Hills ends holdout; now accepts plastic - Hills Department Stores Inc., a discount retailer, begins accepting credit cards

Discount Store News, Nov 27, 1989 by Laura Liebeck

Hills Ends Holdout; Now Accepts Plastic

CANTON, Mass. - Hills Department Stores has reversed a 31-year cash-and-carry-only tradition by finally allowing customers to make credit card purchases.

The 208-unit discounter began accepting MasterCard and VISA credit cards chainwide in mid-November in the hopes of increasing sales and attracting new customers, said Wes McDonough, vice president of advertising and marketing.

Hills' executives have been watching profits plunge while expending millions on store expansion, mostly due to the costs associated with opening and stocking the 33 Gold Circle stores it purchased last year. Hills also opened eight additional stores in 1989 for a total of 41 new units, by far a company record.

Through the 26 weeks ended July 29, 1989 - the most recent figures available - Hills' loss plummeted another 71 percent over the same period in 1988. The loss totaled $25.2 million, compared with $11.0 million in 1988. At the same time, Hills' cost of sales rose 27.5 percent to $598.1 million from $468.9 million.

Operating profit, resulting mostly from preopening costs, declined by 81 percent during this period. Sales jumped 26.7 percent to $828.9 million in the same six-month period, up from $654.0 million the year before.

Next year, Hills plans to slow its store growth and concentrate on building profits. The chain hopes to open between eight and 10 stores, said McDonough. Among the planned openings are stores in Flint, Saginaw, and Kalamazoo, Mich., and Massena and Syracuse, N.Y.

Hills began testing MasterCard and VISA credit cards in early October in 13 stores. By the end of the first week of the four-week test, company executives were convinced that its long-held no-credit policy was history.

Adding credit card services "was a bitter pill to swallow" after so long without it, admitted McDonough. Hills conducted focus group research to be sure that its customers would not think the new credit card service would cause the chain to increase prices on merchandise in the store.

The change has not affected Hills' everyday low pricing policy. Ticket prices will remain constant, McDonough said.

Hills is apparently the last full-line discount store operator to offer credit card services but is not the only chain to recently offer its customers more ways to pay for goods.

This fall, Target began accepting American Express charge transactions, and K mart and Wal-Mart are reportedly contemplating the addition of American Express card services (DSN, Oct. 30).

McDonough said Hills will constantly review the MasterCard and VISA program, and "naturally look at others," such as the Discover card.

Prior to accepting the two major credit cards, Hills refused to accept any credit card purchases because of the cost of handling the transactions. "With today's technology, the cost of handling credit cards has dropped to a point where we can now offer it in our stores without altering our pricing," Jack Brouillard, senior vp, finance and administration, said. "Technology has also been able to make the credit approval process extremely fast, thus reducing potential register delays."

Sales rose at the test stores as a result of the credit services, McDonough said, although he declined to cite specifics.

Hills first looked at adding the two most popular credit cards in the country in July in response to increased customer requests for purchasing with credit. Its second quarter and six-month financial results may also have played a deciding factor.

But before adding the cards, Hills executives wanted to be certain that the requests for credit card services were not just the requests from a vocal few but really the preference of many.

Three focus groups were conducted last summer to examine the viability of the requests, producing convincing evidence of the need to test the program. Focus group participants said they would appreciate the ability to use credit cards, that they would purchase more product and still would continue to use Hills' liberal layaway program. Hills attributes 15 percent of its sales to layaway.

After the focus groups, Hills selected 13 stores from various areas of the country to test the program. Among the test cities were Rochester and Syracuse, N.Y. and Lexington, Ky.

The focus groups and the test program found that credit cards are found at all levels of society including Hills' core customer, traditional cash users, and that as Hills entered more metropolitan markets the demand for credit card usage rose, McDonough said.

"We were surprised how easy it was for customers to use credit cards," he said.

In the test markets, Hills' TV ads featured Brouillard delivering a straight-forward explanation for the addition of credit cards, said McDonough. Hills often uses company employees in its advertising instead of actors.

In an unrelated Hills development, the discounter announced six store openings, the last for 1989: Teas Valley and New Martinsville, W.Va.; two in Flint and one in Saginaw, Mich. - new markets - and one in Lancaster, Pa.