Credit Operations
In the US jewellery market it is necessary for speciality retailers to offer credit facilities to the consumer. Management regards the provision of an in-house credit programme, rather than one provided by a third party, as a competitive advantage for a number of reasons:
- authorisation and collection models are based on the behaviour of the consumer to the division;
- it allows management to establish and implement customer service standards appropriate for the business;
- it provides a database of regular customers and their spending patterns;
- investment in systems and management of credit offerings appropriate for the business can be facilitated; and
- superior cost effectiveness by utilising in-house capability.
Furthermore the various credit programmes help to establish longterm relationships with customers and complement the marketing strategy by enabling additional purchases, higher units per transaction and greater value sales.
The table below presents data related to the in-house credit business for the past three financial years. Since credit authorisation and collection systems were centralised in 1994 the credit terms and performance have been relatively consistent over the economic cycle. The average outstanding balance at the year end was $957 (2005/06: $841).
The credit portfolio turns approximately every seven months and the monthly collection rate in 2006/07 was 14.6% (2005/06: 14.5%). The bad debt charge for the year, at 5.3% (2005/06: 5.8%) of credit sales, was at the bottom end of the historic range. In-house credit sales represented 51.7% of total US sales in 2006/07 (2005/06: 51.6%). A number of programmes offer interest-free financing of less than one year’s duration, subject to certain conditions and these account for a significant proportion of credit sales. In most US states customers are offered optional third party credit insurance.
Authorisation and collections are all performed centrally at the US head office, rather than by store staff. The majority of credit applications are processed and approved automatically; they can and are initiated via in-store terminals, through a toll-free phone number or on-line through the division’s websites. All applications are evaluated by the scoring of credit data and using data obtained through third party credit bureaux.
Investment in staff, training and systems to maintain or improve the quality of the credit portfolio continued in 2006/07. In 2005/06 a customised collection system was fully implemented which replaced one initially installed when credit operations were centralised. The system provided management with flexibility to implement and/or modify collection strategies, through a user-friendly platform. Collection strategies and efforts continued to include emphasis on risk-based calling and first call resolution. In authorisations, new applicant scorecards were updated to provide improved separation in evaluating high and low-risk applicants and to increase activation rates with preferred customers to encourage higher sales.
In addition to in-house credit sales, the US stores accept major credit cards. Third party credit sales are treated as cash sales and accounted for approximately 39% (2005/06: 38%) of total US sales during the year.
| 2006/07 | 2005/06 | 2004/05 | |
|---|---|---|---|
| Credit sales ($m) | 1,372.1 | 1,191.2 | 1,055.2 |
| Credit sales as % of total sales | 51.7% | 51.6% | 51.2% |
| Number of active credit accounts at year end | 896,289 | 883,873 | 838,916 |
| Average outstanding account balance ($) | 957 | 841 | 792 |
| Average monthly collection rates | 14.6% | 14.5% | 14.8% |
| Bad debt as % of total sales | 2.8% | 3.0% | 2.8% |
| Bad debt as % of credit sales | 5.3% | 5.8% | 5.5% |
UK
Whilst the division does not have an in-house credit operation, it does accept major credit cards. Credit card sales are treated as cash transactions and accounted for approximately 28% of sales during 2006/07 (2005/06: 30%). During the period approximately 2% (2005/06: 2%) of sales in the UK were made pursuant to interest-free programmes, which are available for purchases above a particular price. The receivables for the interest-free programmes are sold at a discount on a limited recourse basis and administered by an unaffiliated company.