Peace of mind in recession

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The last year of trading has been tough in almost every sector of the electrical industry, predominantly due to the now infamous credit crunch.  This reduced volume clearly means fewer potential customers for a retail credit agreement or add-on warranty sale, but both products have a strong appeal to consumers when the future is uncertain.
Retail finance at point of sale has been in a steady state of decline for almost ten years but there are signs the trend is changing. The decline can be almost entirely attributed to 0% credit card offers and customers releasing equity to pay for electrical goods – two financing options rapidly disappearing in the credit-crunched climate.
“2008 has seen an increase in the number of finance applications,” comments Mark Allen, business development director at Hitachi Capital Consumer Finance. “This has been offset by the fact that the amounts consumers are borrowing are lower but we have seen a definite increase in application volumes over the last few months.”
This increase is not simply due to consumer cash shortages and Mark attributes much of the growth to retailers offering promotional finance packages: “Customers are becoming more inclined to use a promotional finance package if it is offered, enabling them to keep any savings they do have.”  This would indicate that a pro-active approach to finance – enticing a larger trade up sale with cheap or 0% finance – could be a useful strategy in the current market.
Another retail sector seeing increased use of point-of-sale credit is the internet. Able2Buy, a retail credit provider with a large number of multi-channel (internet and high-street) independent retail partners is certainly faring well. Director of sales, Richard Castello, comments: “We are seeing much greater use of our services throughout the UK independent retail sector as consumers have less disposable income and reduced access to other types of borrowing.  As 0% credit cards and secured loans are far less available, attractive payment options are increasingly demanded and required from internet retailers.”
Like Hitachi Credit, Able2Buy is seeing much of the growth come from promotional activity. Electrical goods customers are becoming ever savvier about the cheapest way to buy goods and many will make the final purchasing decision based on the option of a 0% deal. The days when a consumer would sign-up to a 29%APR finance package to secure a colour TV or new kitchen appliance are well and truly over but retail finance still has a function in store. The difference being it is now more of a carrot than a stick.
Warranties
The evolution of the warranty market in the current climate appears less cut and dried. There is also clear demarcation in warranty business through independents and multiples. Figures recently published by Kesa (owner of Comet) and DSG (Currys, PC World) show that like for like sales of electrical goods have fallen in the last 12 months, with Kesa reporting particularly weak sales of white goods. This has had serious negative impact on their warranty business, further compounding a decline that started with the first Competition Commission investigation of the sector.  Recent OFT statistics report that the number of consumers who purchase extended warranties at point of sale (rather than by card return or mailer after the sale) has fallen from 82% in 2002 to 68% in 2008.
Simon Brimicombe, director of Allianz Schemes, a major provider of warranty services to multiple retailers, comments: “It is clear that the credit crunch combined with a weak housing market is having an impact. It is also estimated that two thirds of the current decline in warranty sales is due to manufacturers offering their own free extended warranties.”
However, look at the picture in the just the last few months and signs are considerably more positive: “We have found that warranty sales right now are holding up despite falls in retail sales,” adds Simon. “We genuinely believe that at a time when the outlook for the economy remains uncertain many people will value the peace of mind that an extended warranty can bring. As well as providing protection against mechanical and electrical breakdown, a warranty will often include additional forms of protection such as accidental damage cover and frozen food loss insurance.” 
The independent sector certainly seems to be fairing the best in this area, warranties being viewed as a valuable part of the overall ‘independent’ service. Lee Miller, head of retail at Domestic & General comments: “In spite of the cool economic climate we are seeing the sales of warranties continue to grow year on year. The feedback we are getting from retailers indicates that they are using warranties to increase their overall service offering as well as maximising revenue per customer. This Christmas period will be a very important time for retailers and many will be looking at every possible way of increasing average sale value.”
Like retail finance, warranties are also being touted at a discount or even free to secure a sale. While many manufactures have been using this sort of promotion for a while, some independents are now offsetting the cost of providing a warranty to gain customer footfall and close the sale.
“We believe that in an uncertain market consumers are actually more likely to be attracted by an extended warranty on an electrical purchase,” adds Lee. “Large screen TVs, PCs and premium domestic appliances are major considered purchases, so the appeal of a warranty that offers ‘new for old for life’ is very strong. In more affluent times, customers may have been happy to replace or upgrade an appliance when it went wrong but few people want that sort of commitment going into an uncertain future. In this climate, the peace of mind a warranty brings has real value.”
Quite how much consumers are willing to pay for this ‘value’ is a different matter.  The up-front cost of a warranty will always be compared to the potential repair or replacement cost. This in itself has been skewed by the relentlessly falling ticket prices of electrical goods. Consumers today still assume their next TV, for example, will be bigger, better and cheaper – as they are largely unaware of the massive cost increases affecting manufacturing globally.
Moreover, customers are increasingly price-centric so may not grasp the value proposition of a warranty product from the up-front cost alone. This has given rise to the concept of retail credit on warranty sales, with some providers offering terms up to almost one year for little or no additional premium.
Lee Miller at D&G notes: “We offer plans that can be broken into ten monthly payments to the consumer and we have recently introduced the Pay Monthly Plan. This gives all the benefits of a standard D&G service plan for a fixed monthly fee. Customers perhaps put off by long term financial commitment can be assured that they can cancel the plan at any time. Retailer feedback has been very positive on these products, as the concept is easy to sell and the retailer receives their entire margin up front on the collection of the first direct debit.”
Dealer support
As retail finance and warranties have become a rather more ‘considered’ purchase, service providers have risen to the challenge of offering comprehensive dealer support across the board. Extensive PoS, stationary, leaflets and all manner of promotional in-shop media are standard fare, with many offering comprehensive staff training programs as well. Key to the support package is keeping retailers working within the legal regulations governing the sales of finance and warranty products – although the actual onus to abide by the rules is the dealer’s responsibility.
Hitachi Capital allocates each of its retailers a Hitachi Capital Relationship manager as a direct point of reference. This ensures the retail channel is fully up to date with legislation and have the tools to sell finance within the legislative framework. “We work closely with our retail partners to keep them up to date with any legislative changes,” comments Hitachi Capital’s Mark Allen. “In addition to any issue being raised by their relationship manager we write to each retailer advising them of changes and the actions they need to take where appropriate.”
The very same is true of warranty providers, not least because of the very close eye the OFT and the Competition Commission keep on the market. “At Allianz, we view training as an important factor in the complete service we provide to our partners,” adds Simon Brimicombe. “We develop tailored training programs and back this up with mystery shopping to assist retail employees in understanding the extended warranty product and its regulatory environment.”
D&G’s training initiatives run to in-store training, conferences, remote learning and, recently, an interactive sales staff training DVD. “We are also expanding our field team of sales trainer merchandisers,” adds Lee Miller. “Their primary role is to visit retailers with all the necessary PoS and documentation, train sales staff and help and advice regarding the rules around compliance.”
Online
All of the service providers we interviewed for this feature agreed that online retail was a key area for growth and new business. All were adapting and implementing business strategies for the online retail environment where customers are simply not exposed to the face-to-face ‘sell’ one gets in a traditional store.
“Online retail is indeed a growing business for warranties simply because more and more people are using the web to buy products,” says Allianz’ Brimicombe. “What is key for this environment is for the online retailer to make the presentation of information on warranties an integral part of the overall buying process. The website needs to ensure the benefits of being covered (and the price) are explained clearly and succinctly, with information positioned close to the image of the main product.”
“Selling warranties at point-of-sale online is a more difficult proposition as there is little or no retailer-customer interaction to encourage the attachment sale,” agrees D&G’s Lee Miller. “However the potential is great because the features and benefits of D&G warranties purchased online are exactly the same as those sold by bricks and mortar retail stores. Those retailers moving into web-sales in addition to their traditional retail outlets are well placed to maximise warranty sales online as they already have the face-to-face experience. The trick is replicating that in an online environment, ensuring the benefits and costs of a warranty are thoroughly highlighted during the purchasing process.”
Even retailers not wanting to integrate direct warranty sales into their e-commerce engine or shop-floor operation can still benefit from warranty sales. This takes the form of a direct mail campaign to the customer based on retailer referrals. “All the retailer has to do is provide some basic information, name, address, product etc, and we will mail the customer a courtesy letter and a warranty offer. The retailer receives a fee for every mailable record,” explains Miller.
While one could postulate that the whole retail environment, including finance and warranties, is moving inexorably towards the web and away from the high street, it is not necessarily so. Able2Buy is best known for its credit facilities for online retailers but it is seeing much greater use of its services in the UK independent electrical retail sector. Able2Buy director Richard Castello comments: “We see the UK’s independent retail sector as our primary target market. Electrical retailers are increasingly adopting multi-channel (shop and web) strategies and are looking for a finance partner that can support their business across all its platforms.”
However, there are many retail finance providers not enjoying such success either on or off-line in the independent sector and two key players actually declined to comment for this feature.  Adds Richard Castello on this subject: “We are seeing many of our mainstream competitors withdrawing their services from smaller independent retailers as they attempt to concentrate their resources on larger volume retailers.”
For the independent sector at least, retail finance and warranty sales remain relatively strong and retain good potential despite of, or possibly even because of, a credit-crunched electrical market.  What is changing is the way these products are perceived by consumers and how they need to be sold, both in store and online. No longer are they a simple necessity purchase or accessory sale, finance and warranty products need to be actively explained and promoted, and in some cases used as promotion, to reap their financial and customer loyalty benefits.

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