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.