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Consumer Finance: What a Difference a Year Makes!

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WHAT A DIFFERENCE A YEAR MAKES

Interview with Mike Rittler

Thoughts about what retailers can expect as we transition to a less favorable credit environment.

When Furniture World last spoke with TD Bank’s General Manager of Retail Card Services, Mike Rittler, in 2021, his optimistic predictions for furniture sales and credit turned out to be spot on. What a difference a year makes! Looking at what’s likely to happen as we approach 2023, he paints a less rosy picture.

Predictable Slowdown

“At TD Bank,” said Rittler, “we are seeing a predictable slowdown in furniture store credit applications as other categories like travel and entertainment ramp up. This year has been a record year for furniture retailers, so a flat growth scenario would be a very good outcome this year. Factoring in inflation, even if business turns out to be flat, it will mean fewer units sold. That’s what we are seeing month-on-month from our major retailers.”

Effect on Consumer Financing

“Inflation puts pressure on lending, so shorter-term financing options will probably be more attractive to retailers. As financing durations shorten, monthly payments will increase. Stated another way, if the duration goes from 48 to 36 months, a customer’s monthly payment will be larger. That’s not even considering the effect of price inflation on furniture purchase prices. These factors are likely to contribute to the flattening of demand this year.

“The job financing companies always have in front of them is to provide options that make purchases more affordable and realizable for consumers and their retail partners.

“It’s been a really favorable credit environment for quite some time with record levels of liquidity fueled in part by stimulus payments. Now that’s all reversing. In May 2022, consumer debt hit a new record high. I try not to forecast credit losses, but experience tells me that the further down the credit spectrum you’re lending, the higher rates go, and they rise faster and sooner than in the prime space.”

Problems with Returns

“At the same time,” he added, “click and brick furniture retailers were getting tens or even hundreds of thousands of returns per year. Bringing back and reselling all these items in clearance centers was problematic, especially when reverse logistics were impractical. Ryan and I realized that this problem could be solved with a solid recommerce strategy for returns that generates revenue, facilitates new customer acquisition and achieves other business goals.”

Challenges

Last year, long lead times for sold products created challenges for retailers as authorized financing transactions were delayed until furniture was delivered. Furniture World asked Rittler if this was still an issue.

“This problem created challenges when shipments were split and charged on different cycles,” he recalled. “If a customer financed a full living room of furniture and half of it was delivered immediately, with the remaining half delivered four months later, the purchase was recognized on different payment cycles. This created confusion for some customers from a credit perspective. Retailers and financing companies that did a good job of communicating with customers helped alleviate this confusion. Now, this issue is mostly behind us.

“In certain product categories like custom furniture, delivery timelines are still longer than pre-COVID. The good news for retailers is that if those products are just coming in now, financed sales will be recognized in future months. It will be nice for a lot of retailers to have an inventory of backlogged sales.”

Consumer Demand

“It’s interesting that even as inflation has risen and the spending categories have shifted a bit (as of mid May), consumer spending hasn’t slowed down much yet,” observed Rittler. “Where it will go from here is a bit of an unanswered question right now.

“Usually, consumer demand follows consumer confidence. Unemployment is still very low, wages are at record highs and job opportunities are still out there. It’s a mixed picture. But at some point, should confidence wain that’s when we’re really going to see some downside issues.”

Millennials’ Purchases: “Research we did about a year ago showed that millennials expected to continue to make major purchases.

“Thirty-one percent of consumers we surveyed said they use buy now—pay later financing. Forty-five percent of those respondents were millennials who prefer shorter-term financing options with installment features. So, if millennials get squeezed beyond what we expect,” mused Rittler, “it could result in faster contraction from an engagement standpoint and flatten demand from this vitally important home furnishings group.

“Anecdotally, millennials choose what I would call less risky products. Before they engaged with credit, they were much more likely to use a debit card than a general-purpose credit card or a private level credit card.

“If millennials get squeezed beyond what we expect, it could result in faster contraction from an engagement standpoint and flatten demand from this vitally important home furnishings purchasing group.”

“When they moved into actually borrowing, they started to favor installment loans because they are closed-ended. The attraction is that they know what the payments will be and the duration. It’s easy for them to plug those numbers into a budget and make it work.

“They also like Pay in 4 types of financing products that flip the script on the traditional lay-a-way model so that purchasers get delivery upfront and pay in four equal installments. It’s a good financing product when used responsibly by consumers.“

Still, commenting on millennials’ likely purchasing behaviors, Mike Rittler noted, “Another interesting thing is that there are a lot of people shopping for furniture who are experiencing their first market downturn. This adds some uncertainty when trying to predict the confidence level of younger demographic groups going forward.”

Additional Uncertainty

“Speaking of uncertainty,” Rittler continued, “with the midterms coming up, followed by the presidential cycle, it’s going to get interesting. Anytime there’s uncertainty in the political environment, it’s just another factor that’s going to increase the volatility in consumer confidence.

“It’s been a long time since we’ve seen rates jump at 50 basis point increments. Right now, we are in an unstable rate environment that will definitely have an impact on financing.

“Retailers need to make sure that they have financing products that make sense to the specific customer groups they sell to. So, taking time to understand what their customers want, how they engage, and offer financing products that speak to their needs is more important than ever.

“For a high-end luxury furniture retailer, a buy now, pay later loan may not be attractive to many of their customers. Breaking one large payment up into four large parts doesn’t help them that much. Generally, for furniture retailers, the value of revolving accounts cannot be overstated because it establishes ongoing relationships with customers and provides opportunities to re-engage to build future business. But sometimes, a revolving loan is not the right fit either. It may be that a closed-end installment loan with a four-year life will be a better option,” explained Rittler.”

Omni Channel Financing

“Whether an omnichannel experience is being delivered online, in the store, or over mobile,” Rittler concluded, “shoppers need to understand what’s available from a financing standpoint. They want easy access to it and to be able to get the same decision no matter how they shop. Retailers can facilitate this by allowing customers to scan a QR code to get an application and fill it out before making a store visit. The online experience should mimic the in-store experience. So, if shoppers buy online, it’s easy. And, if they decide to shop in-store, they already know what financing options are available. Make shoppers feel more comfortable about the whole process and you will be sure to win the moment each time you interact with a customer who is considering financing.”


Questions about this article can be directed to Mike Rittler care of editor@furninfo.com.

Furniture World is the oldest, continuously published trade publication in the United States. It is published for the benefit of furniture retail executives. Print circulation of 20,000 is directed primarily to furniture retailers in the US and Canada.  In 1970, the magazine established and endowed the Bernice Bienenstock Furniture Library (www.furniturelibrary.com) in High Point, NC, now a public foundation containing more than 5,000 books on furniture and design dating from 1620. For more information contact editor@furninfo.com.