For cash-strapped consumers, the amount of money they spend during the holiday season this year is important — as is where they spend it. The gloomy economy and massive cutbacks in shoppers’ spending habits — during the third quarter, consumer spending dropped at its fastest rate in 28 years, according to Commerce Department estimates — have wreaked havoc on retailers. One day a store’s open for business, the next it’s gone.
The latest victim: KB Toys, which (for the second time) filed for Chapter 11 bankruptcy protection Thursday and is planning to close all of its stores. The toy store chain is just the latest in a a string of major retailers to call it quits. Over the past year, Circuit City, Tweeter, Linens ‘N Things, Sharper Image and CompUSA, among many others, have either filed for bankruptcy protection or are in the midst of liquidating stores. And, in October alone, struggling retailers shed 38,000 jobs, according to the Labor Department.
To help offset sluggish sales, retailers are slashing prices and rolling out early holiday sales. Stores on the verge of bankruptcy are offering shoppers even steeper discounts. While these going-out-of-business sales are great opportunities for bargain hunters, those sweet deals have the potential to turn sour if shoppers don’t know exactly what they’re buying. “If [the store] goes out of business, you may need to have an ongoing relationship with it for certain things like gift cards and warranties.” says Tony Giorgianni, associate editor at Consumer Reports.
Here’s a guide to navigating the closeout sales and protecting your purchases.
Shop early
“Everything must go!” “Going out of business!” “Store closing!” Savvy shoppers salivate over signs like these. However, as those discounts get deeper, the merchandise selection gets shallower. Not only will the selection be limited, but remaining items will most likely of lesser quality.
Floor sample sales are final
The best deals are often on floor samples. Sure, it comes in an open box, but that bargain-basement price is worth it, right? Not necessarily. Keep in mind that, should that brand new flat-screen TV go on the fritz or the Blu-ray player fails to fast forward, you’re stuck with it. “They’ll have signs all over the place – ‘All sales final.’ I’d be cautious about buying a floor item,” says Edgar Dworsky, founder of consumer advocacy site ConsumerWorld.org.
Research return policies
If you’re eyeing the latest Canon digital camera at Circuit City, ask the salesperson about the company’s return policy before handing over your credit card (also check the retailer’s web site). If something goes wrong, you may not be able to bring it back, says Dworsky. On the other hand, some struggling retailers offer a window of time when returns will be accepted. The web site for department-store chain Mervyn’s, which filed for bankruptcy protection in July, says it will accept returns until Nov. 14 as long as the customer has a receipt dated Oct. 29 or earlier.
Don’t worry about warranties
Obviously, if you’re thinking of buying a pricey plasma TV from Circuit City, make sure it comes with a manufacturer’s warranty. As for extended warranties, the chain’s precarious financial situation shouldn’t be cause for worry. These warranties are usually provided by outside companies. Circuit City says its warranty plans are “provided by unrelated third-party companies and, as a result, are not impacted by the company’s Chapter 11 filing.” See our story on warranties.
Use a credit card
Making a purchase with a credit card will give you extra purchase protection. You can “dispute a charge if goods are defective, or if there’s some reason [the product is] not received,” Dworsky says. Some credit-card issuers offer their own extended warranties, as well. Also see our story on credit-card protections.
Avoid gift card pitfalls
Consumers spent $26.3 billion on gift cards last holiday season, according to the National Retail Federation. It’s no wonder why they’re so popular: They’re convenient and don’t require wrapping paper. But when a troubled economy is causing companies to go belly up, they also become risky.
In the bankruptcy court’s eyes, gift card holders are considered “unsecured creditors.” That means you’re near the back of the line when it comes to getting paid. “Realistically, you will not get your value out of that card because you’re a creditor,” says Brian Riley, research director in the bank cards practice at Tower Group, an advisory firm. If you have a gift card at an ailing retailer, make sure to use it as soon as possible, says Giorgianni. The longer cards go unused, the more vulnerable they are to a retailer going bust.
Buy bank-issued cards instead
Stumped on gift ideas for Aunt Estelle? Then get her an “open loop” or bank-issued gift card, instead. These cards, which carry the MasterCard (MC), Visa (V: 53.43*, +1.34, +2.57%) or American Express (AXP: 20.11*, -0.02, -0.09%) brand, are accepted wherever those credit cards are, so consumers aren’t confined to one retailer. One caveat: They usually have expiration dates and come with fees. A gift card from AmEx, for example, tacks on a fee of $3.95. And if the recipient doesn’t use it within the first 12 months of the purchase date, the card’s value decreases by $2 each month. Lose the card and it’ll cost you $5.95 to replace.