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Last Year's Free Shipping Is This Year's Free Layaway

Stacey Widlitz |Retail Consultant and Independent Analyst
Monday, 10 Sep 2012 | 10:42 AM ET

There has been a lot of focus in the press recently about retailers moving to cheaper or free layaway. Is it a big deal? I say yes.

In my opinion, this year's free layaway is last year's free shipping. While it is not a significant part of sales, it is the headline that counts. After all, the average consumer is driven in by freebies.

Last year, retailers were trying to figure out a way to "one up" each other. And guess what? They all began to dangle the free-shipping carrot in front of consumers’ faces. In the end, it was a race to the bottom (the gross margin bottom that is). Some started in the third quarter and some followed in the fourth quarter. But the bottom line was: it was a hit to profitability.

Consumers are in a position of power. The incremental freebies tell us that. The problem is if all retailers follow each other, we are looking at a permanent structural shift in gross margins.

The good news is this year — unlike last — inventories at most retailers are in marathon shape. That means there are likely to be fewer markdowns due to leftover product. That situation may be bad for the consumer, but it's good for retailers' profit-and-loss statements.

Remember all those huge markdowns last year, after winter did not show up? Those bargains for shoppers resulted in gross-margin declines of more than 500 basis points at some retailers.

This year, cotton prices may be on the side of consumers, but tight inventories are not. Want that must-have apparel item? You better grab it.

Although it sounds like retailers are in the driver's seat this year, they are still exhibiting signs of skittishness. So the stop they are pulling out this year is layaway deals. (Read More: Businesses Retool Layaway Programs Ahead of Holidays)

Kmart has free layaway from now until Nov. 17. Previously, the retailer charged a fee of $5 for eight weeks. (Read More:Kmart Waives Layaway Fee, Joining Rivals)

Wal-Mart Stores brought back its layaway program last year, and it looks like it worked. This year,fees go to $5 from $15, and if you pay for the merchandise in full you get a $5 gift card. (Read More:Wal-Mart Brings Back Interest-Free Holiday Layaway)

Last year,Targettold us they felt the competitive pain from Wal-Mart's plan, but no word yet on what they are planning.

Toys 'R Us has free layaway until Oct. 31. After that, the fee goes to $5. But my guess is if the environment heats up like last year, all these layaway fees go the way of the wind. (Read More: Toys 'R Us Waives Fee for Layaway Program)

Reminds me a bit of last year's free shipping. If everyone races to the competitive bottom, it's another win for consumers.

-Guest Blog by Stacey Widlitz

Stacey Widlitz is the President of SW Retail Advisors Inc. She has worked at UBS, SG Cowen, Fulcrum Partners and in 2005 was one of three analysts to launch the Research Department at Pali Capital, where she covered Retail and Home Video for 5 years. Follow Stacey on Twitter @StaceyRetail.

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