Opportunities in recession

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In an electrical retail market that is down in volume and value in most sectors, both warranties and retail finance, are enjoying quite a renaissance. Warranty conversions are increasing as customers look to protect themselves from an uncertain future and retail finance is enjoying double-digit growth through many retailers. With a nervous banking industry refusing to lend money generally, 0% credit card offers disappearing daily and the cheapest unsecured personal loans some 8% above base rate – perhaps it is little wonder financial services are booming at point of sale.

Comments Gerald Grimes, divisional managing director for Hitachi Capital Consumer Finance: “Across all our sectors the number of applications we receive is dramatically up this year – up circa 33% and last year was already a record year. In the electrical sector the number of applications for finance at point of sale is up over 20%, although a smaller proportion of our customers are independent retailers.”

These are no doubt quite staggering figures, made even more dramatic by the fact that the current growth reversed a five-year negative trend. Retail point of sale finance tends to be counter cyclical, effectively growing in a recession and tailing off when the economy is booming, but that alone cannot account for the dramatic rise in retail finance seen throughout the last 12 months. It has been a combination of events. The drying up of traditional low-cost credit lines (personal loans and low-rate credit card offers) added to increasing consumer debt (credit card balances are higher than ever), added to rising unemployment (potentially 3 million by year-end), added to a sinking housing market (no equity release funding), added to general uncertainty about the future (customers hanging onto any nest eggs) – has meant a boom in easy-to-apply-for credit at point of sale in almost every retail sector in the UK.

Warranty sales haven’t been quite so dramatically bolstered by the aftershocks of the banking crisis but they have certainly benefited. In the past, consumers might buy a 40in HDTV, for example, with a view to replacing it in three years with a bigger/better model – not a scenario likely to illicit an add-on warranty sale. Today’s customers want value and long term reliability from their investment and, quite often, the added protection a warranty or service plan brings against unexpected repair bills in the future. Add to this High Street retailers desperate to increase the overall value of every sale by pro-actively selling attachment and accessory products, and it is easy to see why the warranty market is alive and well.

“Sales of warranties are certainly holding their own,” says Steve Burrell, new business manager, Allianz Retail. “In some instances we’ve seen volumes rise because retailers are focusing more closely on insurance sales as a means of filling the gap left by reduced footfall in stores. But we think the resilience of warranties could also reflect the fact that consumers are becoming increasingly cautious with their spending and might be seeking refuge from future costs.”

It is not all roses of course. Many of the high street banks are reviewing their subsidiary operations including point of sale finance divisions. For retailers this leaves uncertainty about their finance company’s ability to support them through buy now pay later or 0% interest deals. Many key players have withdrawn from the retail finance marketplace altogether. Moreover, the cost of offering retail finance packages has increased for all finance companies and this has been further compounded by higher levels of consumer defaults. The result is simply that retail finance packages will cost more for consumers.

Nor have warranties been exempt from negative effects of the global economy. There has been a significant rise in the average cost of settling claims due to the worsening availability and higher costs of replacement parts and increasing costs of engineers and truck-rolls. In the mid-to-long term this will almost certainly increase warranty premiums too.

Missing out on selling out?

For reasons of logistics, lack of specific financial product sales expertise or sometimes simple fear of the unknown, an awful lot of High Street and online retailers do not offer financial services at point of sale. With this market in an extremely positive phase, now is the time to change that. And, according to some of the sectors longest standing suppliers, it’s not as difficult as one might imagine.

Domestic & General has been offering warranties on electrical goods for over 50 years and has around 2,000 electrical retail partners in the UK actively selling D&G plans. Director of sales, Lee Miller, says that the company has built its reputation on working with retailers, and getting started in warranty sales is actually quite straightforward: “Once a new retailer has contacted our dedicated Dealer Support line or our field staff, the process involves standard credit checks and store visits by one of our sales managers. They will go through legal compliance to ensure the retailer stays within the law and supply all paper work and point of sale material (a legal requirement) to sell-in warranties. We then offer a wide range of staff training initiatives to help maximize customer conversion.”

Hitachi Capital has been in the retail finance market for 27 years and its secure Japanese financial backing means it has not been as adversely affected by the Western economy as some European suppliers. Gerald Grimes offers this advice for retailers: “The right point of sale finance solution will help increase sales cost effectively. So it’s really important to enlist a specialist financial advisor and draw-up a credit strategy as part of your overall marketing plan. Our retail teams can really give an idea of what works well and the prevailing trends, especially in other sectors. The process of introducing retail finance into your business is then straightforward and we have a dedicated training team geared up to meet the needs of the individual business.”

Having arranged a retail finance or warranty proposition from a supplier, the benefits of low buy-in costs and zero stock holding are soon negated if your staff can’t sell them through. Rarely are either service actually requested by the consumer as part of their product enquiry so effective sales technique, derived through adequate training, is an essential ingredient to success. Thankfully all reputable financial services suppliers are geared up to offer comprehensive sales training and actively encourage retailers to make use of these services.

Allianz for example provides direct training prior to the actual launch of a warranty scheme to ensure staff is able to talk confidently and compliantly to customers. Comments Steve Burrell: “Once a scheme has been launched, training can be incorporated into a retailer’s staff induction programme and ongoing training techniques such as mystery shopping can be used to identify specific skills gaps. Ongoing measurement is key to the long term success of any warranty scheme and it’s important that sales figures can be measured at the store, team and individual level.”

But like all sales skills these will quickly fade if not practised regularly so an incentive or reward scheme may be the best way to continually motivate ground floor staff. Moreover, if they are going to be truly successful at selling warranties they need to genuinely believe in the value of the warranty product and sell it with conviction.

“We find that once sales staff fully understand the features and benefits of our service plans it makes selling them into to their customers much easier,” says D&G’s Miller. “Our free training initiatives cover direct in-store training through our network of trainer-merchandisers, off-site staff training conference-style and our intera
ctive sales training software, the latest version of which is being launched on a D&G branded USB drive. Each training route is complimentary and provides on-going support as well as up-to-date information about legislative changes that affect retailers selling warranties.”

The key to D&G’s style of training is treating each customer individually and ensuring retail staff highlight the most relevant and appealing product benefits. One example from the D&G training program involves the customer with a young family. For this customer an added-value benefit of a warranty product might be repair or replacement cover for damage caused by accidents in the home – a standard feature of D&G retail warranties. Real-world examples further increase customer engagement. For example, mentioning that D&G has witnessed a huge rise in claims for damages caused to TVs by people using Nintendo’s Wii wireless controllers is almost certainly going to get the customer thinking about their family’s antics when playing Wii Fit or Wii Sports.

Online services

For dedicated e-tailers or high street retailers taking part of their business online, maximising finance applications and warranty conversions within a web sales environment presents a much bigger challenge. Without the direct contact it is certainly more difficult to assure customers of the security and validity of your financial services and harder still to sell warranties on their added value benefits. Says Allianz’s Burrell: “Selling warranties on the internet presents unique challenges for retailers. One of the biggest hurdles is the absence of opportunity to engage the customer in face-to-face conversation.”

Burrell suggests that positioning the warranty offer as close as possible to the products it relates to is vital and certainly to ensure the offer appears ‘above the fold’ – that part of the web page that is visible without scrolling down. Further information, such as the terms and conditions, should be made available via a click-through and via the site’s main search facility. Where possible it is useful to express the cost of the warranty as a weekly sum or similar quantity to which the customer can easily relate. Provide a choice of cover period where available and, most importantly, include a stage in the final check-out process where the customer is required to pro-actively select whether or not they wish to take out warranty cover.

A good example of these practices will be familiar to anyone who has shopped on the Dell website. While only just within the bounds of compliance, the company automatically adds warranty cover to any major purchase and requires the user to pro-actively reject the offer before final check-out.

The same challenges hold true for retail finance business online, although this often benefits from being a ‘need to have’ service as opposed to warranties which are simply ‘nice to have’. Last year Hitachi Capital developed an online service proposition dedicated to helping online retailers offer cost-effective point of sale retail finance. Known as PayByFinance, Hitachi Capital claims that it is the first finance company to offer the same credit terms in store and online. Says Hitachi’s Grimes: “The site offers retailers and consumers a secure credit application service that can be branded by the retailer. It gives the retailer a vast amount of detailed management information, such as understanding trends, and like traditional point of sale finance aims to turn browsers into buyers.”

Online and in store there has never been a better time for retailers to offer warranties and retail finance packages at point of sale. The consumer demand is there, the bottom line and customer retention benefits are clear and there is a good selection of service suppliers offering outstanding training and support to maximize sell-through. In a sector beset by doom and gloom, financial services are a little bit of boom.

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