How important is access to credit in the average consumer’s jewelry purchasing decision? If you study the data, you will discover that about half of all the jewelry bought by Americans is purchased using an in-house financing plan. So it stands to reason that any jewelry retailer who is interested in increasing revenues would benefit from the introduction of a strong private label credit card program. In fact, you’d think that an effective credit program would, for many stores, be a huge game changer. But if you poll independent jewelers, it’s actually pretty hard to find one that is happy with their store credit program, and some don’t even bother to promote the availability of financing, because their personal experience with approval rates is so poor that the whole idea seems like a lost cause.
This unpleasant historical experience with credit lies in stark contrast with the operational experience of the major chains, whose business models are heavily reliant on the extension of consumer credit. In order to understand these widely differing experiences in credit program effectiveness, as well as to gain insight into why a major breakthrough may be just around the corner, here’s a little background.
It’s impossible to predict with complete certainty whether a specific consumer will succeed, or fail, in making payments on time after making a credit jewelry purchase. However, it’s actually surprisingly easy to predict the aggregate behavior of a large group of consumers in this regard. All that you need is accurate data about their demographics and employment experience, as well as an algorithm (that’s a fancy word for a mathematical equation) that relates their personal characteristics to their creditworthiness. So why is it that the majors succeed with credit, while independents fail?
There are several reasons, but the big one - the ultimate destroyer of nearly all private label credit card programs serving independent jewelers - is a mathematical principle from the field of probability and statistics called “Adverse Selection”. To understand this, let’s compare the hypothetical shopping experience of 100 randomly selected consumers at a major chain, versus the experience of a similar group of consumers in a typical independent jeweler.
At the major chain, our 100 consumers are all likely to see signage prompting them to take advantage of the store’s credit program. Store personnel will mention availability of credit several times during the sales presentation, and they’ll also offer credit again after closing the sale, as they take the consumer to the cash register. And when the consumer offers their own Visa to pay for the item, the store associate will again mention the advantages and benefits of the store’s credit program (for example, “90 days same as cash,” which is a better deal than if the consumer uses the Visa to pay for the purchase). You see, they’ve been trained to do so, such that every single one of the hundred test consumers in our hypothetical scenario will be offered the option of opening a store charge, multiple times, in the course of shopping in the major chain store.
Now, let’s contrast this with the experience of our hypothetical shoppers in the independent store environment. Let’s assume that our test independent jewelry store has access to one of the two current national programs (underwritten by either GECC or Wells Fargo). Will there be signage present informing our 100 test consumers about the availability of credit? Possibly. Will the store personnel be trained to make a credit offering during the presentation to each consumer? Probably not. At the end of the presentation, when our test consumer hands the store associate a Visa card, will the employee still try to talk the consumer into opening a store account? Almost certainly not. In fact, of our hundred consumers who enter the test independent store, which ones will be offered the opportunity to apply for store credit? Only the ones who ask, which means that only the ones who need access to credit will apply. And this phenomenon, in which the pool of potential credit purchasers is “adversely selected,” such that consumers with the highest degree of creditworthiness don’t make a credit purchase, and therefore don’t contribute to the creditworthiness of the overall purchasing group, is what kills private label credit card programs in the independent sector of the jewelry business.
You see, some of this group of “credit-needy” consumers will qualify - just barely - for credit. The fact that purchases made by these just barely credit-worthy consumers aren’t balanced, in the overall receivable pool, by purchases from folks with excellent credit, means that the overall delinquency rate of the credit pool will suffer. The credit provider underwriting the private label program will respond to higher than expected delinquency rates by - you guessed it - lowering the approval rate, by adjusting the scoring algorithm. Which means that any independent retailer participating in the program will become even less likely to offer credit, because the approval rate will be so low. This, in turn, will increase the adverse selection problem, because only consumers who assertively ask for credit will now be given a chance to qualify. As you can see, we end up with a downward spiral, of ever-increasing delinquency and ever-decreasing approval rates. In the end, nobody wins, except, of course, the major chains.
It’s all quite disheartening, especially given the importance of credit for stores wanting to expand their bridal businesses, because bridal remains the most credit-intensive purchasing category in the jewelry business. How many times have you lost an engagement ring sale because you couldn’t get financing for a couple, who ended up buying from the major chain where they could get credit? And how many more sales have you lost because you didn’t have the advantage of the positive word of mouth within the peer group of the bridal purchasers who wound up buying at the chain store?
There was once a period during the mid to late ‘90s when there were a number of choices in manufacturer-driven private label credit card programs. Initially, all of these were a boon to the independent jewelers who participated. Predictably, however, all of them ultimately crashed and burned, as adverse selection worked its unhappy magic.
Recently, I’ve been studying how credit is offered in other retail categories (particularly flooring and furniture), to see if there might be ways to re-think the way Private Label credit can be handled by independents in our industry. I’ll save the actual details for another article, but I’m now beginning to suspect that new marketing techniques may now exist that will allow us to finally solve the problem of adverse selection. In fact, I’m conducting a test in December in twelve of our customers’ stores, using multiple credit providers, some of whom even target consumers with relatively low credit scores.
If you read my columns, you know that I’m a big fan of testing ideas by collecting data. In this case, we’ll get an enormous pool of data, fairly quickly, so that we can understand how best to proceed. I’ll keep you posted.