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RENT-TO-OWN STORES POLISHING THEIR IMAGE

By Mark Seavy

Aaron Rents has set the industry standard by moving to 8,000-square-foot locations, some in high-profile community centers.

After years of toiling in strips and community shopping centers bordering on the lower-income neighborhoods they catered to, rent-to-own (RTO) dealers are seeking to upgrade their image.

While the typical customer still has an annual income of $15,000 to $50,000, RTO chains are moving to higher-profile locations with larger stores that can draw from a radius wider than the three-mile area that has been an industry standard for years. And while the business operation remains the same, with customers making monthly or weekly payments over periods of 18 or 24 months with a goal of eventually owning the product, RTO dealers, which typically sell consumer electronics, furniture and appliances, are also seeking to upgrade their merchandise.

“When I started five years ago, we could take a store in a neighborhood strip center that was built in the 1950s, and we didn’t even have to be on Main Street,” said James Day, an Aaron Rents franchisee who operates 20 stores stretching from Brownsville, Texas, to Denver. “As long as it was in the right neighborhood we knew that with our deals we would be able to draw enough customers to make a profit. But Aaron’s won’t let you do that anymore.”

Indeed, Atlanta-based Aaron Rents, which has more than 400 company-owned and franchised stores, has set an industry standard by moving to 8,000-square-foot locations, some in high-profile community centers where co-tenants could include restaurant chains like Long John Silver’s and discounters McFrugal’s and Target.

In moving to the larger space, many RTO dealers have expanded a merchandise mix that includes consumer electronics and appliances as well as jewelry and furniture. The region from which the RTO dealers draw customers has grown from three miles in more urban and suburban markets to upward of 20 miles in rural areas with populations under 100,000, industry officials said.

“We have changed our floor plan to add more product, especially in furniture. The theory is that if you can display more, you can sell more,” said Kent Brown, vice president of real estate at the 2,158-store Rent-A-Center chain. The Plano, Texas-based company also has another 364 locations under the ColorTyme banner and has begun to expand its stores to 4,000 square feet from 2,500 to 3,000.

Renting more product has never been a problem for the $5 billion RTO industry, which leased 7.3 million products to 3.3 million households in the United States in 1999, the most recent year for which statistics were available, according to the Austin, Texas-based Association for Progressive Rental Organizations (APRO). What has been a hindrance has been a series of lawsuits filed by attorneys general across the country seeking to curb heavy-handed collection tactics and exorbitant prices where some customers paid more than double the retail cost for products. But many of those suits were resolved as states placed limits on the rental payments that can be charged and generally required fuller disclosure of all the costs involved in a standard contract.

“They’ve had some issues there, but from our perspective, we’ve always found them to be good tenants,” said Drew Alexander, CEO at Houston-based Weingarten Realty Investors, which owns 197 shopping centers in parts of 14 states and whose tenants include major RTO chains like Aaron Rents, Rent-A-Center and Rent-Way. “Most of our centers are grocery-anchored, and they [rental chains] benefit from the traffic drawn by that, but they also are a destination trip, so they don’t necessarily have to be in a center that attracts a lot of traffic.”

From an RTO industry perspective, settling the lawsuits and agreeing to more regulation were key if the business were to expand beyond the one- and two-store chains that were its roots. Currently the top six rental chains in the United States account for nearly 50% of the market, with Rent-A-Center alone representing 25% of the estimated 8,000 RTO stores. Most of the larger chains are now publicly traded, bringing another layer of scrutiny to an industry that has already been the subject of state investigation regarding consumer fraud allegations.

“By clearing up the lawsuits it made them more attractive to investors, who then gave these companies money to secure these leases,” said Richard May, an APRO spokesman. “I don’t think the landlords cared as much as long as the rent was paid every month.”

Yet at the same time, growth among some of the larger chains has slowed. Rent-Way, Erie, Pa., which operates more than 1,000 stores, suffered an accounting scandal last fall that forced it to restate earnings and close or merge 20-30 outlets. Canfield, Ohio-based Rainbow Rentals, which previously purchased smaller regional chains, has eased expansion as it seeks to integrate acquired stores. But Rent-A-Center, which placed growth plans on hold for nearly a year in 1999 after acquisitions increased it to nearly 2,000 stores from several hundred, has moved forward with plans for upward of 50 new outlets this year. “The growth has slowed, but there probably is a little more room for consolidation,” May said.

What the RTO chains have been seeking within a leased space has also changed with the move by some to better locations. In addition to getting more space, some RTO dealers have sought to have new locations built to suit their needs. For example, some Aaron Rents franchisees have paid property owners $70,000 to $100,000 to “finish out” a location to make it conform with the chain’s format, Day said. In Aaron Rents’ case, that means adding carpeting to replace tile floors and installing a “race track” that allows customers to walk around the entire store, he said. In return for property owners installing the store format, Day said he has agreed to 10-year leases. Without the installation work, Day said he generally seeks five-year agreements.

On the other hand, Rent-A-Center generally does the store design work itself and seeks three- to five-year leases as a hedge against the area surrounding the store changing, Brown said.

“Leases protect you in case the area around starts growing in a different direction and that can happen these days over the course of a five-year lease,” said Day, who noted that he was forced to sublease a Denver location after the neighborhood shifted from the lower-to-middle income customer who frequented his store to one that was buying lofts in restored brick buildings for $300,000 to $500,000.

The property owners themselves also tend to “shy away” from making “specialized” improvements at a given location with the knowledge that they may have to rent the same space to a new customer in the future, industry officials said. “We tend to stick with more of a plain box or less,” Alexander said.

In addition to the store size, RTO dealers also tend to seek locations with easy access for customers, given that most are making weekly or monthly stops at the store to make payments, said Wayland Russell, CEO at 112-store Rainbow Rentals. Since the individual stores don’t need large parking areas, they tend to fit better into a strip center environment, he said.

While Weingarten and New Plan Excel Realty Trust are among the higher profile property owners that have specialized in leasing space to the big chains like Rent-A-Center, others are giving the industry a second look depending on the market they are in, industry officials said.

“I think the middle-income demographic areas are where you are going to have success with chains like Rent-A-Center,” said Thomas McDonough, a senior vice president at Jackson, Fla.-based strip center owner Regency Realty. “If you get reputable operators, I think there is demand for the type of product they offer in a lot of areas. If you get somebody who is not going to take advantage of people, I think there is a good business model there, and somebody can make a good return.”

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