Layaway makes a comeback

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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.

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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.”

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.

Snyder says layaway gives Kmart a leg up on the competition.

“It’s not an easy thing to mobilize against, with the inventory, management and administration,” he says. “There are a lot of moving parts to doing a layaway operation very well.”

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21st century layaway

In the age of the Internet, layaway may be getting a second life in the form of a new technology-driven business model known as “e-layaway.”

When Sergio Pinon saw merchants like Walmart abandon layaway, he recognized an opportunity to use technology to reinvent the unwieldy beast. The result is, the Florida-based company he founded.

“We met a lot of companies, both large and small, that were managing their layaways on index cards, no Quickbooks or anything,” says Pinon, who also serves as chief marketing officer. “There were no tools available for them, so we kind of took that ball and ran with it.”

E-layaway simplifies layaway for both merchant and consumer by removing the costly, time-consuming storage and bookkeeping processes. Layaways remain at the distribution center during the layaway period instead of taking up valuable warehouse space.

Payments are automatically deducted from the customer’s bank account. Customers set the contract period, from three to 13 months, and can adjust their payments online. is just one of several new vendors battling to become the “eBay of layaway.” Pinon says the e-layaway system helps retailers tap into a new pool of consumers.

“This is a large part of a consumer base that merchants in the past have been unable to reach online because they don’t have credit cards or any form of payment,” Pinon says. “Now, people who have been unbankable or uncreditworthy for years have a way to transact with merchants. We open up a huge market for them.”

And the big nationals are listening. Best Buy, Home Depot and the Apple Store are just a few of the retailers using e-layaway. Even Kmart and Sears are boarding the e-layaway train, albeit without abandoning their legacy in-store layaway programs.

Davidowitz sees e-potential for retail.

“With everything bad that is happening to consumers, it may very well be that e-layaway will take off as a form of credit,” he says. “For the merchant, the economics appear to make more sense.