The retail industry is in a Catch 22 gridlock. Consumers have little, if any, discretionary money. Consumers without money cannot get credit.
The current situation is perhaps most dire for retailers selling big-ticket items such as furniture, appliances and electronics that have historically required consumer-credit approvals.
“Some of our best customers, including enlisted military personnel, can no longer qualify for credit,” said John Spach, director of marketing and advertising at Ashley Furniture.
The Clayton, N.C.-based retailer, an independently owned licensor operating under Ashley Furniture Industries, Arcadia, Wis., does not have an in-house finance department but is working to establish better credit options for its military customers. (See related story on page 70.)
Most retailers outsource credit to third-party financers, but Beaumont, Texas-based Conn’s, Inc. has operated a successful in-house credit department since the 1940s. Over the past three years, 59% of all sales at the home-appliance and consumer-electronics retailer have been financed through the company’s internal credit department. (Conn’s is one of the highest-performing retail companies, profiled in the cover story starting on page 29.)
William C. Nylin Jr., executive vice chairman of Conn’s, said the current economy has not really changed the way his company is handling credit applications. “We’ve been through many economic downturns. In the late ‘70s and ‘80s, Conn’s was the only place many people could get credit.”
That said, he acknowledged the current economic downturn “seems to be worsening and companies can’t get credit even if they are in good standing.”
Conn’s appears to be an exception. “Over the last two months, we were able to drop a $100 million revolver credit, replace it with a $210 million revolver credit, and we reserved a 364-day $100 million credit facility,” explained Timothy L. Frank, president and COO of Conn’s. “Another local bank gave us $10 million unsecured—so even in this very difficult time, we were able to get good liquidity and credit to support our company.”
Conn’s gives as good as it gets. The retailer has two credit vehicles. Its standard credit vehicle is for those customers who are relatively good risks, and these accounts comprise approximately 77% of the credit portfolio. The second vehicle, accounting for the remaining 23% of Conn’s portfolio, is for shoppers with challenged credit and requires a higher down payment, 20% vs. 10%; proof of residency and proof of income.
“If you combine the two portfolios, the default rate is less than 3%, which is very, very good performance,” stated Frank. “We also have a high-performance credit-collection division with large call centers in Beaumont and San Antonio.
“The idea is to collect the money and keep the customer,” he said. “Over the life of a customer they could be worth $100,000 in purchases, so we want to help them continue to have credit with us.”