The unlikely comeback of layaway

By Natalie Berg, Grocery Research Manager, Planet Retail

Layaway, the payment plan that virtually died out in the past decade as credit cards became the payment method of choice among consumers, is making a rather unexpected resurgence at some US retailers. The unlikely comeback is mainly due to the fact that credit cards in today’s economy are not only more difficult to obtain (due to tougher lending) but also less convenient (many banks have reduced limits even to those consumers with good credit ratings) and have become more expensive in some cases (high fees and interest rates).  

As a result, the annual growth rate of revolving consumer credit (i.e. credit cards), as measured by the Federal Reserve, began to slow in the first half of the year. However, consumer credit outstanding has surged in recent years, jumping 25% from USD2 trillion in 2003 to the current USD2.5 trillion. Unlike the asset-backed debt associated with the housing crisis, revolving consumer credit is a non-secured form of credit and therefore could pose a fairly significant risk to retailers and the economy alike, given that defaults are usually equivalent to a complete loss.

Having long amassed the highest level of per capita debt in the world, US consumers have curtailed credit card usage as a result of the above mentioned and of course due to the fear factor. With unemployment rapidly on the rise in the US and house prices rapidly on the decline, consumers are understandably more cautious when it comes to spending – or, more accurately, when it comes to spending what they do not have.

And this is where the layaway concept comes in: shoppers reserve an item by placing a down payment (usually 10% of the price). The retailer then holds the item and charges a small service fee (usually around USD5). The shopper continues to make instalment payments by returning to the store until the item is paid in full. 

Wal-Mart recently said that credit used as a form of payment is falling and that the decline is expected to reach into the double digits this year. Wal-Mart’s sales typically surge around pay periods at the beginning and middle of the month. That spike, the retailer says, has become more pronounced as consumers’ budgets become more stressed.

So, all things considered, it makes sense that some retailers are willing to go back to the hassle of holding excess stock and the bookkeeping of many small payments. Sears reintroduced its layaway programme this holiday season after ditching it 19 years ago. Kmart’s Christmas ads this year are focused on its layaway programme, and Burlington Coat Factory has noticed an increase in layaway items this year. Discount clothing chains TJ Maxx and Marshalls also offer the payment plan in some stores.

In addition to the fact that layaway provides a value-added service for cash-strapped shoppers who may not otherwise be able to receive credit, there is another clear benefit for the retailer – a guaranteed return trip. In a similar vein to photo development and prescription refilling, there is a huge opportunity for additional sales when the shopper is required to revisit the store. As the Christmas trading period can account for more than half of a retailer’s annual turnover, it’s crucial that, in spite of the economic environment, retailers continue to find innovative solutions to drive traffic, sales and ultimately bottom lines.