Over the last few years retail finance at point of sale has reached rock bottom, and in many cases started digging. There has been little product innovation, most of the high street banks exited the sector completely and the remaining lenders have been hindered by credit card deals, in particular 0% balance transfers, and archaic application systems that took-up valuable time in today’s ‘instant’ society. Lenders offering buy-now-pay-later deals have backed away from the electrical sector as the risks are simply too high against the rewards in the current economic climate. Even 0% for 12-month schemes have dried up as electrical retailers footing a high interest bill for the promotion had to raise product prices to swallow the cost – making them uncompetitive. How long before electrical retailers start displaying that classic pub sign: ‘In God we trust, everybody else pays cash’?
However, there are some rare beacons of light in the bleak landscape of this once very lucrative business sector for retailers. Hitachi Capital Consumer Finance has just announced a record year for new retail business, reporting an impressive 53% growth in volume for 2009/2010. The company has bucked the recent market trends and expanded to work throughout the UK with over 1,200 retailers including Best Buy, proving there is life in the retail finance model yet.
Comments Gerald Grimes, HCCF MD of consumer finance: “As disposable income and credit access continue to remain tight and with buying and selling a house typically running into thousands of pounds, we are seeing an increasingly ‘improve, don’t move’ mentality among homeowners. Many electrical retailers have capitalised on this demand using point of sale finance options as marketing assets to spread the cost for the consumer over a set period of time. Correctly marketed tailored finance options can effectively increase customer footfall and we have seen retailers increasingly use finance options to maintain or even increase sales.”
Offers for modern consumers
So how is Hitachi Capital making the most of the retail finance while once old stalwarts like Black Horse have taken the decision to bail out of the sector completely? “We have continued to drive forward by providing tailored products such as PayByFinance to aid the way consumers shop,” adds Grimes. “In order to support the growing online retail customer base, the market is demanding integrated point of sale multi-channel finance solutions as the public wants instant credit decisions, whether in store or online. The electrical sector is an extremely resilient one, which can tap into emerging consumer trends and embrace the consumer appetite for online sales. The finance industry must support retailers and maximise the online sales surge by introducing bespoke finance offers at the right time, and in the right way. Our own evidence shows this approach facilitates multiple spends and converts browsers into buyers,” adds Grimes.
Another proponent of multichannel retail finance is new entrant Pay4Later which began building a retail finance gateway in 2008 and launched a full service in July this year. Among an impressive list of features the company’s offering is said to be the first fully paperless application process with real time reporting. The system is largely agnostic of the retail channel and brings the benefits of speedy response and instant access to the application along with features to integrate with CRM and marketing initiatives. Anecdotal evidence from the first retailers to see the system in action has been very positive.
Pay4Later MD Scott Law told IER about Pay4Later’s background in credit card payment processing and that coming into the retail finance arena was a revelation: “We couldn’t understand why retail finance hadn’t happened on the internet – where was the competition? The only example we could find was Billmelater in the United States. From the outset we wanted to offer a solution that would appeal to mainstream online and multichannel retailers. It’s taken us longer than we would have liked but we are delighted to be the first to offer a paperless system with a fully featured API. The response from retailers has been fantastic.”
Point of sale finance
There is, of course, still a healthy demand for credit even though the banks are far less willing to part with their money cheaply, if at all. Could this itself drive up retail finance at point of sale? As the market for retail finance stands, interest free credit is still around 80% of the market although buy now pay later deals are increasingly rare. Typically point of sale accounts for between 10% and 20% of extended payment preference across all retail sectors, with little data available specifically for the electrical sector. As the overall figure would include furniture business, traditionally awash with 0% and buy-now-pay-later promotional finance, one could argue that the point of sale finance business for independents is currently a very small hill of beans. Looking at it another way, there is a lot of potential for growth, particularly as the banks take on an increasingly Dickensian attitude to handing over money.
Interestingly this growth could come from the stratospheric rise in internet sales of electrical goods. Buying big screen TVs or new luxury kitchen appliances is ever easier when customers have access to thousands of products and information from the comfort of their own home. Buying now and paying later is often about encouraging the impulse or non-essential purchase, making internet sales and retail finance potentially happy bedfellows. The only bucket of water cooling this relationship is consumers’ lack of trust in putting their finance on the internet (albeit diminishing) and the difficulty in pro-actively selling financial products and services online.
One solution to the latter is Pay4Later’s innovative ‘email-links’ feature. Explains Scott Law, “Retailers can create a unique URL link to a pre-configured credit application. The URL can then be emailed to a customer, either individually or as part of the check-out process. When the customer clicks the URL in the email, a secure pre-populated credit application form is instantly displayed. This means that for the first time retail finance can be extended into email marketing, to a single customer or an email campaign delivered to thousands.”
With innovative new multichannel retail finance systems available and the banks remaining frugal, retail finance may well be due a long-awaited rise in fortunes.
Over in the closely associated warranty market it appears that, on the surface at least, it is business as usual. Overall volumes of warranties sold at point of sales are virtually static. The top line figures, however, disguise continued downward movement in major appliance and big screen TV sales offset by retailers increasingly converting their customers to warranty customers.
Comments Jeff Griffiths, national account director at Domestic and General: “There has been a growing momentum from both our existing proactive retail partners and from new clients to further develop their profits from warranty sales. This has meant that although appliance sales have fallen, the increased activity and enhanced PoS penetration have ensured that our warranty sales are only marginally lower than last year.”
These findings are a little at odds with a recent Datamonitor report that predicted retailers will struggle to sell and profit from extended warranties on electrical goods over the next few years. Reasons cited were the depressed housing market, bargain-hunting consumers looking for the lowest price and a move to passive online sales.
Robert Mattai, analyst at Datamonitor said: “Consumers just aren’t
buying the more expensive electrical items as often anymore; they’re spending less and products are lasting longer negating the need for extended insurance. When consumers do buy big ticket items, such as washing machines and TVs, they’re shopping around far more aggressively than they did before the recession and there has been a shift towards supermarkets and online. The growth of electrical sales online makes it far harder for retailers to sell extended warranty insurance because of the passive nature of the sell,” added Mattai.
However, according to Domestic and General, electrical goods are certainly not lasting any longer these days as the company’s ratio of inbound calls reporting faults compared to the number of active warranties has remained largely static for many years. Perhaps in a more disposable society there is a perception of major appliances like washing machines and TVs lasting longer compared to everyday devices like mobile phones which have a life-cycle expectancy of under two years. When I worked in retail in the 1980s and early 1990s we often quoted the life expectancy of a family washing machine as about 7-8 years. I popped into a local store last week and asked the very same question – the answer I got was 5-7 years.
Adds D&G’s Jeff Griffiths: “Warranty products are always going to be hard to sell on some goods, whether this is through falling product prices or local free warranty offers. However this has been the same for the last 10 years when video recorders fell from around £300 down to the Christmas buy one and get one free for a tenner offers. During this time though our warranty sales rose and despite falling product sales we continue to see strong warranty performance from both existing and new technologies.”
Datamonitor’s Mattai certainly concurs on the new technology front, adding: “With 3D TV promising to take off over the next few years and a return to growth in the housing market leading to more sales in white goods, it could mean a more positive future for the electricals extended warranty market from 2012 onwards.”
That is not to say that the independent electrical retail channel is making the most of warranty sales today. There is still much potential for growth, with today’s products and warranty sales very much in the hands of the retailer and the shop staff.
In the insurance industry generally there is an adage that 10% of customers are risk averse and will always buy protection if offered to them. Another 10% are not risk conscious at all and will never buy warranty or insurance protection. The remaining 80% need convincing to buy. This would suggest that if retailers offered warranty at point of sale at least 10% of customers would purchase with at least some of the 80% likely to be convinced by good sales practises.
The warranty conversion rate in independent electrical retailers typically varies between sub-1% and up to 7% in the best stores. This would indicate that not only is there a job to do in retail sales training on selling warranties, it would also indicate there is still huge potential growth in the warranties market for electrical retailers.