INSTALLMENT CREDIT AND THE LOW-INCOME MARKET RETAILER 5 Of the 18 low-income market retailers, 14 could be described as furniture stores; 2 as appliance stores; and 2 as miscellaneous merchandise stores. These distinctions did not appear particularly important for purposes of analysis, however, and the low-income market retailers were treated as a combined group. VARIATIONS IN INSTALLMENT CREDIT SALES A striking characteristic of low-income market retailers is the high proportion of their total sales accounted for by installment contract transactions. Table 1-2 indicates that installment credit transactions accounted for 92.7 percent of the total sales of the 18 low-income market retailers. In contrast, installment credit accounted for only 26.5 percent of total sales of general market retailers. Most of the lowincome market retailers made more than 90 percent of their sales through credit; none of the general market retailers had such a high proportion of installment credit sales. Many of the general market retailers in fact had the bulk of their sales accounted for by cash. transactions or by noninstallment credit. TABLE I-2.-Value of installment contracts as a percent of sales, District of Columbia retailers, 1966 While extent of installment credit sales is the primary factor distinguishing low-income market retailers, there are also significant differences in the general business methods employed by this group. Prices and gross margins tend to be substantially higher for low-income market retailers. Bad-debt expenses are also considerably higher. Extensive use of credit together with higher prices and gross margins form a distinctive pattern for low-income market reailers. However, before discussing the findings concerning these differences, it is useful to place low-income market retailers in proper perspective with respect to the total market for appliances and home furnishings in the District of Columbia. 6 INSTALLMENT CREDIT AND RETAIL SALES PRACTICES A PERSPECTIVE ON THE IMPORTANCE OF LOW-INCOME MARKET RETAILERS The 18 low-income market retailers had net sales for 1966 of $7.9 million (table I-2). This amounts to only 5.2 percent of sales of all retailers surveyed. Nevertheless, it is a substantial amount when compared to total expenditures by low-income consumers on furniture and appliances. Low-income consumers within the District of Columbia accounted for only a fraction of total expenditures on furniture and appliances. The low-income market for such goods is considerably smaller than the total consumer market. No statistics are available on total expenditures for furniture and appliances by low-income consumers, but it is possible to make reasonable estimates. We estimate that District of Columbia households with an annual income under $5,000 in 1966 had total income of about $260 million.3 Additionally, we estimate that in 1966 these households spent about $18 million on furniture and appliances.* • Sales Management magazine, June 10, 1967, "Survey of Buying Power," page D 47, published estimates of the percent distribution of disposable household income in the District of Columbia for 1966. About one-third (32.2 percent) of District of Columbia households had after-tax incomes of less than $5,000 in 1966. For purposes of analysis, this bottom third of the income distribution will be considered the low-income group. In chapter IV of this report, the family incomes of a low-income market retailer's customers are tabulated. Three-fourths (76.1 percent) of the sample of customers had before-tax incomes of $6,000 per year or less. This would roughly correspond to after-tax incomes of $5,000 or less. It seems plausible that most of the customers of other low-income market retailers would also have family incomes of less than $5,000 after taxes. We can estimate the total income of such customers for 1966. The total number of households in the District of Columbia was estimated to be 270,500 in 1966. Sales Management data indicate 16.6 percent of these, or 44,900 households, had incomes of less than $3,000 per year. There were 15.6 percent, or 42,200 households, with incomes from $3,000 to $5,000 per year. If we assume that the mean income of households in the under $3,000 category was $2,000, and that the mean income of families in the next category was $4,000, then the total income of families with incomes below $5,000 would be $259 million. The Bureau of Labor Statistics conducted a study (Consumer Expenditures and Income, Washington, D.C., 1960-61, Bureau of Labor Statistics, Report No. 237-53, February 1964) in 1960-61 of family expenditure patterns in the District of Columbia. We will assume that low-income families spent the same percentage of their income on furniture and appliances as did other families. (Actually the BLS study suggests that low-income families spent a lower percentage of their income on furniture and appliances, but the sample was too small to provide conclusive evidence on this point.) Household furnishings and equipment accounted on the average for 4.9 percent of aftertax expenditures. Purchases of television sets, radios, etc., were included in the "recreation" category, which accounted for 4.2 percent of expenditures. We will assume that half the expenditures in this category may have gone for such appliances. This would give a total of 4.9+2.1 or 7 percent of income spent on furniture and appliances. Multiplying this percentage by estimated total income will give an estimate of the low-income market for furniture and appliances: 7 percent X $258.6 million = $18.1 million INSTALLMENT CREDIT AND THE LOW-INCOME MARKET RETAILER 7 Low-income market retailers surveyed had total sales in 1966 of $7.9 million, about 44 percent of our estimated total expenditures by lowincome households for furniture and appliances. This suggests that the low-income market retailers surveyed are definitely an important factor in the low-income marketplace, even though they did not account for a major portion of total retail sales of furniture and appliances in the District. GENERAL MARKET RETAILERS Forty-seven of the stores surveyed were classified as general market retailers, appealing either to a broad consumer market or primarily to middle and high-income groups. General market retailers were further classified into the following subcategories: furniture stores, appliance stores, and department stores. This was necessary for comparative and analytical purposes because, unlike the relatively homogeneous low-income market retailers, there were some differences in pricing and credit policies of the various types of general market retailers. Appliance, Radio, and Television. There are two types of merchandise that are customarily sold and serviced by appliance, radio, and television retailers-brown goods and white goods. Television sets, radios, and stereo-phonographs are electronic home entertainment merchandise, collectively referred to among retailers as "brown goods." Washing machines, dryers, refrigerators, and freezers are collectively called "white goods." Sewing machines and vacuum cleaners are other household appliances customarily sold by brown and white goods retailers. The general market classification of appliance, radio, and television retailers included 22 companies operating stores primarily selling these types of merchandise. These retailers sometimes sell furniture and floor coverings, but only as secondary merchandise lines. Discount stores and full-service retailers are included in this retailer classification. Furniture and Home Furnishings. Those retailers that specialize in the selling of furniture and home furnishings to a broad consumer market—a total of 22-have been grouped together for analysis. Retailers selling furniture primarily to low-income consumers are included in the low-income market retailer classification. Among furniture and home furnishings retailers are those that carry a wide line 5 While most of the sales of low-income market retailers were accounted for by furniture and appliances, other lines of merchandise were sold. The actual proportion of furniture and appliance sales is not known, but examination of survey returns indicates it is about 80 percent of total sales for low-income market retailers. On this basis, such retailers would account for about 35 percent of sales of furniture and appliances to low-income customers. 8 INSTALLMENT CREDIT AND RETAIL SALES PRACTICES of furniture, as well as a secondary line of appliances, and those that specialize in particular home furnishings items, such as rugs and carpeting. Department Stores. The category of department stores, of which three included in this study sold goods on installment credit, includes large stores selling apparel in several merchandise departments, but also having departments engaged in selling furniture, home furnishings, appliances, radios, and television sets. Such stores are an important outlet for furniture and appliances. To qualify as a department store, a retail establishment must employ 25 people or more. Some smaller stores, classified in this study as low-income market retailers, also carry apparel and soft lines of home furnishings, as well as appliances and furniture. LIMITATIONS OF THE SURVEY This survey was limited to stores actually located within the District of Columbia. The District itself is part of a larger metropolitan area encompassing suburbs in Maryland and Virginia. In 1960 the population of the entire metropolitan area was 2 million, while the population of the District alone was 764,000. In terms of total retail sales, the 1963 Census of Business indicated that the District accounted for about 42 percent of metropolitan area retail sales. The proportion probably is somewhat lower for furniture and appliance sales alone. At first glance, it might seem that the survey is limited because data on suburban area retailing are not included. This is not likely to be a serious problem, however, when comparing practices of retailers selling primarily to low-income consumers with those selling to a more general market. Census data indicate that most of the low-income consumers live within the District itself rather than in the suburbs. Median 1959 family incomes for components of the Washington Standard Metropolitan Statistical Area are shown below: Area Washington, D.C. 6 All of the suburban areas have a significantly higher median income than the District itself. While it would be useful to have data on suburban stores selling primarily to higher income consumers, it is doubtful that such data would alter the basic findings of the survey. One reason is that many of the large volume suburban stores are branches of retailers located in the District and probably follow similar policies. Also, inclusion of suburban discount retailers of furniture and appli Source: 1960 Census of Population, Series PHC(1), pt. 11, p. 15. INSTALLMENT CREDIT AND THE LOW-INCOME MARKET RETAILER 9 ances would tend to sharpen the contrasts in prices and margins found in this survey rather than to weaken them. This survey was restricted to retailers of furniture and appliances. A more extensive survey would probably indicate the existence of a low-income market for other goods and services also. There is ample reason, based on information received from consumers by the Federal Trade Commission, to believe that many of the practices found in this survey are also prevalent in the sale of clothing, variety goods, jewelry, and services such as reupholstering and auto repairs. It was not possible to cover all forms of retailing in a single survey, however, and the focus was placed on furniture and appliances because this is a large segment of retailing and is reasonably homogeneous in terms of product lines sold. The survey did not include any retailer with estimated 1966 sales of less than $100,000. Very small retailers were excluded for two reasons. First, such retailers do not usually keep detailed records and many would have probably found it impossible to complete the survey questionnaire. For example, many small retailers of furniture sell both new and used merchandise. In most cases such retailers could not meaningfully separate sales of the two types of furniture. Second, while there are a large number of small furniture and appliance stores, their total sales volume is not great. The 1963 Census of Business indicated a total of 264 establishments in SIC 571 (furniture and home furnishings), SIC 572 (household appliances), and SIC 573 (radio, TV, and music stores). Of these 264 establishments, 124 had three employees or less. This would be roughly equivalent to less than $100,000 per year in sales. While almost half the establishments fell in this small size category, their combined sales were only 7 percent of the total. In SIC 531 (department stores) the Census indicates no establishments with sales of less than $100,000 per year. Even restricting the survey to stores with over $100,000 in sales did not eliminate all sample problems. A substantial number of retailers had moved, gone out of business, or were unable to complete the survey questionnaire. Usually these were the smaller stores. The final group included 18 low-income market retailers and 47 general market retailers. We believe the 18 low-income market retailers surveyed provide an adequate sample to make meaningful generalizations about this type of retailer in the District of Columbia. Those retailers that conceivably could have been considered low-income market retailers but were not included in the final group represented a much smaller combined sales volume than the 18 that were included. Moreover, table I-1 clearly indicates that the bulk of total sales in the categories surveyed was included. |