Layaway Makes a Comeback as Retail Sales Rise

Nov. 15, 2011— -- Even though consumers are earning less, the latest numbers indicate they're willing to spend more.

Retail sales keep climbing, with October's numbers up 0.7 percent to $283.2 billion, excluding auto and gas station sales, the Commerce Department said today. That's the biggest increase since March. Overall, total retail sales increased .5 percent to $397.7 billion, higher than the 0.1 percent rise economists were expecting.

Businesses eager to capitalize on that sentiment, especially during the holidays, are embracing store layaway plans.

Once a long-forgotten option, layaway resurfaced when the recession began in 2008.

"It was something that had just come out of mothballs," said Jody Rohlena, senior editor at ShopSmart Magazine.

But it's not necessarily the best financial decision for consumers. The plans, which became especially popular in the '70s, allow consumers to reserve items they want for a non-refundable fee while making payments toward the total purchase. Once the items are paid off, the customer can pick them up, but if they can't pay they're fined.

"People don't necessarily have cash on hand to go holiday shopping. We have learned on our surveys, when you spend cash you tend to spend less," said Rohlena. "I think [businesses are] aware of the fact that people are strapped for cash and they're trying to offer them a way to pay over time."

The increasingly popular alternative to credit cards has become a boon to large retailers.

"When stores first started offering layaway again in '08 or '09 it doubled the volume of dollars of merchandise that is being bought through layaway," said Megan Donadio, a retail strategist at retail consulting firm Kurt Salmon.

In October, Walmart began offering Christmas layaway service for the first time in years. For $5, the world's largest retailer, which previously only offered layaway for fine jewelry, lets customers sock away toys and electronics as long as each item costs at least $15 and the total purchase is $50 or more. If final payment and pickup isn't made by Dec. 16, however, the order will be canceled and all payments (except for the $5) will be refunded, minus an additional $10 fee.

Walmart doesn't allow online layaway, but Kmart, Sears and websites such as Elayaway.com cater to customers who prefer to shop on the web.

Ever since Elayaway.com launched in 2006 its members have grown an average of 53 percent annually, said Elayaway.com marketing coordinator Melissa Valido. In addition, the average volume of purchases made by their members has grown an average of 69 percent each year.

That trend will likely continue as the economy falters and attaining credit becomes more difficult.

"I think people are going to be capitalizing on it more," said Donadio. "It helps them budget, it helps them stay away from plastic."

Although it's important to steer clear of high-interest bearing credit card accounts, layaway plans can be risky.

Louis Hyman, an assistant professor at Cornell University who studies the history of capitalism in the U.S., says those considering layaway ought to limit the number of purchases.

"The real tricky thing about layaway is unlike credit cards … you pay back over time and you don't get the goods unless you pay completely," Hyman said. "Layaway can be very dangerous because then you're [potentially] left on December 24th without any presents under the tree."

And the fees can add up. If you sock away $50 of merchandise, but the fee to hold that merchandise is $5, that's a significant percentage of the total cost.

"For people who are upper middle class that is almost nothing. For people who are actually using the service, $5 is a lot of money," he said.