High Point — Credit sales are a furniture retailer's lifeblood, and most stores these days get help to keep the flow running smoothly.
Third-party financial companies, led by such heavy-hitters as GE, Citigroup and Household, are managing the credit operations of retailers large and small.
It's a task that, until a couple of decades ago, retailers often did in house, figuring out how much credit to extend to which customers and carrying the receivables themselves. By outsourcing, stores give up some of the income from a well-run credit operation, but they also relieve themselves of the risk of making credit mistakes.
As they compete for retailers' business, financial companies cite their experience, expertise and financial clout. They also talk about how credit can work with and support other operations, like billing and promotions. Extended financing offers are almost as common a sales tool these days as price discounts, and third-party credit providers work with stores to keep the offers fresh and effective.
Keeping a focus on sales
"Working with a consumer financing company with marketing expertise and strong customer service enables the retailer to grow their business while concentrating on what they do best ... selling furniture," said Kelly Nugent, client development manager for GE Retail Sales Finance.
With an in-house credit operation, mistakes can become costly. Heilig-Meyers ran a profitable consumer finance arm for years, but saw the operation become a drag on earnings in the years leading up to its bankruptcy filing three years ago.
"From my perspective, what occurred (at Heilig-Meyers) was that they were just too aggressive with credit," said Dick Klesse, national director of business development and client relations for Household Retail Services. "They did not have the proper controls in place and did not have the proper expertise in risk management."
For Household and its competitors, risk management is a core capability. "We can be very aggressive in giving people the maximum approvals and maximum credit lines and still achieve the loss ratio that we need," said Klesse.
A popular form of credit these days is the store-brand credit card, which has the advantages of pre-approving a customer for a line of credit and creating loyalty to the store. A shopper with a Levitz card in her bag, for example, is more likely to come back to Levitz.
Growing variety of tools
A variation on this, said Terry Fuller, senior vice president of business development at Wells Fargo Financial Retail Services, is a co-brand product that incorporates the store brand and Visa on one card. This links two separate credit lines to a single card, and gives the consumer the benefits of a store card plus the flexibility of a Visa card.
Credit companies also work with retailers to extend what seems to be a growing variety of promotional financing offers — combinations of no-interest, no-payments and no-down payment for varying periods of time. Some offers now stretch into 2006.
Retailers pay for the offers, getting less from the credit companies that take over the receivables. Credit companies won't specify the cost of extended-financing offers, since there are so many variables and the companies say they work with each retailer to come up with the best approach for that retailer.
"Flexibility is a priority, and we offer a variety of credit solutions for retailers to choose what's best for their business," said Nugent of GE.
"We're seeing a lot of longer-term, no-interest option promotions as far out as 2005 and 2006, and not as many longer-term promotions without payment," said Wells Fargo Financial's Fuller. "You can have one, two, three years with no interest, but there are typically monthly installments associated with this type of offer. Such programs are generally more affordable and more attractive for the lender and the retailer."
Klesse at Household said there are a couple of reasons that more retailers are offering longer terms on financing promotions.
"First, the consumer is getting a little weaker, and stores are having to work harder to draw customers in," he said. "Second, because interest rates are down, the cost of offering these (financing programs) is down."
Many retailers believe extended financing is a less costly and more effective way to drive traffic and sales than a price reduction, Klesse said. Retailers often say that financing offers are a competitive necessity these days — customers look for them, and the store down the block offers them.
Special financing and other credit-related promotions usually have two distinct goals — attract new customers, and get existing customers back in the store to spend more.
Credit companies work with retailers, sometimes offering coop help, to create and execute mass-media ads or direct-mail pieces to promote the financing offers. Direct mail can be trickier, since it must reach people who are in the market for furniture to be most effective, but the financial companies say they have ways to narrow the list to what is likely to be a receptive audience.
"We are able to activate more customers at less cost," said Klesse of Household.
Something new and different
Innovation helps too.
"We've teamed up with NASCAR Winston Cup driver Kyle Petty and we've had some phenomenal results from this exclusive sponsorship opportunity," said Anderson at Wells Fargo. "If there's a race in a retailer's area, he can have Kyle and is #45 Georgia Pacific show car in the parking lot to generate traffic into that store."
Aside from credit expertise and marketing, the financial companies say they can help retailers work efficiently.
Wells Fargo, for instance, works with interface software providers GERS, Storis and Tyler to integrate the point-of-sale systems at stores to the credit company's computers. This dramatically reduces the need to enter the same customer information twice, in making the sale and extending credit.
E-commerce also is figuring into more credit operations, with retail Web sites offering links to credit companies and applications for financing.
