Store credit cards- they seem like a wonderful idea. Unique perks, special discounts and free shipping; these cards have everything a big-box retailer needs to entice middle-income shoppers, incentivizing them to indulge their spending temptations.
However, store-branded credit may just be a lucrative veil that sheaths retailers' declining numbers.
The steep drop in Macy's stock on Thursday by 3.04% is testament to the notion that resorting to the use of store credit with suspiciously high interest rates is, in fact, a desperate measure employed in order to bolster diminishing profits. Think of it as a micro-level manifestation of the 2008 financial crisis: subprime lending that is built upon the hope that doling out credit will simultaneously increase cash flow and investor confidence by making it appear as though there is little risk involved.
"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.
This card income stream is the result of thousands of consumers hoping to improve their credit score and establish a credit history whilst saving hundreds of dollars when shopping. The problem is the high interest rates that often accompany such cards, which are normally twice that of a normal credit card: these can reach up to 30%. Thus, store credit seems to function upon the assumption that many consumers are indeed going to incur some sort of debt in the process of making retailers money on steep interest charges.
Plastic profits only last so long- they are fleeting. While branded credit cards accounted for 39% of Macy's profit stream last year (an increase of 26% from 2013), they are being used as more than just a sales instrument. They are obscuring the true extent of the traditional retail industry's struggles in light of e-commerce rivals such as Amazon, whose sales far exceeds Macy's. Macy's attributed this decline in industry to "changing customer behavior" and underperforming locations, but this does not change the fact that the corporation had to let go of thousands of workers in January in addition to declaring disappointing holiday sales.
It is not only Macy's that finds itself in this debt trap- Kohl's, Target and a multitude of large retailers that are struggling to compete with digital brands and failing to evolve with consumers are desperately falling back on store credit cards. 35% of Kohl's profits stemmed from store credit. On the other hand, Amazon procured only 3% of its profits from plastic.
Retailers are soon realizing how much of a short-term solution store credit is. Eventually, lower-income consumers will not be able to pay back their debts due to the immensely high interest rates, causing not only a drastic fall in profits, but also deterring those existing consumers from further shopping in that location for some time. Hence, Christian Buss, a retail analyst at Credit Suisse, said credit card profits were a "temporary subsidy" that the industry could not count on over the long term.
With investors losing faith in traditional retail and their stocks plummeting further, corporations like Macy's need to focus on creativity and innovation in their sales tactics rather than trying to impose quick-fix solutions such as store credit upon their deep-rooted problems.