Credit Execs Worry About 0% Programs

Although large retailers are getting larger, many independents and regional chains have learned how to survive and profit in today’s electronics/appliance market.

That is just one of the opinions volunteered by executives with several leading retail finance companies during TWICE’s annual roundtable on retail credit.

These finance executives are hopeful about retail sales in the fourth quarter and 1996, but they are rightfully concerned about 12-month/zero percent credit options and suggestions to extend it to 18-month and possibly 24-month programs. Several suggested higher costs for those programs, not only for their companies but retailers too.

Participating at this year’s event, held two weeks ago at our New York offices, were: Bruce Seater, GECAF programs director, General Electric Capital Corporation; Robert Incollingo, senior VP, Deutsche Financial Services; Dave Kratoville, VP-sales director, National City Card Services’ Retail Card Services Division; Terry Oxford, national sales manager, SPS Payment Systems; James Hentz, VP, Transamerica Commercial Finance; and Tony Vignali, sales and marketing VP, Whirlpool Consumer Finance Division. The roundtable was hosted by TWICE editor Steve Smith.

TWICE: What is the current overall financial condition of electronics/appliance retailers today?

SEATER: The big are getting bigger. Regional chains are still out there and are getting bigger. But I think independents have found a niche. They’re not falling off as they did in the past. And probably the biggest attrition now is the independent who are getting up in age and deciding to just get out of the business. I don’t think they are being forced out.

HENTZ: The independents have settled in pretty nicely with the buying relationships that they have. They’re getting more value from those relationships they’ve had in the past. If anything, there are more problems with larger regional players. They are still experiencing some difficulties. They are the ones that are in-between the “gorillas.”

SEATER: I think the independent has found a nice niche, and they have been flexible, they have been able to withstand major competition. This is especially true in the markets where the “800-pound gorillas” haven’t come to and probably won’t go. The regional players are the ones who are kind of caught in-between now.

VIGNALI: Some of the independents have finally focused on what it is they do best — same-day service, same-day delivery, et cetera — rather than trying to match price points. They have remembered ways to compete successfully.

TWICE: What about independent computer stores? Are you seeing attrition there?

SEATER: I don’t see a lot of them surviving. I think the CompUSAs of the world and typical electronics stores like [Nobody Beats] The Wiz are taking a lot of that business.

OXFORD: I also think what you find is that on the commercial side, your office superstores — Staples, Office Max and others — have gone to commercial and consumer clients with computers. You are also seeing a lot of sales going to traditional electronics superstores.

TWICE: And are they taking in a larger and larger share of the overall business?

HENTZ: Yes. As the consumer has become more educated in computers, the need for that small computer store to be where you receive system solutions has gone away. So consumers are more inclined to buy PCs from mass merchants, or if they need a large solution, then they go to a larger computer retail chain. Being a small independent computer retailer is really a tough business today.

TWICE: How did retailers cope with this year’s slower first half sales, and greater- than-normal margin competition?

HENTZ: It was probably more luck than business sense as sales picked up and started solving the problem for them. But I don’t know if there was any great strategy when the business downturn occurred in the first four to five months of 1995. But they have been recovering nicely now.

TWICE: The saving grace for most electronics/appliance retailers is always appliance sales. But appliance sales have been flat or down all year. How have retailers coped?

SEATER: They’ve been flat or down from a record year, so it’s not a bad year. But it is not 1994, which was a record year. If you say it in terms of units sold, it’s still not a bad year. If you put it up against major increases that some were expecting, then it is bad.

Appliances is a strange business in that it’s primarily a replacement business now. You replace it when it breaks, or when you move, or remodel, so I don’t know that it ties to home sales as much as it does the economy. If things are good, I might remodel my house and buy a new refrigerator. If the washing machine breaks, you may say, “Hey, I’m going to replace it.”

TWICE: Isn’t major appliances one of the most sensitive categories when it comes to interest rate changes?

INCOLLINGO: I think that they’re tied somewhat to new homes, because the builders buy appliances to put them in new homes, and then people who buy the resale homes are also customers in the appliance market. So, I think it has impact, but I can’t really say that it’s the most affected.

It was pretty evident when the rates were up, home sales slowed down, appliances slowed down a little bit, and automobiles slowed down from the boom period they had. Now that the rates have been dropped just a little bit, especially the mortgage rates, home sales are picking up, and I think they’re going to drag other things up with it.

OXFORD: I don’t think we’ve seen any real impact [on appliances] relative to interest rates. You know the private label [credit card] business continues to grow. Our programs continue to grow. I agree that you see a mass influx of special programs with deferred or interest-free payment options across the board now, especially in the larger ticket items.

Eventually, you have to look at programs like that, and if that trend continues the cost has got to be shared, with the greater responsibility going back to the retailer.

TWICE: So, are you saying that the retailers are going to have to pick up the tab?

VIGNALI: He’s going to have to pick up more of it. But one of the things that I have noticed, particularly in the past six months, is more and more of the manufacturers now are coming out and sponsoring a lot of these programs because competition demands that they do.

You probably know that the Mitsubishi Three Diamond Program has been very successful for a long time. So you’re looking at Zenith and Sony and everybody else kind of jumping in. At some point in time they are also going to say that it’s time for the retailer to pick up a little more of this tab. Particularly, independent are fighting that.

TWICE: What effect have the narrow margins for computers had on retailers’ bottom lines? What do you project for the future?

SEATER: I think a lot of them got into the computer business as a traffic-builder, most people I’ve talked to in retail don’t make a lot of money and really didn’t expect to make a lot of money in the hardware. In the software, you know, there’s a margin in there, but I think they went into it as much for traffic.

INCOLLINGO: There is a merging process going on between office equipment and the PC industry. At some point, a lot of people believe, they are going to become one industry. I tend to agree that these retailers are staying in the computer industry, it’s kind of a defensive move.

I’m not sure why they got into it, although I am sure they are looking for some profits. But PCs have really become a commodity, and if they can make anything at all, it’s got to be on the peripheral equipment and software.

HENTZ: Retailers got into because it became a commodity and it brought more people in. They went into it fully understanding it was a very difficult margin business to be in.

The ones who are doing it right are trying to sell hardware, software, creating floor traffic, and creating excitement in their stores. And I don’t believe we’re going to see many withdraw from that marketplace.

TWICE: Do you see more computer software at retail than you did in the past?

OXFORD: I don’t know if you see more, because for one thing, the hardware packages that are sold to the consumers today are coming with a lot of software built in, and they didn’t have that in years past. But you see different types of software being offered rather than just the traditional packages.

HENTZ: I don’t see independent retailers expanding their floor space for software or for hardware in PCs. But what we are seeing them drifting into now is the furniture business. There is certainly a lot of differentiation in that product.

They give good margins, they are suddenly playing nice size vignettes, and I think that’s going to be a trend that is going to continue to increase with those retailers.

TWICE: We talked a little bit about the 12-month/zero percent credit options available this year. What other programs are popular other than the zero percent?

VIGNALI: Well, that depends a lot on the individual retailer and their understanding of the demographics in their market. There are some deals where they don’t have to offer the credit if they can pre-approve it. If pre-approves their credit, I know I’m directing that appeal toward the credit-necessary person who matches my store demographics.

We see a lot more of the pre-screened, pre-approved offers that are highly targeted at that particular dealer’s type of customer versus giving everybody the 12-month, 15-month deal. Another issue from our perspective, is that when you give people that much time, your first payment defaults are going to go up. You haven’t put them in the habit of making monthly payments over a period of time.

SEATER: Five years ago many institutions would have never considered giving a customer six, 12 or 18 months before they have to make their first payment. I don’t think I’d want to be in a collection department in January of ’97, because that’s when all these payments are coming due, and we don’t know what’s going to happen. We’re just getting used to the 90 days and the six months, and now it’s been raised.

KRATOVILLE: The scary thing is the telephone calls you get when ask, “Well, I’m thinking about a 24-month program. What do you think about that?” You know there is always somebody in the marketplace that’s willing to up the ante.

OXFORD: It’s almost infinite the number of programs and different variations that you can offer to retailers. Whether you are doing combinations of deferred or interest-free programs, or stand-alone programs to individual categories [retailers have to] do a lot more active credit marketing, a lot of demographic profiles for their customer base — targeting and using smaller marketing dollars and going after new business, other than just using a special financing program as a way to increase your customer base.

SEATER: That’s the key. If you just let a customer go for 18 months and then pay off that product with no finance charges generated and no additional sales, it has become too expensive for anybody to do it. The key is, during that 18 months somebody has to resell that customer something, whether it’s us selling some service or whether it’s the retailer selling another product.

But somebody’s got to sell that customer over and over again in order to justify [these programs], because if you’ve got 18 months to pay it off, the price tag’s going to be too heavy for anybody to afford.

OXFORD: It is the consumer who has become very accustomed to having those programs available to them and almost demanding that the programs are available. So it’s not just our changing our minds, the consumer is the one that’s going to drive it.

TWICE: What good do these promotions provide to retailers?

SEATER: The good thing about these promotions is that they’re geared toward the high end — big-screen TVs, double-door refrigerators — and toward other products that the dealer should be able to make some money off of.

TWICE: How have interest rates this year affected your business and your retail clients this year? What do you expect during 1996?

SEATER: Interest rates are probably still higher than they have any reason to be, and they will probably come down over the next year as we get into an election year. I don’t think it has had a very big impact.

If you look at every ad on the retail side it’s no-interest offers, so rates have nothing to do with [those promotions].

VIGNALI: I concur with that. Part of the situation is that the credit-necessary customer isn’t really rate conscious. If they get credit, they are more focused on monthly payment. The sophisticated credit customer is going to pay it [before the term is over].

KRATOVILLE: A lot of the programs in today’s market are the variable rate type. As the prime went up, so did the consumer’s interest rates. What tends to negate that to some degree is credit promotions. They’re so prevalent today.

consumers who are paying you off within the promotional time period, they pay no finance charges, and therefore, the rate is meaningless to them. And what that really says in a nutshell is more people are paying you off and taking advantage of the promotional opportunity that’s there. I think that the real potential fallout from that is that the burden… is eventually going to become the retailers’ burden.

TWICE: How can private label credit card programs be a tool for retailers, other than just bringing in extra sales?

VIGNALI: Retailers have to understand that credit is a merchandising tool. They have to understand how to apply credit in a targeted way with the different types of customers they have who use credit differently. I mean, it can be a good merchandising tool, but everyone is so caught up in the “give-it-all-away-to-everybody-right-now” mentality that credit is not being used as a tool.

OXFORD: I think that retailers are becoming much more conscious of this. They are wanting to identify demographically what their best customers look like and what programs they would be attracted to. It’s helping them understand their customer base.

SEATER: Surveys show it costs $70 to bring a customer into a store. That’s the total cost to bring a customer in. There are so many retailers out there who are just really comfortable to spend that $70. When the customer walks in, you let them walk right back out, take their Visa or Mastercard, knowing that in the next billing statement the card company can offer a VCR, a TV or something that competes with you.

I think of that $70 when they let them walk out, and that’s our frustration, trying to convince them of this. The products we are dealing in are not impulse-type items, especially in appliances, where something happens in order for you to buy another.

Retailers can establish a communication pattern with their customers so that once an appliance needs to be replaced, rather than pick up the paper and look for the best price, the consumer will follow up with a retailer he knows.

TWICE: On financing inventory, what has gone on this year? What do retailers want and need?

HENTZ: I think what we’re seeing this year is a continuation from 1994. It appears that suppliers are continuing to withdraw terms or taking down terms. Retailers expect the inventory lenders to keep the same terms even though the suppliers’ contributions are diminishing. It’s a tug of war.

There are a couple of reasons for it. Certainly, the marketplace reflects that in many cases there are benefits off the inventory finance programs going back to the retailers. And the manufacturers take that as an affront and, therefore, figure they’re leaving money on the table, so their reaction is to take the money off the table.

That puts a lot of pressure on us as inventory lenders to try to keep the same terms available for the retailers as we had in the past.

SEATER: Most manufacturers now are emphasizing to retailers to turn inventory more quickly, market it better, and buy smarter. Don’t keep as much in the warehouse.

Most manufacturers are very good about being able to deliver very quickly if you don’t need as much. So they’re consequently saying, “We’ll all do those things, so you don’t need the same terms you had before.” The retailer is a little slower to react. He likes those terms whether he needs them or not.

INCOLLINGO: That’s especially true in the PC industry. Manufacturers are becoming more and more reluctant to give floor planning or inventory financing, and those that do are continually trying to reduce the cost of it to themselves. That puts pressure on the inventory finance companies to run their businesses closer and monitor the terms of the inventory so we don’t lose money on the new rates.

TWICE: Based on where we’re sitting now, what do you think about the fourth quarter? What’s your best guess on ’96 for retail conditions in this business?

INCOLLINGO: I think the fourth quarter is going to be strong, and ’96 is going to be up somewhat over ’94 and ’95. You’ve got a good economy and interest rates that could go down a little bit. The election year always does something [positive], and I guess the Olympics are going to have some impact, at least regionally.

SEATER: During ’96, on the electronics side anyway, there are not that many new products. With DSS, you have Sony into it, and I think other manufacturers are going to enter the market. This will be a nice new product category, the opportunity is not in the dish, but what can you sell with it.

Other than that there is not a lot out there. If you look at product lines, TVs are delivering bigger and better pictures in smaller cabinets. But there’s not another VCR on the horizon.

VIGNALI: Unless it is DSS. I think now that there are more manufacturers involved, the price point is going to come down. If they get the splitting capabilities on that receiver, et cetera, then it’s going to become more viable.

Because of the digital sound, digital picture, you bring that into somebody’s home on their old TV and say, “Now by the way, I have one of these on the truck. Let me show you what it looks like on a high-resolution new TV.” So there is opportunity with surround sound and home theater.

Credit Execs Worry About 0% Programs

But say retail prospects are upbeat for fall, 1996