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Retailers Find Alternatives to Financing Plans

Heath E. Combs, Powell Slaughter -- Furniture Today, December 23, 2010

HIGH POINT - In a still difficult retail climate, consumer finance is evolving as stores and finance program providers adapt to changes in buying habits.
     While retailers don't expect banks to jump on consumer finance like they did during the boom years of the last decade, they are able to offer a variety of programs to broad customer bases.
     It's essential that retailers have alternative financing options for consumers who don't qualify for the first-tier offers at stores, said Charlie Malouf, managing partner and chief operations officer at Broad River Furniture, which has 12 Ashley Furniture HomeStores in the Carolinas and Georgia.
     Malouf said the stores usually lead with a long-term finance offer and most consumers can get at least six months with a minimum purchase requirement. The more money that qualified consumers spend, the more time they're given to finance - those spending $1,000 can get 12 months, while those spending $4,000 can get up to 48 months.
     Another popular option for these consumers is a promotional offering, like a television package - but they don't get the financing option with that package, he said.
     And because an increasing number of consumers are turned down by the lenders, the Broad River stores are offering other options to still capture the sale, Malouf said.
     "Three or four years ago, we never had to really focus on alternative finance or payment plan options.... (It was) maybe was the red-headed stepchild of our business. We were getting as much business as we needed from the regular customers," he said.
     Today, Malouf said, this growing market of "under-banked customers" who can't get approved from primary finance vendors ends up averaging about 10% of the financing at his stores, but in some months that can flex up to 25%.
     One secondary finance option is offered through Regional Management Corp. of Greensville, S.C., which formerly specialized on auto sales but has delved into furniture. It determines a consumer's creditworthiness and gives a loan to consumers in an interest bearing account to make a purchase, he said.
     A second alternative is the Rent-A-Center division RAC Acceptance, which offers flexible rent-to-own options for consumers.
     A third option, Malouf said, is layaway, which has come back into vogue in the past year.
    Among the secondary finance options, Regional Management accounts for about 3% of the overall business, RAC Acceptance 6% and layaway 1%.
     "Any chance we can get to fight off that erosion in our finance business, our credit business, is a chance to rebuild our sales in the new normal," Malouf said.
     He added that he's seen the return of 60-month finance offers, although the stores use them sparingly for special events.



"Any chance we can get to fight off that erosion in our finance business, our credit business, is a chance to rebuild our sales in the new normal."
Charlie Malouf, Broad River Furniture

Charlie Malouf
Mark Fedde



"Sometimes people look at the credit information you need to fill out and say, ‘You know what, the heck with it, I'll just pay it.'"
Mark Fedde, Fedde Furniture

     Their revival may show that the industry has stabilized enough for financing companies to get more aggressive, he said.
     In the last two years at Fedde Furniture, consumers have opted for additional discounts, such as 5% off the price, rather than one-year, nointerest financing programs, said Mark Fedde, president of the a mid-priced and upperend store based in Pasadena, Calif.
     "When we offer consumers the choice of the savings versus financing, they want the savings. Our customers are proud of the price they get on something as far as the discount," Fedde said.
     "They're not going to tell their friends: ‘Hey, I financed no interest for two years.' They're going to say: ‘Hey, I got an additional 10% off, this is great,'" he said.
     The store does about 4% of its sales through financing offers, he said.
     Approvals have become more difficult, going from nearly 99% two years ago to about 85% now, he added. Finance companies also are pressing for additional detail and documentation on consumers' ability to pay. But some consumers are just not opting to jump through hoops for approval, Fedde said.
     "It's definitely a more aggressive approval rate. I don't care what industry you're in these days. Sometimes people look at the credit information you need to fill out and say, ‘You know what, the heck with it, I'll just pay it," Fedde said.
     Mike McClure, owner of Furniture Warehouse Showrooms in Lyman, S.C., said he's currently using GE Capital and American General for financing. He said he uses mainly one-year, same as cash offers, or financing for up to three years when running special sales.
     The tough economy means stores have to be more selective about when they offer special finance programs, since those programs can be costly.
     About 10% of his customers are using financing these days and an increasing number are financing purchases themselves, he said.
     "We're liking that they're putting it a lot on their credit cards right now," McClure. "They're using their own credit lines. They're trending away from going to the old typical finance company with 18% interest for three years. All that's a thing of the past. You don't see that much anymore in our part of the world."
     While most consumers would have been approved for financing three years ago, that number is closer to 60% now, he said. And it's getting even harder to be deemed creditworthy, McClure said, noting just having a good credit score is not enough to qualify for financing.
     "If they don't have a credit card or the money to buy it, they don't buy it," he said. "Most people would be turned down now if they tried and they know that."
     He recalled a recent customer who was denied financing.
     "They said he didn't make enough money to prove that he was paying for it all because he's working two or three jobs. They turned him down on $1,800. A few years ago they would have jumped all over it. Now all the numbers have to fit."
     Greg Pittman, vice president and general manager of retail sales for lender GE Capital, said that a 12-month promotion is probably the most popular program offered by the company now. But he said he's starting to see some stores shift to longer financing offers.
     "The consumers are looking to spread those payments over longer periods of time," Pittman said. "Also from the retailer perspective, the longer term seems to be great in terms of driving greater foot traffic."
     One of the more popular programs recently has been installment loan products that run from 12 to 48 months and have fixed payment on purchases, he said. That allow consumers to better compartmentalize purchases, Pittman said.
     "It's still in the early stages in terms of what types of consumers are gravitating toward it. We know there's a certain group of consumers that want the assurance of that fixed payment and the product seems to be right for them," he said.
     Terry Fuller, senior vice president at lender Wells Fargo, said that from a volume perspective, there was little growth in consumer finance from home furnishings retailers in 2010.
     "I think where you saw some of the bigger improvement was (that) consumer performance was a little better from their payback, their ability to make payments this last year," he said.
     Fuller said Wells Fargo is encouraging retailers to utilize longer-term special promotions, such as those that have accrued finance charges with a minimum payment due each month.
     While some of the most popular offers lately have been 12-month programs, Wells Fargo is educating retailers on longer-term payouts with movement toward 15 to 18 months or longer, he said.
     "Anything with 12 (months) or longer, we're finding to be a little easier on the consumer from a payment perspective," Fuller said.

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