Layaway, once a staple of the American retail experience, has faded away as credit cards have become more common. But layaway is making its way back. Many consumers have experienced credit crunches of their own, and are hesitant to use plastic to pay for their purchases. Sears brought back layaway in 2008, and Toys ‘R’ Us started offering the option for big ticket items two years ago. Now Walmart—which discontinued layaway in 2006—is bringing the practice back for the holiday season.
“Layaway’s resurgence at Walmart is a gentle reminder that many of its customers are struggling financially,” said Eric Anderson, a professor of marketing. Most retailers make a significant portion of their sales during the holiday shopping season, and Walmart is no exception. It is probably hoping the prospect of layaway will draw customers to its stores, even if it doesn’t sell more items. “Even if a Walmart consumer does not use layaway, the mere fact that it is offered sends a clear message that Walmart is aware of the financial stress its customers face and is trying to be responsive.”
Layaway is also uniquely suited to shopping habits during the holidays, said Brian Melzer, an assistant professor of finance. In the absence of layaway, households that have neither a credit card nor enough cash cash might turn to payday loans. For regular purchases, payday loans have the advantage of allow people to buy an item and use it immediately. Such financing usually far more expensive than layaway, though. For example, Walmart is charging a $5 fee on a minimum purchase of $50, whereas payday loans typically charge $7.50 for every $50 borrowed. Since people shopping for Christmas don’t need their items in October, payday loans are unnecessarily expensive. “Ultimately for holiday gifts or purchases that are being put away for later, then layaway is clearly the better option,” Melzer said.
Layaway also acts as an alternative to saving, Melzer pointed out. Recent research suggests people have a difficult time sticking to savings plans, especially if there isn’t some tangible benefit or loss. Layaway offers a few incentives for such consumers. “If you don’t follow through with full payment by the deadline, you lose whatever you have paid to date,” he said. Furthermore, it protects consumers against price increases and guarantees their purchase should the item go out of stock.
In the end, Anderson thinks layaway will make up only a small portion of retail sales this holiday season. “It only appeals to credit constrained buyers who are patient and good at planning.” That’s likely to be a small portion of the market. Where layaway may help retailers more is in the message they are sending consumers—that they understand finances are tight. “This may end up being a larger effect,” Anderson said.
Photo by eric731.