Selling financial services has become increasingly difficult for retailers over the last few years. Compressed margins and lower volume sales of major products along with an increasing propensity for manufacturers to offer promotional finance or warranties has made stand alone financial products look like a tough sell. The flip side is that in the current economic climate, finance and protection has never been more popular with consumers.
So can retailers tie up this demand with both existing products and new services?
Gerald Grimes, managing director of Hitachi Capital Consumer Finance and chair of the Consumer Finance Committee for the Financing and Leasing Association, comments: “Like many sectors electrical retailers are facing an ever challenging environment and promotional marketing and targeted finance is more important than ever. Point of sale finance is still a key tool for retailers and we are expecting to write more business this financial year than in any other in the last five.”
Newer entrant Pay4Later is also seeing healthy growth in its business with electrical retailers, including a recent deal for retra members. Pay4Later managing director Scott Law admits the sector is a tough one but sees great potential for retailers offering new retail finance initiatives: “Electrical has become a difficult segment for finance companies because most retailers don’t have the margins to subsidise interest free deals and consumers are increasingly wary about buy now pay later offers. I think that many electrical retailers have lost interest in offering finance due to a lack of relevant solutions. We’re working closely with a growing number of electrical retailers to help them rediscover the benefits of finance, namely attracting new customers, growing their overall sales and increasing average order values.”
On the High Street, 12-month interest free or very low APR credit is still a very attractive option for consumers when the usual credit channels are being restricted. But in our time pressed society speed is almost as important as the offer itself. Customers just won’t hang around to fill out reams of paperwork even if the credit deal is 0%. Pay4Later offers a high-speed online application process where decisions are returned in five to ten seconds and the entire process can be concluded in less than five minutes. Meanwhile Hitachi Capital has introduced its ‘e-signature’ facility which substitutes a physically written signature with a simple, but highly secure, online click. The system is as useful in-store as it is for e-commerce retailers.
There is a propensity to view retail finance as simply a tool to help customers finance their purchases but the benefits can be leveraged to increase sales value at point of sale and to improve your customer relationship management into the future. “We see fantastic commercial results when retailers enthusiastically promote relevant finance offers,” adds Scott Law. “By adding our finance options retailers can see a boost in sales of up to 40% and average order values increasing by up to 300%.”
In an endeavour to maximise revenue per customer, both retailers and retail finance providers are increasingly tying-in their finance product offering with initiatives like discount schemes, loyalty cards and VIP sales. While the economy has certainly dampened the public’s enthusiasm for this sort of impulse shopping, big name retailers like Debenhams and Richer Sounds still drive a lot of business through their store card and VIP offer initiatives respectively.
The UK buying public is also getting much more astute when it comes to buying durables. A recent Hitachi Capital sponsored survey of over 3,000 shoppers revealed that 73% of consumers considered themselves to be savvier when shopping now than five years ago. The key reasons cited being the need to save money, the availability of offers and the explosion of information online. The mobile data revolution has also had a part to play, with many customers browsing in-store and online simultaneously.
Hitachi Capital’s consumer-facing loyalty brand ‘Savvi’ offers its members a range of discounts, special offers and vouchers from participating retailers, designed to drive business back into store. “Our survey insights reveal that customers like rewards and the simplest schemes seem to attract the most support. I believe that increased intelligence on what makes the new breed of savvy shopper tick will aid the industry in driving the recovery in sales towards the 2012 Olympic year.”
For the forward thinking retailer, technology also gives scope for innovation within loyalty schemes. Smartphone Apps in place of physical loyalty cards would reduce the need for upfront investment and give consumers detailed access to their rewards account. With credit card limits and overdraft facilities being reduced, finding new ways to enable consumers to spread the payments through PoS finance remains an important sales tool.
Like retail finance, economic conditions and market forces have taken their toll on the warranty sales over the last couple of years. Price erosion on major goods, the growth in online retailing, reduction in the number of high-street retailers and manufacturer promotional guarantees share the blame. Unsurprisingly the value of the market has declined but recent research by Mintel shows that extended warranties continue to be highly valued by the customers who buy them. As that is around 12.5million customers spending £750m per year on product protection, warranties remain a very viable added-value business.
“Warranties sales through independent retailers went into a decline throughout 2010, while volumes through larger retailers remained fairly stable,” comments Kevin Brown MD of UK Warranty. “Indies have come back strongly this year and we have seen significant growth for this sector over the past nine months.”
Overall spending in the electrical and electronics sector has actually remained stable over the last 12-months, although the key TV sector has taken a nosedive in value. Not only has reduced volume sales impacted on warranties, lower item cost lowers the perceived value of a warranty. Many consumers now see lower-cost TVs as disposable items. To some extent this decline has been offset by the more stable white good sector.
Jeff Griffiths, national account director at Domestic & General, comments, “Warranty sales track goods sales very closely so the near 10% reduction in the TV market has had a commensurate impact on warranty volumes in this sector. With the growth in white goods value and volume we expect to see an upward trend in warranty sales against major domestic appliances this year.”
For warranty providers the demise of many High Street retailers has had a relatively small impact as many customers will purchase their goods and a warranty from other retailers still in business. Moreover many consumers now buy into service plan protection through post point of sale channels. So for retailers the art lies in maximising the overall warranty penetration at the point of sale.
“Our best performing retail partners can achieve 10-15% warranty penetration on white goods,” adds D&
G’s Jeff Griffiths. “Those shops that sell fewer warranties per 100 major appliance sales than this are really missing out on both the revenue and the extra level of customer service that service plans can bring.”
Fuelled by a desire to maximise total revenue some independent retailers have looked to developing their own warranty schemes. These schemes have to be service plan based without accidental damage cover to avoid tight regulation and ring-fencing finances required by the FSA. Even running a service plan can be fraught with problems as the major warranty providers are keen to point out.
“The difficulty for independents in running their own service plans is that it is notoriously difficult to ascertain the cost of underwriting the service,” says UK Warranty’s Kevin Brown. “Costs can spiral if there is a run on incident rates on particular lines or other unforeseen factors such as rising fuel costs. The key benefit in using a larger insurer such as UK Warranty is that it smoothes out the peaks and troughs in costs. Independents can sell warranty products and benefit from the wrap-around customer care without taking any of the risk.”
Domestic & General is proud of its comprehensive repair network and exceptional customer service record, which Jeff Griffiths suggests simply cannot be replicated by a single retail outlet: “Shop-schemes frequently undermine the greatest business benefits of a warranty, namely customer satisfaction and long term retention. Most retailers cannot offer 24/7 call-centres, extensive repair and parts logistic network nor the red-carpet customer care that major warranty providers offer.” As D&G has recently celebrated reaching 10 million customers, it is clear that this level of service is just what consumers want.
Another fly in the warranty ointment is the on-going OFT investigation. Started in spring as an examination of the long-term effects of the 2003 Competition Commission report, the conclusion has been delayed until the autumn. Overall opinion is that the jury is still out and the report could go either-way; leaving the market pretty much as it is or recommending another full scale Comp-Com enquiry.
“My feeling is that the OFT investigation will mix some criticism with a balanced view of the market,” says Kevin Brown. “Once they have looked at the profit and loss on underwriting warranties on electrical goods, and the fact that the price reflects incident rates reasonably, I think the industry will be shown to be fair to consumers.”
Worst case scenario for the industry would be that another Comp-Com enquiry could effectively ban point of sale warranties, like it has Payment Protection Insurance. Dixons would probably fold overnight, with Comet and Jessops not far behind, and Best Buy would most likely pack up its toys and head back home on the next plane. Given the government trying to rebuild the economy that outcome may be unlikely. So how will the warranty market pan out for independent retailers in the next 12 months?
“It is all about maximising penetration to make the most of warranty revenue and customer service benefits,” says D&G’s Jeff Griffiths. “There are many retailers out there that have developed the skills and techniques to dramatically increase their warranty penetration without affecting core sales. They are enjoying the benefits of double-digit warranty penetration while shops that are not focused on maximising warranty sales struggle to hit 2% from the same customer base. That is a huge untapped potential for sales in the year ahead.”
Kevin Brown adds: “Overall we are seeing good signs of recovery in this sector. A lot of independent retailers who may not have been interested in selling warranties in the past are now seeing the benefits for both their business and their customers.”
Retra’s online warranty portal
Retra members got their first chance to experience the new online warranty solution from retra Insurance Services at this year’s annual retra conference. Developed by software provider Glenfield Software Solutions, the online tool makes it easier for retra members to process retra warranties, irrespective of which IT system they use in-store. Barry Pattison, chairman of retra Insurance Services (RIS), said: “It’s an online-based system – members can print out the cover note and all the information and submit it to RIS.”
Bryan Lovewell, retra’s chief executive, has welcomed the introduction of the warranty solution. He said: “I am delighted with the solution that Glenfield Software has developed for RIS. I’d encourage members to sign up for the solution because the system really is straightforward to use and will speed-up the process in-store. The online solution also saves the typical paper trail that surrounds warranty sales, which is another positive element.”