smart spending

Layaway makes a comeback

Highlights
  • Some retailers returning to layaway in the wake of the recession.
  • System good for cash-strapped customers, costly for retailers.
  • Internet brings layaway into the 21st century.

Today's hard times are tailor-made for layaway.

Born during the Great Depression, layaway is a system where a merchant holds an item, usually for a small fee and deposit, until the consumer finishes making installment payments.

Pay now, pick up later
Retailers that offer layaway plans for cash-strapped customers include:
  • Burlington Coat Factory.
  • Kmart.
  • Marshalls.
  • Sears.
  • T.J. Maxx.
  • Toys R Us.
Layaway largely vanished during the 1980s with the onslaught of consumer credit cards, which allowed shoppers to bring home their treasures before paying for them in full.

"Layaway was popular 30 years ago, before the credit card companies sent out cards to everyone. If you lived in a homeless shelter, you got like seven cards," says retail consultant Howard Davidowitz, chairman of Davidowitz & Associates.

"Once everybody got a card, there was no reason for layaway."

Now that unhappy days are here again, could layaway be making a comeback?

Thanks to the Great Recession, layaway appears to be paying off for retailers like Kmart, which attributes its better-than-expected 2008 holiday season to its 600,000 layaway customers.

"Layaway is something that the Kmart format has had as part of its value proposition for the past 45 years," says Mark Snyder, chief marketing officer for Kmart. "For Kmart, it is very, very close to the brand."

Kmart has redoubled its TV advertising of late, in part to promote its layaway program as a year-round payment option. At least one new national retailer, Toys R Us, recently cranked up a layaway program.

A handful of national retailers have continued to offer layaway over the years. They include Sears, T.J. Maxx, Marshalls and Burlington Coat Factory.

Yet, despite the success of Kmart, there is little indication that other merchants are rushing to devote valuable warehouse space and manpower to layaway.

The unwieldy beast

Although layaway may work for cash-strapped consumers, it is a costly headache for most merchants. Walmart discontinued its layaway program in 2006 for that very reason.

"Layaway was not economically viable for a retailer," Davidowitz says.

Layaway most often is used in the purchase of apparel items, Davidowitz says. If a customer stops making payments, the retailer has to take the item back.

"The problem is, it's three months later; the color is wrong, the fabric is wrong, the weight is wrong, so it takes a 60 percent markdown," he says. "It's practically worthless."

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Despite layaway's potential drawbacks, some retailers remain committed to the payment plan. At Kmart, consumers activate layaway by paying a $5 fee and a down payment of $15 or 10 percent of the item's value, whichever is greater.

The prospective buyer then makes 25 percent payments biweekly. After eight weeks, the item is theirs. Customers who cancel prior to purchase are dinged $10.

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