Back in the day, when someone said they were buying “on time,” they were doing it the old-fashioned way: Layaway. With credit tight, jobs scarce and consumers pinching pennies, some retailers are reviving the practice to build sales.
“The light went off one morning. I just thought, ‘We need to do a layaway program,” says Chris Gunner, parts manager at Maxim Honda in Allen, Texas, a Top 100 winner in 2010 and three prior years. The 18-employee outfit started offering layaways on PG&A last October for the holiday season, promoting it in its newsletter.
Just because people can't get credit cards and don't have a lot of money saved up doesn't have to mean you lose sales. Medium- to high-ticket items can still move.
With layaway, the customer puts down a percentage of the purchase price of the item, the retailer pulls it from available stock, and the customer makes payments on a set schedule until the item is paid off and the customer picks it up.
Sure, the stock is in your storeroom until it's paid off. But wasn't it sitting on the shelf anyway? No bank hoops to jump through or fees to pay, you can do it in-house. And it may mean the customer makes a few monthly trips to your store to make payments. And maybe pick up a T-shirt or beerwarmer.
Dealers Blazing the Layaway Trail
“I was surprised as far as people remembering how much they used to like [layaway]. Then it just kind of disappeared,” says Kim Rich, a partner in Two Wheelz in Butte, Mont. “Back in my day of raising my kids, the layaway program worked wonderful for me.”
The shop is less than a year old, but has offered layaway on PG&A year round since it opened. “A lot of our customers really appreciate it,” she says.
The key to a solid layaway program, say dealers and retail experts, is to have clearly defined processes, well-trained staff and strong followup. Done wrong, layaway can be a disaster. Done well, it can add beef to the bottom line.
“You’ve got to come up with a matrix that makes sense in your operation,” says Howard Davidowitz, chairman of New York-based retail consultancy Davidowitz & Associates. “Every retailer has to figure out what the economics are for them. And they have to be organized to follow up.”
Layaway plans can be continuous, seasonal, limited to PG&A or extended to high-dollar items including vehicles and customizations. Layaway management can even be outsourced online. Each dealer must balance the potential benefits against the planning, implementation, training, execution and costs of a layaway program.
All Inventory, Great and Small
Xtreme Machines, a 25-employee dealer in Millstone Township, N.J., has a program that lives up to the dealer’s name. The 2010 and multiple Top 100 dealer has offered layaways on everything on the lot, year round, since the economy crashed in the 2008 holiday season.
“It’s most popular on vehicles,” says office manager Wendy Hall. “They can put down as little as $100. It really depends on how much they can afford, as long as they are making payments.”
Layaway offers customers flexibility and a safety valve in uncertain economic times.
“Most of the people that put things on layaway, they don’t have the money or the financing to put down on the unit up front,” Hall says. “It helps us in making a sale that we might otherwise not have.”
But that safety valve can mean returning the customer’s money if circumstances change before an item is picked up, and how much a dealer has to return will depend on contract terms and state and local return laws. Some places may not allow restocking charges or other penalties for unclaimed items, and may require a full refund, especially if the item has never left the store.
Maxim Honda’s holiday terms were a minimum purchase of $100 with 20percent down. Items had to be from regular stock and picked up by Dec. 23. The dealer promotes it for PG&A, but “We’ll do it on anything right now, to tell the truth,” GM Matt Maschmann confides.
Parts manager Gunner says the program was easy to implement, courtesy of a module in ADP Lightspeed software, and layaways accounted for about 5percent of PG&A purchases during December. Average layaway purchases were between $200 and $500.
“It definitely helps our customers. We had 42 transactions related to Christmas layaway in December and mid-November,” he says. “It just added an element of customer service. It gave them an option.”
It helped with gift purchases, he says, because “the spouse may have been here at the time, but they put it on layaway to pick it up later.”
Gunner and Rich report that street apparel is the top layaway seller, and Rich said one 2009 holiday layaway at Two Wheelz was worth $700. That’s no surprise to MaryLynn Keborn, who’s been running the apparel website Motorcycleleatheroutlet.com for three years (the site is undergoing upgrades).
“My products are expensive. It’s giving them another way to participate other than their credit cards,” she says. “I have not had any returns, and people made their payments.”
Keborn estimates a third of her year-round business is layaways (more around the holidays) with orders averaging $200 to $300.
Nuts and Bolts
A short time after starting her online-only business, Keborn started offering layaway through startup eLayaway.com. The Talahassee, Fla.-based company, launched in 2006, manages layaway programs for retailers with an online presence, and has plans to roll out new applications for mobile environments and retailers who don’t have websites early this year.
The customer’s checking account is debited on a regular schedule until the item is paid off. The company also handles customer service, account maintenance and lets the merchant customize promotional messages on the receipts eLayaway sends to customers. (For more about eLayaway.com, click on this link.)
Many retailers already have a tool for handling parts layaways at their fingertips. The capacity has been part of ADP Lightspeed’s software suite for decades. Eighty-three percent of the company’s powersports clients have used the feature in the last year, and 75percent of those to a “significant” degree, says John Renak, manager, DMS Product Management at ADP Lightspeed.
“I believe most of us here consider layaway capability an integral part of the motorcycle parts selling process,” he says. “A layaway is really a special order, but I already have the part in stock. What you are doing is just securing a part that is in stock for a particular person. You are pulling it out of the regular inventory.”
Dealers running the software can allocate some of its capacity to layaways.
“They would have parts of the sales function set aside for the layaway program,” Renak says. “It’s usually because they have a lot of things they want to move and they want to increase their chances of moving that product.”
Layaways can also extend the sales life of seasonal items, says eLayaway founder and Chief Marketing Officer Sergio Pinon, because it’s a way to promote off-season items that will be there when the weather changes. “It allows merchants to find opportunities where in the past they could not sell them at all or had to discount certain items,” he says.
Planning for a layaway program isn’t confined to the sales department. It has to happen throughout the organization. Retailers need to know state and local laws governing layaways, product returns and penalty fees. They need to consider how monthly payments on items still on the premises will affect accounting and inventory placement. OEM flooring terms have to be factored into offering layaway on vehicles.
“The dealer principal needs to understand the accounting. You might have to bring in a CPA or talk to your accounting department. It will revolve around securing a unit for a particular person. It might go into almost a rent-to-own program,” says Renak. “Short-term, layaway will keep the unit on the ground longer. But it will move that machine sooner than you would have.”
The best layaway programs have specific terms including duration of the contract, percentage down, payment size and schedule, late fees, restocking fees and penalties. Customers shouldn’t get any surprises. And if someone doesn’t pay, the contract has to specify recourse.
“[Our clients] want to do what is best for the customer. It’s important to set up very clear terms,” says retail consultant Joe Milevsky, CEO of Kennesaw, Ga.-based JRM Sales & Management.
Although dealers interviewed for Dealernews say they’re happy with their layaway programs, snafus happen. And the higher-end the item, the higher the risk.
“We had one customer that was making layaway payments toward the purchase of a bike. He had been making payments of $100 to $500 a month toward the bike for four to six months. Now he has about $1,500 and he wants his money back,” Hall says. “Now we have a 2008 that we could potentially have sold over the summer.”
To manage that risk, experts advise limiting layaways to six months, preferably less.
“The shorter the duration, the more likely it is going to materialize in the end. If I put something on layway for six months, a lot can happen,” says Milevsky. “With higher ticket items, you’ve got a lot more money tied up.” But as times get tighter, Davidowitz disagrees.
“I think it probably makes sense. You have a big-ticket item, where credit could be central,” he says. “It could be very important. And the costs of layaway becomes less of an issue, because the item is higher ticket.” In the end, even with clear terms, abandoned layaways may still force difficult choices.
“The down side would be, you put together the rules and policies, but every customer is an individual case. You don’t want to make them mad,” says Maxim’s Gunner. “Their girlfriend left or they lost their job or something, we are going to make them happy and give their money back. It’s a case-by-case scenario.”
Some dealers must be doing it right, because they say layaway is here to stay.
“It is most definitely here to stay. We really need to brand it better,” Gunner says. “Next year I am going to promote it even more. But we are not going to do it on a year-round basis, we’ll make it special for Christmas.”
Read more: Online Layaway: Outsourcing the Headaches