With credit harder to come by and consumers short on cash, retailers are dusting off an old-school payment plan to lure shoppers this holiday season — layaway.
A product of the Great Depression, layaway works this way: Buyers reserve merchandise with a nominal fee and a down payment. The store holds on to the items until the balance is paid in full.
The practice fell out of fashion when credit became widely available during the 1990s.
But with credit limits shrinking and interest rates rising, retailers such as Burlington Coat Factory, Marshalls, TJ Maxx and Sears are re-emphasizing or reviving layaway.
Last month, Toys R Us introduced layaway for “big gift” purchases, including bikes, play kitchens and outdoor play equipment.
Sears, Roebuck and Co., which also owns Kmart Corp., began promoting layaway during last year’s holiday season. The program was so popular Sears made it year-round.
This year, Sears and Kmart added a modern twist with online layaway. Shoppers can reserve items and make payments online, then pick up merchandise at the store.
Who’s Laughing Now?
U.S. consumers are known for wanting immediate gratification, making a tradition of piling on debt that’s still around for Christmases future. For millions of consumers, paying for something before they enjoy it is alien. But the recession is shaping new shopping trends.
“The pundits last holiday season laughed it off, saying Americans were too impatient to take advantage of layaway,” Sears spokesman Tom Aiello said.
But even after the holidays, shoppers continued to use the program. They put fitness equipment on layaway as they pledged New Year’s resolutions and used the payment plan for back-to-school items, Aiello said.
So who’s laughing now?
Stores Magazine in July ranked Sears No. 9 among the top 100 retailers based on revenues. The magazine credited Sears’ layaway program, among other strategies, for the success.
Differing Details
The details of terms and policies vary by store and even by city.
There are no interest charges with layaway, but there are nominal fees and down payment requirements. Consumers should read their policies carefully, experts say.
Sears’ policies are typical.
Consumers must pay a nonrefundable $5 service fee to start a layaway account, and pay a $10 cancellation fee if they back out of the purchase.
The down payment at Sears is $15 or 20 percent of the purchase price, whichever is greater.
Sears also excludes such high-dollar items as refrigerators, washers and dryers from layaway.
Buyers must make a payment at least every two weeks and pay the balance in eight weeks.
‘I Can Get What I Want’
Those terms suit Texas City resident Shawn Smith just fine.
Smith, 33, has kept her job as a driver for Amed Ambulance Service. But her hours were cut. The mother of three boys — twins, 13, and another, 6 — said she likes to be smart with money and avoid paying interest.
Layaway has allowed Smith to complete half her Christmas shopping, she said.
And with layaway, she doesn’t have to worry about missing out on an item because she’s temporarily short on cash, Smith said.
“I can get what I want at that time, without waiting and wishing it was still there when I come back,” Smith said.
Some industry observers see layaway as beneficial to both consumers and retailers during tough times.
“It allows the consumers to pay things off over time and not have to come up with large payments all at once,” said Jack Taylor, professor of retail at Birmingham-Southern College in Birmingham, Ala.
“It’s also a huge benefit for the stores, because people that need layaway for items will go to the stores that offer layaway. Thus, it’s an incentive to get shoppers through the doors.”
Holiday-Hangover Cure
But there can be pitfalls, said Jim Roberts, professor of marketing at Baylor University in Waco, whose area of expertise is compulsive buying and credit misuse.
“Be smart about using layaway, which may encourage us to buy things we might not without the enticement,” Roberts said.
“Like using credit cards, layaways are less painful than paying for the entire amount in cash in one transaction, which might encourage excessive spending.”
But used properly, layaway can be a savvy consumer strategy, Roberts said.
“On the other hand, if consumers use cash to pay for their layaway purchases, they won’t have the post-holiday hangover the rest of us do when using credit cards to pay for our holiday shopping sprees.”
Retail Risk
Layaway also poses some risk for retailers, said Cheryl Holland Bridges, director of the Center for Retailing Studies at Texas A&M University.
“The risk comes when the consumer decides not to pay the full amount for the product and cancels the order,” Bridges said.
“In that case, the retailer may now own aged inventory that they can no longer sell at the original price or sell at all.”
But the benefits are many. Aside from luring more customers, retailers have the deposits to invest or borrow against, even if consumers don’t complete a purchase, according smartmoney.com.
“Truth be told, we’d love them to pay cash and get the money right then,” Sears’ Aiello said.
“But obviously, the best thing for the customer is the financial tool they can obtain at that time.”
