[Image of: RetailWire Logo and Tagline (for print)]

BUSINESS TIPS

IRI:
Shopper-Centric Execution
ChannelAdvisor:
Online Selling Strategies
RR Donnelley:
In-Store Marketing
LoyaltyOne:
Enriching Customer Relationships
 
[13 comments]

Consumers to Retailers: Charge It

July 22, 2011

Much has been made of the progress Americans have been making in digging out from underneath piles of debt since the Great Recession began. Frugal consumers are watching their dollars and not letting credit card debt put them in financially untenable positions.

Every month, for example, Target provides an update on its credit card receivables, which has shown steady year-over-year improvement in credit card delinquency rates. In June, only three percent of the company's cardholders were 60+ days past due. This compared to 4.9 percent in June 2010 and 5.7 percent in 2009. Going through the company's table, a similar pattern is found for all the other months, as well.

Now, however, it may be that consumers are sliding back. According to research from First Data Corporation, the largest processor of credit cards, credit card volume growth was up 10.7 percent in June, the largest increase in over a year. Volume numbers, according to First Data, are largely driven by inflation.

"Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food," Silvio Tavares, senior vice president at First Data, told Bloomberg News. "That's because there's been no other positive catalyst, like an increase in wages, to offset higher prices. It's a cash-flow problem."

Discussion Questions:

Discussion Question: What does the increased use of credit cards mean for retailers? Would it be in retailers' interests to dissuade customers from credit card use?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How concerned are you that increased credit card use could derail the retail recovery?

Comments:

This article is very misleading--it implies that because volume is up, delinquencies are up. But if you look at the Target data, delinquencies for June are flat or down. Increased credit card usage could be due to the early start of back-to-school sales (at least, here in Georgia) or more confidence that cash will be coming and charging is more convenient. Retailers shouldn't be concerned--they should be happy if volume is up.

[Image of: View Braintrust Panelist button]
Dr. Stephen Needel, Managing Partner, Advanced Simulations

It would seem that Target's customers are more prudent than many competitor's customers are. Probably they can afford to be. But there are more people being hit hard by today's economic realities (job loss, gas and food prices, desperation, etc.) and the use of credit cards is increasing to cope. That indicates that possible losses might be looming for some retailers with heavy credit card receivables.

Still, retailers are in business to satisfy their steady customers and generate volume. Increased credit card usage might assist with that objective; there are better ways to survive without dissuading customers from credit card use.

[Image of: View Braintrust Panelist button]
Gene Hoffman, President/CEO, Corporate Strategies International

Not to use credit cards would seem to be sales growth suicide, even though there are risks associated with potential non-payment, and to move to limit credit card use would seem to have a very negative impact on sales and especially image. Moreover, in the club store, department store, stationery, toy, book, apparel, electronic and other channels, the credit card is frequently the retailer's own and doubles as a membership card. In addition, despite the increase in credit card usage, the Target data indicates a long-term trend downward in delinquency. That should certainly mitigate any sharp increase in credit card usage. Also, if anything, the American consumer has been thoroughly educated both by personal experience and media coverage as to the dangers of excessive debt, and that should also be a favorable factor in the continuing usage of credit cards at retail.

[Image of: View Braintrust Panelist button]
Roy White, Editor-at-large, RetailWire

The bigger story is inflation and wages rather than credit.

The increase in credit cards was fueled by fuel. Fuel credit purchases grew 39% y/y in June 2011 on top of a full 21% a year ago. Food was up only 5% after a 7% decline a year ago.

Fuel inflation not only increases use of credit, it decreases spend in other retail sectors. Electronics and appliances suffered last month, and hospitality, a leading indicator, grew less than previous months.

Overall card spend increased 8.8% versus a decline in May, as merchants were able to pass on higher COGs. But shoppers aren't buying more, they're paying more.

The larger concern is not the increasing use of credit cards but rather the squeeze that inflation plus stagnant wages as on discretionary spend.

[Image of: View Braintrust Panelist button]
Dan Frechtling, Vice President, Global Product Management, hibu, PLC

I'll take any form of payment that is not a personal check, as I am guaranteed payment. Tons of customers are using credit cards more than ever before, and I expect it to continue. Checks are a nightmare, and we encourage all forms of credit and debit cards to be used instead. I love it.

[Image of: View Braintrust Panelist button]
Tony Orlando, Owner, Tony O's Supermarket & Catering

There is a Federal Reserve payments study dated 2010 which shows the continuing rise of debit, prepaid, and ACH methods of payment by consumers while credit card volumes declined for the first time in recorded history.

After expressing concern about high priced credit card debt and showing increased interest in savings and financial responsibility since the recession started in the US, I have now seen other indicators that credit card usage may be ticking upwards once again.

People may use their cards as a means of payment and convenience, but living within our means is the first step to financial solvency. I would keep an eye on the reported level of revolving debt to understand the trends for the future.

[Image of: View Braintrust Panelist button]
Bill Hanifin, Managing Director, Hanifin Loyalty LLC

Sounds like for too many shoppers, the month is running longer than the money. Credit cards are a stopgap measure when the household runs low on milk, eggs, bread and the gasoline to get to the store.

Further evidence for this pressure may be found in the waning days of the pay cycle, when smaller baskets with fewer items and smaller package sizes prevail. Walmart is so aware of this tendency that top executives mentioned it in recent analysts meetings.

I riffed on this myself just yesterday in Tenser's Tirades.

Grim tidings for the consumer economy, I'm afraid.

[Image of: View Braintrust Panelist button]
James Tenser, Principal, VSN Strategies

No one, it seems, fell for the bait: isolated stats--in this case looking at credit card use, but neglecting changes in delinquency rates, bad checks, debit card use, etc.--don't mean very much. "All else being equal..." yes, but it never is.

'notcom'

And to chime in with "notcom" -- increased credit card usage does not necessarily translate 1 for 1 to increased credit card DEBT. It is possible that consumers are using the payment form more freely again--but paying the balances at the end of every month. (Notice I said possible--not probable.)

[Image of: View Braintrust Panelist button]
Ben Ball, Senior Vice President, Dechert-Hampe

Does this data really show what is claimed? If credit card payments are up due largely to inflation, how do I know how much is just a function of the need to pay more for the goods (which would be true in cash too)? And more importantly, how do I know what the "right" level is? Clearly, if delinquencies are down, that would indicate that there hasn't been overspending recently. Maybe the pendulum will swing back too far, but I don't see that in this data.

[Image of: View Braintrust Panelist button]
Jonathan Marek, Senior Vice President, Applied Predictive Technologies

Pretty simple--it means transactions! It means sales that may not have been made a month ago! Our spoiled nation will not go without for long and the old "gotta have it" snake is rearing its ugly head. What's a retailer to do? Well to start with, you can find a way to use the windfall profits you are receiving from lowered swipe fees to give us better sales. From what was testified to by your industry lobbyists, virtually billions were spent on unjustified swipe fees that were going to the big bad banks. Now we are told that because the swipe fees were reduced we are all going to have to pay for our checking accounts and even buy our own checks. I say why use plastic at all! Lets all go back to our paper checks and/or cash. Next thing you know they will be complaining about accepting cash--it's dirty, UGH!

Ed Dennis, president, Dennis Enterprises

Most of the comments have gone well beyond the simple questions asked. There is too little data in the articles to divine conclusions on the overall impact of increased credit card usage. The reasons vary from people needing to use credit due to cash running out, using their cards for convenience, the impact of inflation, and more.

What does this mean for retailers? Credit is merely a means of payment. The answer will vary by retailer and will be more accurately tied to transaction volume and size. It is certainly not in retailers' interest, nor their responsibility to dissuade credit card use. Between consumer education on the downside of overusing credit, to new government efforts to better regulate credit card issuers, consumers are much better equipped to make credit use decisions on their own.

[Image of: View Braintrust Panelist button]
Mike Osorio, Senior VP Organizational Change Management, DFS Group

Most of the comments have gone well beyond the simple questions asked. There is too little data in the articles to divine conclusions on the overall impact of increased credit card usage. The reasons vary from people needing to use credit due to cash running out, using their cards for convenience, the impact of inflation, and more. What does this mean for retailers? Credit is merely a means of payment. The answer will vary by retailer and will be more accurately tied to transaction volume and size. It is certainly not in retailers' interest, nor their responsibility to dissuade credit card use. Between consumer education on the downside of overusing credit, to new government efforts to better regulate credit card issuers, consumers are much better equipped to make credit use decisions on their own.

[Image of: View Braintrust Panelist button]
Mike Osorio, Senior VP Organizational Change Management, DFS Group

Search RetailWire
Follow Us...
[Image of:  Twitter Icon] [Image of:  Facebook Icon] [Image of:  LinkedIn Icon] [Image of:  RSS Icon]

RetailWire's
Getting Started video!

View this quick tutorial and learn all the essentials...

RetailWire Newsletters