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Business Articles
Retail Bringing Layaway Back to Life
(posted on Retail Customer Experience)
By Heather Larson

 

Dori Cagle and her husband have already picked out Christmas gifts for their two sons, ages 3 and 7. They shopped at a Lexington, Ky., K-mart where they put their purchases, totaling $350, on layaway.

"We don't use credit cards, so this is a great alternative for families trying to avoid credit card traps," said Cagle. "We have to wait until the total is paid before we get the goods, but that's a fair trade in my book. I know there's a reward waiting for me when it's paid off and I don't have to pay any interest. Plus, K-mart hides the presents for me."

Cagle is a typical layaway customer. But this year new customers, trying to avoid further credit-card debt or whose credit has suffered because of the economic crisis, may be more interested in signing up for the pay-as-you-go option.

The resurgence of layaway is hot news this holiday season. Sears, the most recent retailer to announce the institution of a layaway policy, is banking on its success by running its layaway offer until Dec. 23. The last day to add to a Sears's layaway will be Dec. 22, which is really cutting it close to Christmas.

 

The layaway option

The concept of layaway, which was popular until the early `90s, hasn't changed. Customers still pick out purchases, make down payments and then make regular payments until the merchandise is paid off. A good credit history isn't required.

K-mart has been offering layaway for more than 40 years. Tom Aiello, division vice president of public relations for Sears Holding in Hoffman Estates, Ill., says the origin goes back to the Great Depression, when consumers needed payment plans that allowed them to buy merchandise over time.

"Not only did we hear feedback from our customers (who wanted layaway), but we saw the very positive response to our sister retailer's—K-mart—layaway program," said Don Hamblen, Sears' chief marketing officer. "In this difficult economic climate, extending the layaway program at Sears was an easy decision, and one that we hope will provide additional value to our customers."

C-level executives at retailers across the country are likely to consider this option, whether it be in time for this Christmas or next. But before becoming the banker, retailers should consider the benefits and downsides of a layaway program.

 

The benefits

"It builds loyalty," said Lynn Switanowski-Barrett, president of Creative Business Consulting Group in Boston.

Layaway customers feel tied to your store and believe you care about them. Retailers with layaway options show flexibility and give consumers a much-needed boost in a harsh economy.

"This is your big opportunity to become the trusted friend to this consumer and develop a long-term relationship," said Switanowski-Barrett. "There's a jewelry store in Boston that lets customers take their purchases home after they've paid 80 percent. Because of that trust, customers keep returning to that jewelry store."

Tao (Tony) Gao, Ph.D. and assistant professor of marketing at the College of Business Administration at Northeastern University in Boston, suggests that retailers offering a layaway program enjoy the following advantages:

  1. Sales from customers who might otherwise not be able to buy products.
  2. Creating a unique marketing opportunity, because layaway customers will return to the store to make layaway payments at least twice. When the customers return, they are exposed to more merchandise and can add to their purchases.
  3. Retailers with layaway collect unique information about their layaway customers, information that isn't accessible about purely credit and cash customers.
  4. Layaway encourages sales with less financial risk than is posed by the credit customer.
  5. From an ethical and social responsibility perspective, retailers that offer layaway help their customers make better shopping decisions that contribute to their welfare.

Those benefits look enticing, but there are downsides.

 

The disadvantages

Layaway merchandise occupies valuable inventory space. Two K-marts in very urban areas of Manhattan in New York aren't able to offer layaway because they lack storage space, Aiello says.

While layaway merchandise is being stored, it's unavailable to other customers who might have the cash or credit in hand to buy now. If the merchandise has a limited season, then a retailer could end up not being able to sell the dated merchandise if the layaway customer defaults.

"Fashion items are a big problem," said Switanowski-Barrett. "You could end up with a dress that is almost past its prime and have to sell it at a markdown."

No matter what kind of merchandise you sell, appropriate planning is necessary before offering layaway.

 

Planning a program

When planning for a layaway program, the policy should include what happens when customers default on payments, as well as thorough employee training. And all of that involves administrative costs.

"That is why layaway hasn't been used in the last 10 years," said Gao. "It's very complicated for the retailer, and when customers used credit cards, that was much easier."

But the economy has changed, and shoppers' income levels have suffered.

Gao also predicts that layaway will continue after the holidays and can be heavily promoted for special occasions like weddings and graduations.

"People will feel like they are managing their budgets better with layaway," he said.

Layaway can be a tool to entice new customers into a store and introduce them to new merchandise. It can also be an opportunity to let customers know about other offers a retailer might have.

"K-mart is also implementing 0 percent interest on their own credit card if the balance is paid off by June 2009," said Aiello. "I think the reason we're getting so much positive feedback is that we listen to what our customers want."

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