How to Destroy your Retail Franchise in Two Easy Steps

The crisis of the summer of 2008 has worked its way into Main Street, and the consumer is feeling the pinch in numerous ways: through shrinking 401ks, losses on investments in stocks and real estate, and job losses. For some it is a double, nay, a triple whammy.

How does the sector of the economy that is closest to the consumer, (namely the Retail Industry,) respond to the sudden reversal of fortunes? Well, some of them seem hell-bent on committing suicide, regardless of the nature of the challenges they face. How is that?

Let’s look at one example. Ann Taylor is a well-established, well-entrenched fashion retailer catering to upscale, professional women aged 30 – 54. For years they have cultivated a database of high-end customers to whom generous credit terms are offered through their credit card policies. For years it was the easiest thing to make a purchase, and open a credit card for immediate approval.



This autumn, the gig was up. The account of every late paying customer is turned over to a collection agency that will pursue aggressive collection tactics with even the best of customers. I learned by coincidence of one of those customers, a middle-aged woman with an excellent credit history and an annual income of well over $100,000 a year. She had a $450 balance on her credit card with Ann Taylor and $65 was due as of November 30, 2008.

Payment five days overdue.

The woman gets a phone call. It is Saturday morning 8:30. “This is World Financial Services – a collection agency for Ann Taylor speaking.” The debt collector tries to have the customer make a payment over the phone. The customer declines stating privacy issues. Her established credit line was $900, a limit she had never even reached. The woman has an impeccable payment history on any debt she has ever owed. A quick verification of the address reveals that the street address is right but the apartment number is missing from the debt collector’s record. So this gets fixed on the spot. “If you don’t want to make a payment over the phone, please go to your nearest Ann Taylor store and make a payment immediately.” More then a bit annoyed, the customer hangs up, thinks this over and decides on the following course of action:

The credit card debt was primarily for a dress she had bought two months ago and while the purchase was OK she really was not all that pleased with the colors, and she had never found occasion to wear the garment.
She thought about it for a while, and came up with an idea: Why not return the garment for a refund, thereby paying off the debt on the credit card?
Taking it a step further, why put up with lousy retailers who one day fall all over you to please open a credit line, and the next day they treat you like dirt? Exactly right.

The woman went to the nearest Ann Taylor store to return the garment and was told that she would receive store credit because the garment was purchased more than 90 days ago. She indicated that she wanted her account balance reduced by the price of the garment and the store refused. The woman asked, “Is this how you treat your customers? By sending a good account to a collection agency who CALLS AT 8:30 AM ON A SATURDAY MORNING, and then refusing to accept a returned garment?” The store manager finally agreed and asked for the customer’s credit card. Which she had inadvertently left at home. (Mind you she had purchased the garment without her credit card – the store had looked up her account online to make the sale.) She was told that without a credit card, the garment could not be returned. The woman left the store, garment in hand, picked up the credit card from home, returned to the store, and again asked that the garment be returned for credit to her account. The manager agreed. After the transaction was completed, she asked for her balance so that she could pay it off. The manager was unable to access this information. She then asked for a scissors, please! In front of the store manager, with a slew of customers watching, she cut up her credit card, placed the pieces in front of the store manager and told here that she did not need Ann Taylor’s favors any longer and that it would be a long time coming before the trust would ever be restored.

A story with a similar undercurrent but slightly different scenario plays itself out across the street from Ann Taylor with a company called Lord & Taylor, another well-established retail franchise. They too are known for falling all over their customers to please, please open a credit line with them directly as opposed to paying cash or with someone else’s credit card. Chances are that they have hundreds of thousands, nay, millions of customers in their database who ended up there through the established policy of easy credit.


What the customer does not know is that these credit lines are financed with other people’s cash. In this case, GE Capital has been providing the cash in support of the credit line policy. Apparently in a total state of panic, GE Capital simply took Lord & Taylor’s customer database, and told all of them in a letter that their credit lines had been reduced (in many cases to $100), if not entirely canceled. Even customers with zero balances got the letter. And that is six weeks before Christmas 2008! Commercial suicide anyone?

You can imagine what this does to the mystique of the customer relationship. What took twenty, thirty years to build got destroyed on one fell swoop with a simple form letter:

“Dear Customer, due to recently deteriorating events in your credit history, your account with Lord & Taylor is now limited to $100. We have no details on your credit history but please contact one of three credit rating agencies. Sincerely, GE Capital.


WOW. Jos. A. Bank, Men’s Wearhouse, Burlington Coat Factory, Frugal Fannie, pay attention! If you notice an increase in retail traffic, understand where it comes from! This must be paradise for YOU!

I am sure you get the picture. These are merely two examples of how retailers’ decisions during tough times can make or break the franchise they have tried to build up for so many years. When times get tough, acknowledge the conditions. Tell your customers that you are aware of what is going on. If you need to cut back on credit policies, come out early, apologize for the change in direction, give the reasons why, and offer some advantage in return. That makes your customers feel good. They will understand.

But don’t be rude and don’t be heavy-handed. My sense is that GE Capital will pay dearly for the aggressive style they cultivated during the Fall of 2008. Hopefully a lesson learned!


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