Finance sources develop new approaches
Suggesting ways to cope with credit crunch
By Marc Barnes -- Furniture Today, February 24, 2008
High Point — The current credit crunch has affected furniture consumers and retailers alike: Consumers are seeing increased scrutiny of their credit applications, and retailers are taking a more conservative view on how extensive their promotions will be, say financial industry observers.
By necessity, many successful retailers are cutting back on the "no, no, no" model, limiting purchases to 12 months with no interest. Retailers are also ramping up their emphasis on customer service, finding new ways to build foot traffic and return business, given that credit has gotten tighter.
Greg Pittman, vice president and general manager for sales finance retail at G.E. Money, said that the current economy contains both good news and bad. The good news is that unemployment is still at low levels. The bad news is that credit delinquency is at an all-time high in some areas, which means that when credit goes bad, it turns to losses much faster.
Pittman noted that the furniture industry has seen some compression of profit margins, with lower-cost merchandise from Asia driving retail prices down and therefore lowering profits. Those factors, coupled with lowered foot traffic, have driven some furniture chains into bankruptcy.
"When you look at it, from our perspective, what we are saying now more than ever before is that retailers have to be focused on execution," said Pittman. "We've been doing this for more than 20 years and we are qualified to help retailers not only survive but thrive in this market condition."
Pittman said the key for retailers is to be fast, flexible and offer superior service. GE Money has invested in people and resources to provide retailers with training on how to use credit to speed up the purchase decision, he said. It also has developed free point-of-purchase marketing materials to build foot traffic.
An overall squeeze
At HSBC Card and Retail Services, Brian Hughes, executive vice president and managing director of marketing, said today's tightening market means that there is less credit available for consumers who don't have good credit. And even for prime customers, it may be somewhat harder to get approval or the loan amounts approved may be lower.
In the past, loan terms may have been extended for several years, or payments might not have started for some period of time. Hughes said the periods now are shortening, both in terms of the length of time they last and when the first payment is required. Hughes said that a no-interest option where the first payment is due the first month will likely gain in popularity.
"While there is no 'one size fits all' answer to the credit crunch with every retailer, this is something that we try to work on with our partners," said Hughes. "It is different from retailer to retailer. Some might want to scale back on the promotions they offer and others might need to scale back on those we approve. You need to change either (how) the promotions run or the number of people who get approved for them."
What works? Hughes suggests that furniture retailers need to become more flexible — and don't assume that what worked in the past will work in the future. He suggests a two-part approach: Target your best existing customers who have used credit in the past and establish more of a one-on-one relationship with them rather than casting a wide net toward new customers with advertising. In addition, he recommends moving more toward promotions in which payments start right away.
More front-end scrutiny
At Citigroup, market conditions are dictating some changes in how it does business.
In a January fourth-quarter earnings conference call, Gary Crittenden, chief financial officer for Citigroup, said that the firm is tightening underwriting standards and evaluating the open lines of credit that exist with current customers.
"We are doing cross-reference work between customers where we have the mortgage position and where we hold the credit card," said Crittenden.
He added that some "substantial missteps" could be made if credit card companies aren't careful in watching credit just now, because there will be some natural growth in outstanding balances that will take place. He said that Citigroup will adopt a careful approach going forward.
Vern Eliason, director of retail for American General Financial Services, said that he hasn't seen a significant tightening of credit standards, but that consumer fraud has become a growing problem.
"That really seems to be on the increase and recently we have had to do more due diligence on that side," said Eliason.
He said that retailers have to balance risk versus reward when it comes to deciding whether or not to grant credit to a customer with a less-than-desirable rating. Making credit too freely available can result in a higher level of bad credit chargeoffs.
"We have had to make some adjustments in that area," said Eliason.
Eliason said that the ripples of the credit crunch come from farther away. Because mortgage lending, especially for equity lines, has tightened up, that has meant that customers are unable to consolidate all of their bills and therefore free up money to purchase big-ticket items like furniture sooner.
Like his counterparts at other firms, Eliason said that American General is focusing its efforts on having more contact with merchants to help them drive business, including meeting directly with manufacturers and providing more training on how to sell financing. And since American General has offices in locales throughout the country, the lender has first-hand knowledge of what is going on in the marketplace, which positions it to have closer relationships with local furniture retailers.
"We're trying to improve that retail dealer relationship on as many avenues as we can," said Eliason. "We can do a better j ob with if we communicate with dealers better. All of that improves our ability to understand their needs better."
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