Retailers Hope Credit Deals Add Green to Season
Eager to boost limp holiday sales, more retailers than ever are enticing cautious consumers to buy on credit with a sleighful of special deals.
Mervyn’s last month sent coupons to 1 million customers with inactive accounts, giving them a 15% discount on credit purchases. Montgomery Ward offered its 14 million credit card customers a chance to postpone payments on large purchases for six months. Rogersound Labs, a Canoga Park-based electronics chain, tempted 350,000 customers to apply for credit by offering a 5% discount on purchases and no interest for 90 days.
While credit promotions aren’t new and are costly to retailers, they are using the gimmick heavily this year. Faced with keen competition for scarce consumer dollars, “retailers are using every tool they have,” said Jay Johnson, chief financial officer for Rogersound Labs.
The question is whether consumers, already burdened with debt, can be persuaded to take on more. Consumer debt nationally has dropped every month since April, an indication that consumers are paying off old debts and steering clear of new ones.
With the economy still in trouble, “consumers are holding back,” said First Interstate Bank senior economist and Vice President P. Kenneth Ackbarali. “They are avoiding new debt for things they don’t need, such as new cars and other big-ticket items.”
Stephanie Hester, on a lunchtime shopping excursion to downtown Los Angeles’ Broadway Plaza on Friday, said deferred financing made her nervous. “You have to pay sooner or later,” she said. “I’d rather pay what I can afford now than sell my soul to The Broadway or whomever.”
Even so, there are signs that the special credit deals spur at least some consumers to spend. Stor, an Industry-based furniture chain, launched its first-ever credit promotion over the Thanksgiving weekend with no payment or interest for three months.
Peter Lynch, vice president of finance, said credit purchases surged. At Rogersound Labs, which introduced its own card in mid-November, purchases with the store card now account for more than 10% of sales.
The credit promotions come as retailers brace for a frosty Christmas. Wary consumers, some of whom face layoffs or wage cuts, are spending less on gifts than in the past.
Among the legion of frugal consumers is Suzanne Williams of Claremont. She’s buying gifts for her nieces and nephews, but not for her brothers and sisters this year. Williams said she won’t have a tree this year either. “We’re in a recession,” she said. “This is not the time to get caught up in festivities.”
With the economic outlook uncertain, sales-hungry retailers are fawning over their charge customers, who have a tendency to spend more than consumers who pay with cash. According to a survey by General Electric Capital, the biggest financier of private-label retail charge cards, credit customers spend $1,071 a year at department stores, while non-cardholders spend $360. People with electronics store credit cards spend an average of $811 a year, compared to $237 for non-cardholders.
“It is more effective to go after the people who have cards than the people who don’t,” said Daniel Porter, vice president and general manager for private-label financing at GE Capital.
Twenty-five retailers whose accounts are managed by GE Capital are participating in a special holiday promotion aimed at getting consumers to buy on credit. Porter said that 1 million consumers were given credit-line extensions averaging between $200 and $400 and were offered a variety of incentives, ranging from 90 days of deferred interest on store card purchases to coupons good for 20% discounts on credit purchases.
Porter won’t identify the retailers involved, and he said it is too soon to say how the promotion is working. But he said that in a similar promotion last year, participating retailers experienced a 30% to 40% jump in credit sales.
Some believe that the credit deals may push debt-ridden consumers over the edge. Paul Richards of the National Center for Financial Education in San Diego said such gimmicks as free financing and deferred payment cause strapped consumers to pile up more debt than they should.
“Free financing lures people who don’t have the cash to make purchases. They buy because they want to keep up appearances for friends and family, and they tell themselves they’ll have the money later,” he said.
Retailers acknowledge that it is possible that some customers may take on too much debt. Even before holiday promotions got under way, the number of charge customers behind on their payments was growing. Ronald Prill, director of credit for Mervyn’s, said nearly 6% of outstanding credit card debt is delinquent, compared to last year, when the amount was closer to 5%. The delinquency rate approximates the rate on bank cards, such as Visa and MasterCard.
Nonetheless, Prill and other credit managers said they believe that the risk that many consumers will skip out on credit payments is a small one. “We’ve found that these promotions appeal to consumers who want to defer payments until they receive a bonus check or a raise,” said George Overland, director of credit services at Montgomery Ward.
The credit promotions are costly to retailers, even if consumers pay their bills. Retailers have to borrow money to pay their suppliers for merchandise that customers buy under defered payment plans. This cuts into the profits that retailers make on the transaction, especially if consumers pay their bills on time.
But few retailers make money on their credit operations anyway. “A lot of retail credit operations are break-even at best,” said James J. Daly, managing editor of the trade newsletter Credit Card News. “Whatever retailers lose on credit, they make up on higher merchandise sales.”
And even in this winter’s credit free-for-all, retailers are taking steps to make sure they’re not giving away the store. Some chains have raised the amount a customer must charge to qualify for defered payment and interest deals. The May Co. raised its limit to $50 from $35 last holiday season. And Montgomery Ward has taken similar steps.
Montgomery Ward credit manager Overland said the higher sales limit hasn’t bothered many consumers because deferred financing is used most on large purchases. Besides, he said, “the bottom line is to get people to spend more.”
