Responding to Evaporating Consumer Credit

For the past several weeks, reputable news outlets such as Businessweek and The New York Times have published reports on Consumer Credit Card problems. Banks and card companies have not only tightened standards for issuing new credit, they've systematically reduced existing credit lines while simultaneously increasing card interest rates. Last week, writing for RetailWire, I called attention to this issue with reference to it's impact on Holiday sales. The implications are clear: less available credit combined with higher interest rates means effectively reducing overall current and potential disposable spending. Credit/Debit cards nationally are historically used for as many as 40% of Holiday retail transactions. Consumer credit card debt is at an all time high, and the percentage of cardholders making minimum payments is significant.

So this is not an "if' but a fact. Consumers will have less credit to use for Holiday retail sales. What will be the impact? You have the answers in your data base, at least to some extent. I suggest that creatively thinking retail executives will have someone in their organization run the following analysis.
1. What percentage of our Nov/Dec sales are via credit cards? Are we seeing any current trends toward credit being used less (Walmart is)?
2. Cross reference product categories (down to the sub-category level) against credit card use if possible. Try to identify the product types with the highest rate of credit card use. Use aggregate and distinct Holiday data. Holiday probably has a different profile than the rest of the year.
3. The categories (or hopefully products) with the most vulnerability to drops in credit card use should have their sales forecasts re-evaluated......downward. With any luck, this will generate lower replenishment orders or cancel some late season balances, reducing overall merchandise inventory exposure.
4. Analyze planned marketing exposure for those products/categories. Promoting these items is not going to generate the lift previously expected. While changing planned marketing exposure becomes a self-fulfilling prophesy against sales estimates, the space could probably be better used on products/categories with less vulnerability.
5. Investigate the possibility of re-introducing store layaway programs. While this exposes the company to the financial risk of potential bad loans, the write-off expense will probably be significantly less than the gross margin loss of accelerated markdowns on higher end of season inventories. In short, even if you write off 5% of the layaway sales, calculate the gross margin basis point loss which would be worse. Your inventory risk due to lower than anticipated sales is probably going to be greater than the financial risk you'll be taking on.
6. Emphasize alternate payment methods for your ecommerce operation.
7. Refocus promotional and marketing efforts on products and categories with less credit card exposure.

The key fact to become comfortable with is that the evaporation of consumer credit means measurably less potential for sales. The consumer may or may not have used the credit which was reduced....we'll never know. It doesn't matter: from the consumer's perspective, they have less money available. This will impact everything.....but some things more than others.

My next post will outline some thoughts about positioning your brand into this cash-crunched environment.