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Layaway enjoying small revival for the holidays

In wake of economic crisis, some retailers revive once-popular program

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Layaway, largely erased by the rise of credit cards, is making a minor comeback in time for the holidays. 

As recently as September, retailers were largely ready to declare layaway dead. "The use of credit has pretty much taken over the notion of layaway, especially in the last decade or so," said Kathy Grannis, spokeswoman for the National Retail Federation in Washington, D.C., in an interview. Much of layaway's downfall was attributed to the widespread availability of plastic, which made the idea of layaway seem outdated. With credit cards, "consumers can purchase and consume immediately rather than delaying the gratification associated with a layaway," says Joydeep Srivastava, marketing professor at the University of Maryland.

What a difference a few weeks and an economic meltdown can make. Retailer Kmart has recently kicked off an advertising campaign promotings its layaway service as an option for the holidays. While it's unlikely layaway will reclaim its past popularity, it's an option some consumers appear to want in this challenging economy.

Kmart's campaign
Discount chain KMart's ads, launched in October, feature animated lightbulb Mr. Bluelight promoting layaway as an affordable way to get presents for Christmas.

Sears Holding Corp. subsidiary KMart has offered layaway for over 40 years, but has recently noticed greater appeal to consumers. "There is definitely an increased interest in layaway," says Kmart spokeswoman Kim Freely. She was unable to confirm whether that interest prompted the ad campaign or vice versa.

Freely says layaway's popularity reflects challenging economic conditions, allowing consumers to set aside items without tying up their ready cash. In tough times, "it's a way they can still make Christmas happen for their families," she says. Whether or not it's a sign of just how widespread the pain is being felt, Freely says it's not just lower income shoppers who are seeking out layaway. "It's something across the board," she says.  

Layaway goes online
Still, to find layaway options in the 21st century, the best bet may be to turn on your computer. Currently, the service has a small online presence, with a handful of companies offering consumers the opportunity to make a series of incremental, interest-free payments over the Internet. "It's the same with grocery shopping -- if you can do it online and have it shipped to you, why not?" says Robert Holland, owner of the appropriately-named website Lay-away.com.  

Holland says he was the first to take layaway online with the creation of Lay-away.com in 2002. "When I started the company, that was when the Internet was really taking off," Holland says. "This was my niche that I decided to start a business in." 

Holland himself served as the model customer. A fan of layaway in college, "I used layaway because I had limited income, and I didn't have credit," Holland says. Other people have warmed to his idea. Currently, "there's a wide range of customers, but I'd assume the majority can't get credit cards or don't want to use credit cards for a big ticket item," Holland says. Entrepreneurs have also taken note: Holland says he knows of about two or three companies that currently offer a similar layaway service online. 

Lay-away.com doesn't charge fees to shoppers, instead earning commission on the products it sells from suppliers. While some things have changed, layaway remains much as it always was: Site visitors who find an item they like can pick a budget and then submit periodic payments until they are done paying. If the consumer is unable to complete the payments, they can request a refund less a $35 processing charge. Unlike payments made by credit card, nothing is reported to the credit bureau, Holland says. "We don't have a bad customer list," he adds.

Tell me about layaway, Gramps
Layaway originally became popular during the Great Depression in the 1930s, and allowed shoppers to make incremental payments on an item over a certain length of time. Stores offering layaway programs held a shopper's selected merchandise until it was completely paid for and the consumer was finally able to take it home. For example, a shopper might find an expensive coat at a department store and have it set aside on layaway, then return each month to put a portion of her paycheck toward the coat's purchase until she paid for it completely.

"Historically, layaway existed even more so during the holiday season than other times of the year for larger purchases and large gift items, like a couch or TV," says Grannis of the National Retail Federation. Additionally, toys were often available on layaway at warehouses for pickup right before Christmas, says Gayle Marco, an associate professor of marketing at Robert Morris University in Pittsburgh.

In a time before the widespread availability and use of credit, layaway enabled consumers with little money to own items that would otherwise be out of their immediate price range. "If I had a credit card, then I was an upper income consumer. If I didn't have that income, layaway was the way to go," Marco says.

Layaway also protected the store: If the shopper was unable to make all the payments, the business could simply take the item out of layaway and make it available once again to shoppers. Meanwhile, unlike credit card delinquency, there was no impact on the consumer's future ability to borrow at that store or anywhere else. "Other than the people in the store who knew," being unable to complete a layaway purchase "didn't have a rollover effect when you went to buy a car," Marco says.  

By the mid-1970s, layaway's heyday had passed. "Retailers noticed this change in consumer purchasing behavior and decided to shift their staffing from being hidden in the back of the store to using those employees in a better way," Grannis says. Eliminating layaway also freed up space retailers were using to store layaway merchandise. Not that some consumers don't miss layaway. "I think if you talk to a lot of old timers, there is a lot of gratification in working for something for three months and then having it," says Joel Huber, professor of marketing at Duke University.

For sales, plastic trumps layaway
Layaway provides stores with the opportunity to ring up additional sales each time the customer visits to make payments. Even so, credit cards may offer greater benefits to retailers.

The rise of plastic may mean increased sales, since cardholders are likely to spend more than consumers who use layaway. For shoppers, "multiple small payments are far more aversive than a single equivalent payment" as with credit cards, says Priya Raghubir, marketing professor at New York University. With credit cards, "they are likely to spend more and worry less about it and forget how much they spent, whereas with the layaway it's going to be salient that you had to save money every month to make those payments," she says.  

"The two reasons: immediate purchase and consumption as well as the lower pain of paying when using a credit card makes a credit card purchase more likely than using a layaway service," professor Srivastava says. "This implies more consumer debt (if the credit card is misused), a benefit to the retailer because a transaction now is better than a potential transaction later on, but the effect on the overall economy depends on consumer spending --- more debt may mean less consumer spending later on (as we are observing in the real estate market)," he says.   

Engangered species?
Aside from a few large retail chains, including Kmart, Burlington Coat Factory Warehouse and select Marshalls and TJ Maxx stores, layaway remains difficult to find. Fink's Home Décor in Perth Amboy, N.J., is one store that still offers layaway service, as it has for decades.

The store continues to see both the appeal of layaway to customers and its benefits to the business. According to owner Howard Fink, grandson of the store's founder, layaway is generally used by the less-affluent customer who "doesn't have the ready cash and doesn't want to tie up their credit or have the credit available to them." These customers may be nearing the limit on their credit cards or may not want to incur the interest charges on the cost of a purchase that must be revolved from month to month. Rather than simply being confined to the elderly, Fink notes that layaway is used by a relatively large age range of shoppers.   

Fink says the service also remains an effective sales tool. Consumers who may say they are considering a purchase -- but might otherwise never return -- are urged to make a small initial payment on layaway. It appears to be an effective technique: Fink estimates that only 20 percent of the customers who put an item on layaway do not eventually complete their purchase. Customers who cannot or do not complete the purchase don't lose they money that had already put down. Instead, Fink's simply provides them with a store credit.

Despite its benefits, Fink acknowledges that layaway remains uncommon. "I don't see that many stores doing it," he says.

The future of layaway
Fink's sentiment is shared by the National Retail Federation: "It's not enough of a trend that we ever see it being popular again," Grannis says.  

While layaway may never regain the mainstream popularity it once had, instead of killing off layaway entirely, plastic may actually encourage layaway's survival. Holland sees the service remaining vital to a specific type of shopper. "As long as there are credit cards out there and there is a customer who can't get a credit card, there will always be customers who want to use layaway," he says.  

See related: 10 questions to ask about layaway plans

Updated: October 22, 2008


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