Stores feel credit pinch
Some report increase in turndowns
By Clint Engel -- Furniture Today, October 6, 2008
HIGH POINT — The global credit crunch, which began taking its toll on furniture inventory financing programs earlier this year, is starting to slap consumers who want to finance furniture and other big-ticket items.
With the federal financial bailout bill in the news, the credit issue was fresh on the mind of Mike Allen, executive vice president of home furnishings for buying group AVB/BrandSource. Allen had just heard from one of his big appliance and furniture dealers in the Midwest about the growing problem.
“He's in the middle of his annual tent sale,” Allen said. “He said business is up 20% over last year, but the surprising thing has been the turndowns in consumer financing. It's running well over 50%.” The usual rejection rate is about 20%.
Allen said he expects to hear more stories like that.
“The criteria (for credit approval) are getting tough,” he said. “I think you're going to see that come across at the consumer level in the home furnishings industry. Companies like GE and Citi — they want to make their portfolios look better. One way to do it is to make sure they have nice clean loans.”
Credit has been an issue for the industry for some time. This spring, reports began surfacing that some factors and lenders were tightening credit, requiring suppliers to take more risk exposure and cutting back on the credit dollars available to furniture stores. GE Capital Solutions cut — and by some accounts effectively eliminated — its unsecured inventory financing program to the industry.
In September, when Philadelphia retailer DD Huber Furniture & Design filed for bankruptcy protection, officials said tighter credit terms were a factor in its downfall. The company listed factor CIT among its largest unsecured creditors with a claim of more than $219,000.
Consumers hit too
Now the screws on consumer financing appear to be tightening, too.
The credit crunch “has had an enormous impact on our industry,” said Robert Myers, president of the Ashley Furniture HomeStore in Chico, Calif. Myers said he has experienced (and has heard from others) “a 10% to 15% hit in approval rates on our retail side.”
The discount rates that lenders charge retailers to run credit offers also have increased, and Myers expects they will climb higher.
“Possibly, the long-term same-as-cash (offers) might go away,” he said.
Jerry Alderman, senior director of membership for the National Home Furnishings Assn., agreed that the cost of providing consumer financing is “definitely going up.”
Although the price of NHFA's financing program through Citi actually decreased about a half percentage point in June, Alderman said he doesn't believe that will hold much longer. Citi's competitors have raised their prices, he said. NHFA will meet with Citi in a few weeks and he feels sure “we will be looking at increased prices just because of their increased losses.”
In a July survey by the Federal Reserve, about 65% of U.S. bank lending officers said they had tightened standards on credit card loans in the past three months. Banks also had tightened commercial and industrial loans.
In a separate August poll by the National Small Business Assn., 67% of business respondents said they had been affected by the credit crunch vs. 55% in February. More reported tighter terms for bank loans and credit cards.
“I would think it's a foregone conclusion that credit is going to be tighter,” said Morty Seaman of Seffner, Fla.-based Rooms To Go, one of the largest U.S. furniture chains.
“Business is going to continue to get worse, and I feel sorry for a lot of smaller dealers who are going to have difficulty going on.”
Ashley Chairman Ron Wanek called the hit from GE in May “devastating to a lot of our dealers.” Indeed, he said some dealers in the industry will go out of business as a result, though he declined to specify how badly HomeStore dealers may have been hit.
Wanek said consumer credit turndowns have become an issue, but it's difficult to measure the degree partly because some of those consumers with credit issues “just aren't coming in the door anymore.” “Everybody is saying traffic is down.… People are thinking long and hard before spending money,” he said.
Wanek said the promotional side of the business is the strongest right now.
But when it comes to consumer credit, retailers of more expensive goods may have an edge. Ethan Allen Chairman and CEO Farooq Kathwari said business conditions are tougher, but the upscale company has yet to see any signs of a decrease in customer credit lines or approvals.
“Our client base, we're told, has one of the best credit histories. Because of that we have not so far (seen a spike in turndowns),” he said.
Ethan Allen's costs of offering financing haven't increased either, he said, because it has a set contract with lender GE Capital. Still, Kathwari added that he senses consumers are holding back. “Consumers are cautious,” he said. “We can't blame them.”
Not everyone's hurting
Selden's Home Furnishings in Tacoma, Wash., may be experiencing a reverse effect of the credit crisis. While the volume of sales it is financing has declined, the company has seen an increase in the dollars approved per customer from its credit suppliers in the past three months, said Scott Selden, owner of the upscale Selden's as well as Thomasville Home Furnishings and Bassett Furniture Direct stores in Tacoma.
He believes it may have something to do with the retailer's focus on the middle and upper segments of the population it targets.
“I think the financing companies are feeling the slowdown in business too, so they're trying to gain a larger share of the business that's out there from better-end clients,” he said.
Selden's cost of offering financing hasn't gone up either. However, its options have been limited. Recently, the retailer pursued a 24-month no-payment financing program through Wells Fargo, but the bank wouldn't go along.
“They're trying to pull down the length of credit terms,” he said.
