Counting on Credit

February 28, 2007  by in UnCategorized   

By Home Furnishings Business in Advertising on March 2007 Furniture retailers in other parts of the country might not feel too much sympathy for dealers in the lucrative Florida market, but sometimes there’s trouble even in paradise, especially in the past couple of years.

“We’ve had a triple whammy,” said Don Marks, chief executive officer of W.S. Badcock Corp. of Florida, the state with the largest share of the company’s 320-strong dealer network. “It had been the hottest real estate market in the United States, but that’s fallen way down. Second, Florida has property taxes, exemptions and caps that are non-transferable, and that prevents people from selling their houses. Third, after all the hurricanes, homeowners’ insurance in some cases has tripled.”

Add to that the fact that even before the furniture retail environment there softened, Florida was, despite its sales potential for dealers, a fiercely competitive state in which to operate a furniture store.

“We’re still showing flat to single-digit increase in sales, though,” Marks noted. “And financing is one of the tools we’ve used to maintain business.”

With the growth of its more upscale Badcock &more format, which now accounts for 240 locations, Mulberry, Fla.-based Badcock uses a lower-key approach to promoting financing than in the past, but it remains an important method for driving traffic, Marks said.

Finding the Right Fit

Finance promotions can be a tricky proposition for furniture retailers, though some make their living that way, and how big a part of the business it is often boils down to price point. While there aren’t too many dealers demanding cash on the barrel before they deliver the goods, credit promotions do play a more important role in making the sale at promotional and middle price points.

A big decision for many retailers is whether to keep their financing in house or farm it out to a third-party specialist. Both options hold their attractions, depending upon a retailer’s business model, and many incorporate a mix of their own paper and a third-party option.

CitiFinancial has more than 30,000 retailers using its third-party financing services at some level, said Darrell Owens, director of client management for CitiFinancial Retail Services.

“Those include home furnishings, appliances, flooring (and) electronics, and a lot of those overlap,” he said, noting that third-party financing lets retailers concentrate on merchandising.

“The retailer immediately frees up cash flow, instead of carrying the customer’s balance,” Owens said, describing the third-party arrangement’s value equation. “That customer takes the furniture home, but you don’t get all your money if you’re providing the credit. If you go with a company like ours, you get the payment immediately” since CitiFinancial funds the retailer within 48 hours of the purchase.

The same holds true for deferred interest promotions designed to get customers in the door.

“And when customers get approved, we’ll maintain that customer base for the retailer,” Owens added. “If we’ve approved a $5,000 line (of credit) and the customer has spent only $2,500, that’s an opportunity for another sale to someone the retailer knows can afford the purchase. It’s easier to sell to an existing customer than someone brand new.”

CitiFinancial also will imprint a custom message on customer billing statements at no charge to retailers, allowing them to turn their statements into marketing opportunities and present special discounts or announcements to increase add-on business; offer direct mail to existing credit customers to make additional purchases; and provide customized point-of-sale material to help retailers advertise financing, special promotions or sales.

Still, some dealers are more comfortable with their own credit programs. For example, financed purchases account for around 90 percent of business at Chicago-area retailer Continental Furniture’s three stores, which write their own paper for consumer financing. Keeping that financing process in-house is a good fit for the retailer’s price point (promotional) and target market—90 percent of Continental’s customers are Hispanic—according to President Mitch Portugal.

“Hispanic customers rely a lot on credit, and buying on credit is well-accepted in that community,” he said. While Continental has always handled its own credit approvals, Portugal said he couldn’t really address the situation of retailers who’ve shifted that function to a third party, but he did say keeping financing in-house has proved beneficial to his specific operation in several ways.

“First, a lot of our customers, at least two-thirds, prefer to come into the stores to make their payment, and that provides us an opportunity to build on an existing relationship on a monthly basis, versus them sending a check to a third party,” Portugal noted. “We get an opportunity to talk, to have some social conversation, and show them new items on the floor. We can ask which room they’re thinking about for their next purchase.”

Around 3 percent of the traffic coming into Continental’s stores to make payments end up buying something else on the spot, he adds, saying “For us, that’s just extra business.”

Total control over which customers receive credit approval is another plus. Portugal believes that writing his own paper allows him to make selective judgment calls on consumers who might get turned down by a third-party finance.

“I don’t want to say that we’re way more lenient than other financiers, but it’s worked for us,” he said. “We average around 89 percent approval, and it’s our call to make.”

A third benefit Portugal cites—one that might strike some retailers who don’t have longstanding credit relations as a negative—is that customers feel more comfortable doing business with someone they know in case they hit a financial bump.

“If they fall behind, they feel they have the relationship built to the point they can come in and say they might be a little late from time to time,” he said. “The fear factor isn’t there that they’d have if they weren’t dealing with our store.”

Bottom line at Continental: “We’re in promotional furniture, and our average sale is $1,600, and without financing that might be $900 at best,” Portugal said. “With a third party, you can get your hands on cash more quickly and it’s probably easier to expand your business, but our way works for us.”

A Blended Strategy

Some retailers find that blending in-house financing with a third-party option expands their reach in attracting a broader range of consumers. The key there is to find the right proportion to fit a particular business model.

Ashley HomeStores of Charlotte, N.C., and Greenville, S.C., financed around 48 percent of sales in 2006 and year-to-date 2007. Of that, 93 percent is through its third-party arrangement with CitiFinancial.

“We have an in-house financing program for those who can’t be approved through CitiFi,” said Celeste Bundy, advertising manager, who noted that in-house credit accounted for less than 3 percent of sales last year.

Twice a year, Ashley of Charlotte and Greenville offers a major credit promotion, such as no interest till 2011, and no payment till 2008.

“Our sales during those months are up 20 percent to 25 percent versus when we promote, say, no payments/no interest for 12 months,” Bundy said. “We try to split our promotional efforts 50-50—this month, everything might be focused on financing; next month it’s all about product in our advertising.”

In her stores’ case, Bundy said the third-party option is always the first recourse, since the retailer just prefers to avoid spending too much time managing a financing business.

“We also keep that in-house financing as separate as possible from the store operations,” she said. “It’s set up as a completely separate company. I don’t want to be in the business of repossessing furniture if someone isn’t making payments.”

On the other hand, some stores that finance most credit sales in-house find that a third-party program provides a valuable option for some shoppers.

Badcock, for example, has complemented its in-house financing with a third-party offering through Household Finance for the past two years. The move has helped drive traffic, Marks said, and offers customers terms Badcock didn’t want to carry with its own consumer credit.

“We wrote our own paper for 80 years, and have one of the oldest consumer financing programs in the country,” he said. “Our own program has some very good terms such as 12 months, same as cash. We offer three months and six months, too.”

Problem was, the company needed something to counter the deluge of no-no-no financing competitors offered to consumers in its markets. Badcock, however, didn’t want to use its in-house financing for no-no-no terms that could end up creating no communication with the customer for 18 months.

“We didn’t want to carry those terms, but we wanted to play in that marketplace, because the consumer is used to hearing ‘no-no-no,’” Marks said.

While Badcock stores typically finance between 65 percent and 75 percent of total sales, only 10 percent of those credit sales are through its third-party arrangement, and Marks pointed out that no-no-no terms aren’t promoted on the sales floor itself.

“The goal of a no-no-no is to bring people into the store, and it opens the door to a sale, but we wait for the customer to ask about it, or use it as a closing tool,” he said.

Extended financing terms also have appeal for home-buyers, Marks noted.

“Say I buy a new house—I need to buy furniture, but I also need to do other things, maybe put in my lawn,” he said. “I’m in a cash-poor position now, but I know that in 24 months I’ll be fine.”