The Ups and Downs of Layaway Programs

Publish Date: 
Feb 25, 2010
By Holly J. Wagner

“IT USED TO BE, 40 years ago, all my clients had layaway. Thirty years later, 5% had layaway. I attributed the change to credit cards,” says Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment banking firm. “Now we have a crisis. The consumer is losing trillions of dollars in credit. The banks are much more cautious. Standards are going up. Now the consumer lacks credit. It’s understandable why layaway is making a comeback.”

Understandable, yes, but not necessarily a boon for retailers, says retail consultant Joe Milevsky, CEO of Kennesaw, Ga.-based JRM Sales & Management. “You tie up inventory. If the merchandise has to be paid for and it is sitting there with a small down payment on it, that’s a major risk,” he says.

So dealers have to consider OEM flooring arrangements on new vehicles and the shelf-life of used vehicles.

“They have taken that vehicle in for cash flow purposes. They plan on selling it for cash flow. If they have that vehicle on layaway for too long a period of time, if the customer wants their money back, they are going to have to come to terms with that,” he says.

There’s also the chance that a comparable item will go on sale, or an incentive will be offered while the item is on layaway. Dealers have to have policies about when such credits apply. And retailers have to consider their industries’ product development cycle, he says.

“If they lay something away and don’t do a good job of monitoring and managing it, they are going to be stuck with something that has been discontinued later and something has replaced it.”

And not all the risks are external, Milevsky cautions: “It becomes too big a part of the sales process. The salespeople fall back on that.”

Davidowitz acknowledges the pitfalls of layaway, but takes a more optimistic view.

“You are dealing with a potentially high-risk customer. You may be dealing with someone who can’t get credit,” he says. (Continued)