has to give back the monies paid in. Now the retailer has inventory than he doesn’t actually need. In the case of seasonal merchandise this could be a disaster: little patio furniture is sold in December! Smaller companies find it difficult to keep customers informed when payments are late – thus cash flow position is weakened.

So while layaway programs can open up a new market for the retailers they must be administered with caution and care. Here are a few suggestions on how to establish a layaway program and avoid problems. Remember, the more restrictive the program, the less attractive it is to the consumer. You have to decide how much hassle or risk you are willing to take to provide this additional service to your customers:

1. Limit the term of the layaway to 90 days for home furnishings;

2. Require a high initial investment – between 33-50%. The customer is thus more deeply committed to completing the transaction;

3. Create a system that requires someone well trained to phone the customer if an installment payment is more that 5 days late;

4. If you must have a cancellation policy, make sure the fee for this service (“restocking” fee) is reasonably large – say 25% of the original price;

5. Assess administrative fees to service the layaway agreement;

6. Establish as a policy the dollar amount of goods that can be placed on layaway – i.e. make the sale attractive enough to the company to justify the time and effort necessary to service it. Don’t put $20 candlesticks on layaway;

7. Test the viability of a layaway program by offering it initially for a limited time only – say, during a 30-day period. See if your system works properly and your sales staff understands how and when to promote it. If it is working and gives your store the edge that it needs, roll it out further.

Every retailer today is desperately looking for new ways to make something happen and grow their business. Properly administered a layaway program can help certain stores better service certain customers. There are risks, but these risks can be mitigated with careful planning, training, and systems that are carefully adhered to. Provided that a layaway program is well-conceived, it can mean plus business for the retailer who wishes to grow his business and penetrate a new market segment.