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Profits From Store-Branded Credit Cards Hide Depth of Retailers’ Troubles

 In our household, as we celebrated the college graduation of our youngest child this year, we executed a four year plan to renovate the master bath in our home. It was a big expense that we budgeted to pay in cash. The vanity we picked out was $2,700, found at Pottery Barn. Our household, where we have varying roles of who is the saver and who is the spender, we were both in synch on the item, especially when I found a coupon that offered me 20% off if this were placed on a new Pottery Barn credit card, supported by Comenity Bank. During this period, the vendor also offered free upstairs delivery for this 500 pound piece; the rebate and the delivery closed the deal for us, making this the first private label credit card we’ve held for 30 years. The true, net savings was in the range of $800-$1,000 to our project, compelling enough to spawn the new account, though our intention to pay the bill off within the first billing cycle runs contrary to the business model.
The business model expects you to trigger the card, revolve, and perpetuate usage, along the lines of what you’d expect for a shopper at Toys R Us or Macy’s, as this story in the NY Times explains.

• For some retailers, those credit cards are not just a sales tool, but also an essential way to bolster their struggling businesses — a trend that has worrisome implications for the industry and its customers.
• But the businesses may be in worse shape than they appear, since store cards are a shaky foundation. If more consumers fall behind on their payments, the profits could dry up, intensifying retailers’ troubles.
• At Macy’s, the money from branded credit cards accounted for 39 percent of the company’s total profit of $1.9 billion last year, up from 26 percent in 2013, according to an analysis by Morgan Stanley.
• At Kohl’s, the profit from plastic totaled 35 percent, up from 23 percent, over that same period. At Target, it made up 13 percent of total earnings, up from 11 percent in 2013.
• Amazon, by comparison, derives only about 3 percent of its total operating profit from its credit cards.

Comenity, the private label powerhouse owned by Alliance Data, and their primary competitor, Synchrony (the GE spinoff) both facilitate the bulk of retailer cards. It is a model that shifted away from retailers holding their own credit card inventors, as was the historical model for large retailers like Macy’s, Sears and Target. The problem with retailers owning their own receivables is as the economy went through standard recovery/recession cycles, retailers often had to sell their portfolios to either Citi or GE to meet payroll. But, with this model change, Comenity and Synchrony must also consider the business risks of their sourcing partners as the economy changes.

• The cracks are starting to show. As signs of customer distress rise, one major lender, Synchrony Financial, which handles the credit cards for stores like Sam’s Club, Gap and Toys “R” Us, is now setting aside more money for bad loans.
• “Investors may not appreciate the magnitude of the retailers’ stress because of the store card income stream,” said Kimberly Greenberger, a retail analyst at Morgan Stanley.
• “These stores are propping up their failing businesses on the backs of lower-middle-class people,” said Charles Juntikka, a bankruptcy lawyer in New York, whose clients often have rung up thousands of dollars in debt on retail cards.
• But any savings quickly evaporate when borrowers cannot pay off their bills right away.

Good article and it does ring a chord in our household. We saved a good amount of cash because we got in and out of the transaction with the creditor and retailer. We won’t be doing another renovation like our new spa bathroom in the foreseeable future, so we do not expect to pay interest at all which disrupts the model. As for Pottery Barn, their model to attract us worked but there might not be enough to keep us engaged, unlike a Toys R Us card might keep a young family.
…Maybe another card for the future with Lowes or Home Depot? But, watch how much you incent me because I am the saver in the family.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

Read the full story here

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