Credit offers playing key role in sales pitch

High Point— Furniture retailers should be able to move more product this year, thanks to a strengthening economy, improvements in technology and new longer-term financing offers and promotions, say industry observers.

Whether or not retailers achieve this goal is largely up to them —

The retail financing landscape has changed. Changes in bankruptcy law led to some losses and temporary tightening in the retail credit sector in the fourth quarter, as expected. Fourteen consecutive rate increases by the Federal Reserve have increased the cost of lending money. And some consumers who were on the edge of not being able to qualify for credit have been pushed over the edge.

The good news is that creative retailers who can accept the idea of less profit rather than no profit at all can still make the sale to those with marginal credit — and that the changes in consumer credit have so far had a greater effect on the MasterCards and Visas of the world, but not on private-label, in-store financing.

Jeff Holifield, director of major account groups with American General Finance, said that today's consumers are using in-store credit because they want to, not because they have to. And the distinction, he said, is important.

"(Consumers) are using the credit because of the interest-free promotions," he said. "You are attracting the higher-end customer. (Financing periods) used to be 12 months, and now it is common to see two and three years and even longer interest-free financing periods."

Shelly Burton, acquisitions marketing manager for GE Retail Sales Finance, agreed — and said the extended terms are the main focus within consumer finance right now.

"This is common and consumers are expecting retailers to offer it," she said. "The retailer who does not offer the extended financing is at a disadvantage, because, most likely, the competitor down the street is offering it."

Smaller dealers jump on board

Burton said that because of that, the smaller Mom-and-Pop stores are the ones that are most frequently signing on with major financing firms to offer their own financing.

"The biggest reason we get from retailers is that they can't compete with the big-box stores," she said. "They really want to jump on board and have the private-label programs and that way they can stay competitive in the marketplace."

David Kratoville, vice president of business development for Alliance Data, agreed with the assessments of some that times have lengthened for some credit promotions, from months to years. And Kratoville said this development may yet attract the attention of regulators.

"There may be interest by the Federal Reserve in these plans that are 12 months and longer of the banks that they regulate, on how much exposure they have and how much they are doing," Kratoville said. "There may be pressure going forward. And when there are questions, policy changes can follow."

Terry Fuller, senior vice president of business development for Wells Fargo Financial Services, said that he has seen no-interest promotions run as long as 60 months — but that the trend won't last forever.

"As the costs of the funds go up, it will result in higher discount fees that they will have to pay and they will make an adjustment in the kinds of promotions they run," he said. "The longer the term of the promotion, the higher the cost."

Retailers, then, will have to make adjustments in their marketing philosophy and in how they advertise, Fuller said.

"It is an added feature they can provide that gives them a leg up on their competition," Fuller said. "You're giving them a quality piece of merchandise, no-interest financing for three years. (Retailers are asking) what can we add that the competition doesn't have? It just adds to the overall value statement to the consumer."

Part of the American consumer's willingness to apply for credit, said American General's Holifield, is that there is now more of a comfort level with buying merchandise over the Internet, so an online credit application, done either from home or in a store kiosk, is not a new experience.

And part of it is that an in-store consumer-financing program can carry several different kinds of options, so the customer can pick out the one that's the best for them.

"What I am finding is that the more programs you can offer, the more likely it is that you will find one that fits the customers' needs," said Joseph Zuber, a client manager for CitiFinancial.

Two main categories of financing have evolved: One offers a short term with no payments and the other, a longer term with no interest. Zuber said that the new products are working.

"Volume is up over last year's numbers and even November and December beat last year's numbers," Zuber said. "We attribute that to giving customers more variety and payment options other than what a typical MasterCard or a Visa would be able to offer them."

That flexibility of in-store financing has been a drawing card for furniture retailers — and even more changes are coming. Kratoville said that online and kiosk credit applications mean that consumers are more comfortable in applying for credit — which may result in a larger sale.

Better yet, applying electronically can result in higher sales. In the past, a customer might want to buy a dresser, would pick it out, and then find out if he or she could finance the $1,000 it would take. Now, the customer applies for credit first, discovers he can get $3,000 worth of credit and may decide on an entire bedroom suite.

Stimulating repeat purchases

Kratoville said that some of the new products within the furniture industry are taking a page from soft goods and apparel: By using the billing statement itself to reactivate customers and encourage them to come back and buy more.

Applying for credit means that customers will reveal demographic information about themselves, which will enable furniture retailers to build a database. Database mining can then be used to craft precise marketing messages directed to particular groups of customers.

Instead of just receiving a bill, customers might now get a coupon or a marketing message — directed just to them — about an upcoming sale. What works for retail giants like Target with smaller items will work in furniture, Kratoville predicted.

"What we have found is that when the pace of change moves up, larger changes start to develop," said Kratoville.

Fuller, of Wells Fargo, said that the information gained from a customer's credit application can be as complex as sending someone who has children a targeted flier about a sale on youth furniture — or as simple as sending a customer a birthday card with a coupon for dinettes.

"The more ways you can reach out and touch the consumer with private-label cards, the more leverage you will have," he said.

Beyond the back office changes that will begin this year, external forces like the economy and even the weather will make a difference in consumer financing this year, many predict.

For the industry, there could be a boom in 2006, with reconstruction of the Gulf Coast beginning in earnest. Zuber said that a similar boom occurred a year after hurricanes raked Florida several years ago.

Zuber also predicted that retailers should see a leveling on the costs of funds, after a number of recent increases in the prime rate. Some are warning that until then, some consumers will be caught in the middle, with increases in the costs of funds because of hikes in the prime rate, coupled with bank losses because of the changes in bankruptcy law.

Risk versus reward

Wayne Crane, senior vice president at Sterling Financial Services, said that the economy has dictated an opposite customer dynamic that retailers should consider: The consumers who were on the edge of being approved in the past may now be turned down because of minimum payment amount requirements.

That type of consumer still enables retailers to make money if they are creative, Crane said.

"It may 'incentivize' retailers to come up with deeper discounts," he said. "Consider carrying your own receivables ... that you could carry and keep yourself."

Crane points out that if the retailer earns $600 on a sale to someone with a marginal credit history, instead of $1,000 on a sale to someone with a perfect credit record, the retailer still earns $600.

"A little bit of something is better than a whole lot of nothing," Crane said. "With those who have marginal credit, not bad credit, you can sell marginal credit paper at a discount from 10% to 40% and there are sub-prime lenders that you can sell that to."

Failing that, Crane said, go aggressive.

"Go 12-months-same-as-cash," he said. "I can tell you that for every 10 customers who were turned down by a finance company and left with nothing, 50% of them could have been financed with a secondary finance company at a discount. You won't make the $1,000 but you will make the $600 and you will have made something."

Crane said that in line with other sales, add-ons and extended warranties will make the deal even more profitable, if the retailer is willing to give it a try.

"Most furniture companies do not take advantage of the secondary financial market and those who do, do extraordinarily well," he said.

Wells Fargo's Fuller said that a basic flexibility in selling furniture is increasingly becoming a requirement for success, because consumers, bombarded by thousands of advertising messages, will eventually tire of what is being offered.

"It's not going to last forever," he said. "What is a hot promotion right now might not be hot next year — it will be something different. The consumer base gets a little bit blasé if they see the same offer from a retailer and they won't feel a compelling reason to come in, not just in financing but in the overall value statement of the retailer."