As the recession drags on, the number of shoppers turning to in-store consumer finance is increasing. Charlotte Hardie looks at how retailers can make the most of this trend

It may not seem like it, but there is some good news out there for retailers when it comes to consumer spending. As shoppers baulk at the idea of using credit cards for larger purposes and are hesitant to take out loans, the popularity of in-store credit is on the up.

Latest figures from the Finance Leasing Association (FLA) for the year to the end of April show that the amount of retail instalment credit issued has increased by 5 per cent to £2.45bn. The year before – just as the credit crunch started to hit shoppers – the industry also experienced a rise, this time of 7 per cent. And yet, in 2007, when times were good and shoppers were spending freely, it had declined by 10 per cent.

An FLA spokeswoman says the general upward trend could well be because fewer forms of credit are available to shoppers. Furthermore, she adds: “Because this form of finance is generally for goods that are less than £1,000, we’ve been putting it down to consumer willingness to take on smaller commitments because they know they can handle the repayments.”

Hitachi Capital Consumer Finance managing director Gerald Grimes backs this up: “The point-of-sale finance business is cyclical. Both retailers and consumers look for it when other lines of credit are tighter. It helps retailers sell more and it feels more comfortable to the consumer.” He adds that Hitachi Capital’s volumes have increased by about 40 per cent in the last financial year.

In contrast, the FLA spokeswoman adds that take-up figures for those forms of consumer finance that do require a much greater commitment have fallen – unsecured loans are down by 45 per cent, while secured loans are down by 83 per cent.

Unfortunately, though, every retailer knows that despite many shoppers’ open-mindedness towards point-of-sale finance, this doesn’t necessarily mean it is an easy way to lift sales. Mark Murphy, chief executive of consumer finance consultancy 5M Consulting, says: “Retailers and finance providers are dealing with a restricted number of people they can accept for credit and fewer people that they can take onto their books.”

In addition, the extent of an increase in consumer finance varies from one retailer to another. N Brown chief executive Alan White says that its customers are actually being slightly more cautious about taking credit.

“This could well be reflective of our older customer base,” he says. “They want to pay their debts off. Because they’re not getting a good return on anything they have in the bank they’re paying, say, more of their JD Williams account off.” But, he adds, N Brown has experienced the fastest rate of growth from some of its younger customers – although N Brown defines its younger customers as those with an average age of about 45. “They’re more credit hungry,” he says.

Despite the overall rise, you only need to look at the figures month by month to know that consumer finance is a volatile business. The month for April was down by 5 per cent, and yet the previous month it was up 24 per cent. This unpredictable pattern has existed for the past year and the fluctuation is difficult to explain, but the FLA believes it might have much to do with a flurry of deals that retailers launch from one month to the next to try to entice shoppers.

It might be not be easy and it might not be cheap, but consumers are open to persuasion when it comes to signing up for retailers’ in-store credit deals. The question is, are retailers maximising these opportunities?

Intelligent marketing is important. If retailers promote a “Buy now, pay 2010” offer, it sounds far more tempting than “Buy now, pay in six months’ time”, although in reality they are the same deal. As Grimes says: “If sales are declining, you need to generate interest in the product. Retailers can cleverly bundle things up, for example, by offering 0 per cent finance to customers if they buy both a flatscreen TV and a DVD player.”

Retailers should also take advantage of marketing resources within the finance provider itself. Many finance companies have specialists who work with their retail clients purely to drive sales. Hitachi Capital, for instance, has recently worked with HomeForm Group – owner of the Möben, Sharps and Dolphin brands – to investigate exactly what consumer finance product drives different types of consumer.

Murphy says the clever retailers are using point-of-sale finance as a footfall driver rather than a means of sales conversion as they used to. They are also starting to move away from interest-free offers to interest-bearing – in other words, buy now, pay later deals. To offer six months’ interest free is costly – about 5 per cent, whereas with interest-bearing deals the finance providers might pay the retailer a small commission so it is far more cost-effective. Murphy adds: “The smarter retail multiples are in a much more constant conversation with the lender about the options available.”

This highlights the importance of retailers maintaining a strong relationship with their finance provider. Many finance companies are very exposed – particularly when dealing with retailers in, for instance, the furniture market, which have long lead times on their products.

Most of the finance houses have the ability to monitor retailers’ general financial position, such as payments made to suppliers, defaults and CCJs – court orders issued when a business has failed to pay money that they owe – the financial position of key directors and a whole host of other metrics. They become particularly concerned when accounts are filed late, so it pays to keep the finance house informed.

Grimes says: “We know some retailers are being stretched and of course if they are our customers, we do regular credit checks. We’ve got to work together because we’re in this together. As long as we’re comfortable that the business is being properly managed, we don’t have a minimum threshold.”

Relationships between retailers and finance houses are generally long-standing ones and this is not the ideal climate to suddenly switch provider. Retailers need to keep their existing provider on side, because they might find that they are not welcomed elsewhere.

Consumer finance opportunities might be booming at the moment but, as White says: “The acid test will be over the next 12 months in terms of what happens to unemployment. That’s when life gets tricky for people.” In the meantime, done well it is a good way to not only drive footfall and sales but steal market share from competitors. Upward trends are hard to find in the retail sector at the moment, so retailers need to be doing all they can to capitalise on this one.

You and your lender

  • How to maintain a healthy relationship with your finance provider
  • Be open and honest
  • Don’t assume the finance house won’t find out if your business is in difficulty. One of the key tasks for their teams in these recessionary times is to look for signs of stress in retail premises such as low stock levels, deteriorating shopfronts, etc
  • Shorten delivery times as much as is feasible
  • Talk to the provider about cheaper consumer finance product alternatives
  • Use the finance houses’ marketing and training resources as these are often free and may help you to be more effective

Source: 5M Consulting