Credit crunch? What credit crunch? As the consumer debt squeeze takes its toll on the UK retail industry, one sector is continuing to reap the benefits of credit. Lisa Berwin reports

As the credit crunch erodes consumer confidence and banks clamp down on lending, words of doom and gloom are the order of the day in retail. But one sector, home shopping, seems to be actually benefiting from changed credit markets.

Shares in home shopping groups such as Findel and N Brown were harshly marked down when the credit crunch initially began to take effect. These retailers’ customers were viewed as liabilities, because they were consumers with lower disposable incomes who borrowed money from retailers to make purchases. But, as poor performances are reported by high street retailers, their storeless rivals are feeling bullish.

Findel’s interim results last month showed soaring profits and sales in the six months to September 30. Likewise, N Brown – despite a share-price drop of more than 20 per cent that month – revealed a confident hand with the acquisition of womenswear fashion business Nightingales and disposal of non-core fulfilment business Zendor.

Findel chief executive Patrick Jolly insists that, far from being a problem, the financial services the retailer provides have enticed valuable shoppers who are finding it harder to get credit from traditional providers in the present slowdown. “The credit crunch has meant fewer sources of credit are available and our credit business gives people an incentive to shop,” he says.

Alan Milne, credit director of home shopping group Otto UK, agrees that, rather than being a source of concern, credit offerings are proving a solid business opportunity. “As banks tighten their lending criteria, customers who used to attain credit from other avenues are coming back to us,” he says.

Milne, who has also worked for Home Retail and GUS, points out that when banks have reined in lending in the past, home shopping companies have often benefited. He says: “The advantage we have is that we are the finance company and the distributor rolled into one and can offer a range of credit options that appeal to a broader base.”

Milne also insists that any risk arising from further lending is accounted for and very carefully managed. “There is always the risk that people cannot pay back, but we have invested in tools to make sure we minimise losses, while keeping avenues open to customers who are profitable,” he says.

The financial lifeline that these retailers provide to customers cements the relationship between the two. “Individuals have uncertain periods, but to maintain strong relationships, even during tough times, will ensure good relationships in the better times,” he adds.

Demographically, home shopping has traditionally been popular with C2DE consumers and that has also helped minimise scarring from the market downturn, compared with other retail sectors. Jolly explains: “For our key customers, cash is always tough, so they are not as adversely affected by the economic downturn as other customers.”

A sub-prime foundation

Much of the home shopping market has, after all, been built on weekly payments and that has made it attractive to those who would today be called sub-prime consumers. This group tends to be older and may have no mortgage, or a very small amount, left to pay, so their custom is not slowing down. They do not have to worry to the same extent as younger consumers, who may be struggling with big mortgages or battling to get onto the property ladder.

N Brown chief executive Alan White says that, although he takes on higher-risk customers, he is not providing substantial lines of credit – a new customer is often offered no more than£100. And about 60 per cent of N Brown’s customers pay off their statements in full each month so, he says, the default risks are not as high as some analysts feared.

“What the market does not understand is the degree of sophistication home shopping now has when it comes to controlling bad debt,” says White. “Traditionally, when consumers have been under more pressure, home shopping companies have increased their credit services, but without high levels of bad debt.”

He explains that N Brown has many levers in place to make sure that does not happen. “The strength of home shopping companies is the amount of data we have on our customers. We can use this to build a correlation between the information held and which customers are likely to default. We also use sources such as Experian, so we can look at credit history and decide whether offering credit is advisable,” he says.

Broker Numis admits that home shopping groups are at some risk from bad debt, but points out that this must be seen in perspective. “By way of illustration, Findel’s average credit balance is about£150 and N Brown’s is£240, so we are certainly not in the realms of£10,000 personal loans,” it says.

In similarly tough economic times, such as the early 1990s, N Brown’s profits were largely unaffected by the financial climate. The retailer has also learnt from past mistakes. Five years ago, N Brown offered an interest-free payment offer on higher-ticket items – the problematic effects of which White describes as a “hiccup”. He says: “We are much smarter now when it comes to credit.” He believes that the 29 to 39 per cent APR rate now in place reflects the risk taken.

Home shopping retailers are also being helped by the adoption of new technology. As broadband technology penetrates all socio-economic groups, including lower earners, they are able to increase the routes by which they reach their customers.

Right place, right time

At the same time, the shift into e-tail by traditional high street retailers has increased trust in online and home shopping as credible and safe. Because the medium provides consumers with a way to shop around for lower prices, they are more likely to turn to the internet – where the traditional home shopping groups have a strong presence – when money is tighter.

Kaupthing analyst Matthew McEachran says that ongoing economic problems could create even more demand for traditional home shopping retailers. “Traditionally, home shopping customers are from lower socio-economic groups who are less exposed to current market conditions than other groupings,” he observes. “Arguably, we could now see more customers of this type as an effect of the credit crunch.”

He is nevertheless cautious about the credit offerings of some retailers. “The reality is that ordinary credit routes are being clamped down on, so what looks like free credit will appeal. But the APR that home shopping companies offer is very high,” he says.

Fashion e-tailer Asos is outperforming many of its high street counterparts. Speaking at Numis’s home shopping conference last week, Asos chief executive Nick Robertson said he may launch a credit service in future. But McEachran thinks that the group would need to achieve turnover of£100 million to£200 million before it would make sense. “This is not a good time to launch a credit offer,” he says. “Whatever the economic climate, a credit service is never an easy thing to set up and Asos has far more important things to concentrate on.”

McEachran also believes that not all areas of home shopping will experience present market conditions in the same way. Next Directory customers, for example, appear more likely to be hit by high interest rates.

Reporting half-year results in September, Next said it had been preparing “for a worsening of bad debts in the consumer debt market”. It took the decision to tighten its credit-vetting process and said it expected tightening credit controls and reduced availability of credit for certain customers to hold back the Directory’s sales growth in the coming season.

Littlewoods Shop Direct Group chief executive Mark Newton-Jones says that if there is a fallout from the credit crunch, his business has yet to feel it. “Broadly speaking, our customer base is above the C2DE level, but in the past three weeks we’ve broken all of last year’s figures,” he says. The retailer’s most popular credit option has been the three-month interest opt-out service, which allows customers to pay for purchases over three months. This has been far more popular than the 20- to 52-week payback option. Newton-Jones only expects the take-up of this option to significantly increase if the economy faces an extreme downturn next year.

He warns against home shopping groups lowering their credit scores to lift sales during tough times. “Artificially increasing sales through credit is a danger,” he warns. “We are very careful to always keep a robust scoring system. About a quarter of those who apply for our credit services are rejected.”

Despite bearish City comments, home shopping groups are confident in their business models and have so far proved to be robust in the face of the credit downturn. Far from being the losers in the lending crisis, they look more likely to come out on top.

Home Shopping on the up

  • Findel’s benchmark pre-tax profits soared 107 per cent to £8.5 million in the six months to September 30
  • N Brown’s pre-tax profit jumped 17.5 per cent to£34.3 million in the six months to August 25
  • Asos’s pre-tax profit rocketed to £2.4 million in the six months to September 30, up from £300,000 last year