Saturday, December 17, 2011

The First National Bank of Kmart

By now everyone has seen the news about "Layaway Angels."  This is a phenomenon in which people are anonymously paying off the layaway purchases of Kmart shoppers.  It's a Christmas miracle.

Yesterday in response to a thread on facebook, I made a snarky comment about this.  While I thought it was humorous, it drew the ire of several people I don't even know.  Ain't facebook grand?

I will quote my comment here, though it will probably just serve to enlarge the angry mob I incited yesterday.  Here you go: 

I'm going to go out on a limb here and say that though I think this is great, it seems that the best thing you could do for the K-mart layaway customer is buy them a basic course in life skills. You know, teach a man to fish instead of smoke with his kids in the car.

I've been thinking about this comment, and the response it got a lot since yesterday.  This morning I woke up early thinking about it.  I'm sorry I wrote it because I think I spoiled the Christmas buzz people had gotten by reading the associated article.

However, since this is my blog and I can do what I want, I think I'll put my comments in context.

I used to work for a company that provided retail assembly services to all the big chains.  Mostly I assembled bicycles.  I regularly worked at Target, Walmart, Shopko and Kmart.  Most of the time I worked at stores in Utah, but on three occasions I was sent out of state to work.  I worked in Detroit, Chicago and Fairbanks.  (Interesting tidbit: the Fairbanks Kmart sold more bicycles than any other store in the chain.)

When you spend a lot of time at these stores, you start to notice things.  They all look the same, no matter where you are.  It's like LDS meetinghouses.  For example:  Target stores are generally cleaner, the lights are brighter, the aisles are wider.  Employees are everywhere.  The shopping carts roll smoothly.  Shopko is generally a little less presentable up front, but with a homey vibe, while their warehouses are much smaller and less organized.  Kmart is at the bottom of the spectrum.  Aisles are narrow and often cluttered with boxes.  Employees are scarce and not very helpful.  Merchandise looks as if it's been thrown on the shelves by an angry teenager who didn't want to clean his room.  The shopping carts are old and rusty, their wheels a good way to teach three-year-olds about shapes other than circles.  Fluorescent lights flicker from a ceiling of crumbling yellow-stained acoustic tile.  The warehouse is a dank dungeon from which light cannot escape.  I hated working at Kmart.

The interesting thing about this is that even though the stores sell a lot of the same crap, they attract a very different clientele.  (In fact, the bicycles at Target were among the worst.  They had a brand there that made Huffy look decent.)  This isn't to say that all of the stores fit my descriptions.  These are generalizations after all.  But real trends are readily observed, and these trends are established at a corporate level, where the suits set their sights on their "target" customer.  (This is why I find the name Target appropriate if not a little "in your face.")

I used to wonder if Kmart was just overseen by a bunch of idiots.  But I believe that there is a method to the madness.  They attract a certain clientele because of their seeming ineptitude, not in spite of it.

This brings me back to the "Layaway Angels."  I believe that at best this is misguided giving, which is still giving and therefore good, right?  But at worst, this is one of the most brilliant viral marketing schemes ever.

Think about it for a minute:  Layaway is a program which provides numerous advantages to the retailer, and very few to the consumer.  Best of all, layaway shifts the risks of the loan back onto the head of the lessee.  Imagine borrowing money to buy a car, paying the loan origination fees, downpayment, and any surcharges they might invent at the time of purchase, then having to leave the car at the dealership until you have paid off the loan.

Kmart loves layaway.  By providing a Layaway program, Kmart effectively becomes a bank.  And not just any bank either: they become a bank like a pawn shop or a payday lender.  They make short term loans at absurdly high rates of return with almost no risk.

Here's how it works:

When you make a layaway at Kmart, you can choose an 8 week or 12 week plan.  If you are buying Christmas gifts, this means you are committing to buy those gifts from Kmart in September or October; well before any holiday sales begin.  Kmart wins.

Next you pay either a $5 or a $10 service fee.  You also pay a down payment.  No matter what happens, Kmart keeps your service fee, and your down payment covers the cancellation fee if you default so Kmart will never have to spend a penny on collection.  Kmart wins.

You then make payments every two weeks to pay off the balance.  Each time you do so, online or in store, Kmart has the opportunity to sell you more stuff.  Kmart wins.

If you are more than a week late, Kmart returns your would-be purchases back to the shelves and you forfeit a $10 or $20 cancellation fee.  You can get a refund for the remaining paid amount.  Kmart wins.

At the end of your contract you can take home your purchases.   

Imagine a person makes a $200 8-week layaway.  If they don't default, Kmart makes only $5 (in addition to the profit they made on the merchandise).  Seems like a fair deal.  Actually though, if you calculate that money as interest, the annual rate is 16.25%.  A similar 12 week layaway yields 21.66% APR.  That's a really high yield considering that Kmart had no risk other than the expense of taking your shopping cart full of stuff and sticking it in the warehouse for 8 or 12 weeks.

If you default it's even better for them.  They don't have to repossess anything.  The merchandise in question is still brand-new, and they triple their return by withholding cancellation fees from your refund.  A customer can default in as little as 3 weeks.  A $200 purchase on a 12 week layaway defaulted in 3 weeks means you paid Kmart over 115% APR on a loan that wasn't really a loan in the first place because goods never changed hands.
Is it so hard to save up a little, buy what you can afford, and hide your gifts until Christmas?  Clearly there is little benefit provided to the consumer that they can't obtain for free with a locked closet and a modicum of self-discipline, while Kmart reaps huge rewards.    

This is why I said that people who use layaway would be better served by being given a free course in life skills instead of by "layaway angels."  This type of program encourages people to buy more than they can afford, and works even better for the retailer when the "loan" goes bad.  And now with the rumors of "layaway angels" swirling (real or fabricated), you can bet Kmart will be laughing all the way to the bank.