Financing sources offer range of strategies
Longer terms, interest-bearing accounts are among options for retailers
By Marc Barnes -- Furniture Today, August 20, 2007
High Point — To help furniture retailers deal with a challenging business climate, financing sources are offering different strategies, including longer terms and interest-bearing accounts.
Jim Seger, vice president for furniture with GE Money Sales Finance, said lingering effects from the sluggish housing market have driven down stores' foot traffic, while higher operating expenses and lowered price points have eroded profit margins.
GE Money Sales Finance has put together some special pricing programs to help retailers compete, including plans with longer terms and deferred interest or equal payment plans, including some that go out as far as 2011.
"Our focus is around financing peoples' dreams and giving the cardholder the flexibility to defer payments or chop their payments up into equal payment solutions, so they can fit (the purchase) into their budgets," said Seger.
Seger said that GE Money Sales Finance also is working on simplifying processes, to make it easier for furniture retailers to do business, so they can focus more on positioning the product and taking care of the customer.
Initiatives include Web-based tools that give retailers daily accountings of transactions, along with better access to the cardholders, which will enable merchants to create their own direct mail marketing campaigns. Data analysis can, for example, let a retailer know when to promote sales on lamps, mirrors and paintings, all of which have solid margins.
No-pay to with-pay
At Wells Fargo Financial Retail Services, Terry Fuller, senior vice president of marketing, said he has seen many retailers go to shorter-term promotions, perhaps from 36 months to 12 months — or six months with no payments and no interest.
"If you look over the last couple of years, 12- to 18-month, no-payment promotions were prevalent because costs were more in line with what retailers were expecting," said Fuller. "Now things are starting to change. Costs have started rising. Retailers are switching from no-pay to with-pay.
Additionally, Fuller said that he has seen an uptick in the use of 9.9% interest over a three- to four-year term, which effectively lowers the costs to the retailer, while still maintaining the benefit of a private-label program.
Other programs that Wells Fargo is testing include cross-selling, in which consumers using one of the firm's automated teller machines receive a special offer from the furniture store where they have a private-label card. Another program involves offering a Wells Fargo equity line that could be used to purchase furniture.
"We see some real promise of bringing other entities of Wells Fargo into the furniture industry to help facilitate sales," said Fuller.
Wells Fargo also is putting more emphasis on marketing by direct mail. This takes two forms — promotions that are included in the billing statement, and additional mailings to customers who have paid their account in full, encouraging them to come back in.
"Once we have established our relationship, the key is to keep the customer aware of the store and their account and the limits," said Fuller. "Our direct-mail campaigns are to make sure the customer base comes back in and uses that card and gets special programs and special offers."
Vern Eliason, director of retail finance for American General Financial Services, said that furniture retailers are changing their promotions more frequently than they did in the past.
"Sometimes, retailers will go two or three weeks with no payment for a year and then two or three weeks with two or three years with no payments, then 18 months with no payments," said Eliason. "They are using a lot more variety."
With big-ticket items, Eliason said he is seeing reduced interest rates in the 9.9% to 12.9% range, rather than the 12-months-same-as-cash that has been popular.
"These customers have determined that they are not able to pay off $6,000 in furniture in six months or a year, so they will have a lower interest rate for a couple of years," said Eliason. "It lowers the cost to the retailer and, in some cases, there is no cost to the retailer."
Eliason said that business for American General is up over where it was last year. He said that his firm has put an increasing emphasis on helping retailers build their business through finance, which he said is working. He said a higher percentage of retail sales are financed compared to two years ago.
"Retailers are getting better at promoting the financing, for one thing, and they are also getting better at managing it, at managing the expenses through down payments and minimum purchases to qualify for programs and things like that," said Eliason.
Joseph Zuber, client manager for Citi Financial Retail Services, said that consumers are showing more interest in longer-term financing with low annual percentage rates.
"Those types of plans really cost less for the retailers, the dealers, because the customers are paying a low interest rate and, instead of an interest-free rate, the dealer can offer the transactions at a lower price than if it was interest-free," said Zuber.
Zuber said that offering a five-year, no-interest plan costs the dealer a discount rate of between 15% and 20%, while offering a 9.99% rate costs the dealer about 2%.
"It is really shifting more to the consumer," said Zuber. "A consumer who needs to pay for furniture over five years is typically focusing more on minimum monthly payments and less on it being interest-free. We are definitely seeing much more popularity on this as the cost of funds has increased in our industry."
Zuber said that another fairly recent development is that dealers are requesting links on their Web sites to allow customers to apply for credit online. A key advantage is privacy.
"For those (consumers) who have questions about their creditworthiness, they don't have to be declined in front of someone," said Zuber. "The advantage to the dealer is if you have someone interested in your product line, once they have found out that they have credit, they are more likely to show up at your store and shop."
In the commercial credit sector, David Dalhouse, senior vice president and regional credit manager of Capital Business Credit, said that many retailers are taking advantage of direct-importing opportunities.
Dalhouse said the key to success for many is careful inventory management, which has an impact on how retailers manage expenses. And that in itself is nothing new, because the best-managed businesses always survive downturns intact and profitable, no matter the sector.
Overall, Dalhouse is hopeful about the future, although business is soft right now. He said that many in the industry expect the retail climate to begin to improve late this year or in early 2008.
"Overall, things have slowed," said Dalhouse. "On the flip side, in the market, you have an excess supply of equity money looking for places to (invest), which is why you are seeing investment firms get involved in retail furniture, which is pretty interesting. They are thinking that this is a good time to buy — this is a viable market and a good business model going forward.... Right now, they're banking on the fact that it will be back."
Roderick McIver, senior vice president of GMAC Commercial Finance, said that cyclical downturns are normal every few years, but this year's drop was exacerbated by the housing slump, high gas prices and bad weather.
"On the plus side, manufacturers, importers and retailers are enjoying the benefits of lower-cost merchandise arising from largely Asian-sourced merchandise," said McIver. "Heavy investment continues in the Pacific Rim, and container deals abound, with quality improving. Fewer players provide an opportunity to garner increased market share, and larger national retailers are emerging as a result."
On the downside, longer lead times make short-ship dates more difficult to accommodate, while consumer discretionary income has been hit hard by rising energy costs. The economy has also had an effect on housing starts and same-store sales.
"As a result, it is becoming ever more difficult to discern between those that will survive this down cycle and those that will not," said McIver. "Those that do, however, will be leaner, better capitalized and nimble enough to adapt to a rapidly changing global landscape."
