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RENTING TO RENTERS

Open-air centers find rental chains eager to grow

BY MAURA K. AMMENHEUSER

Six members of Lucretia Villa’s family have died in the past three years, placing her in economic straits as she struggles to pay for funerals and make up for lost household income. Her credit and finances are in bad shape, but the Lake Elsinore, Calif., resident is still able to afford a few modern conveniences at home, including a fax machine and a computer. Villa is even considering buying a new television set.

But she’s not acquiring these items in the conventional way. Rather, like others whose needs or wants are bigger than their wallets, Villa is a rent-to-own customer. And she found her equipment at Rent-A-Center.

“Any other place, they say no,” she said. “Here I know I pay a little more, but at least I have the stuff. For my situation, it’s good.”

Rent-A-Center is the biggest player in the $6 billion U.S. rent-to-own business. Last year the Plano, Texas-based chain’s revenues hit $2.2 billion, says Kent Brown, vice president of development, up 10.9 percent from 2002, while same-store sales rose 3 percent. Chainwide, sales per square foot averaged about $190.

“Rent-A-Center is our McDonald’s,” said Richard May, public affairs director at the Austin, Texas-based Association of Progressive Rental Organizations, or APRO, meaning the chain is the biggest and most influential in the sector. APRO represents about 300 rent-to-own companies.

Rent-A-Center operates 2,863 stores in the United States, Canada and Puerto Rico. The company also licenses 311 franchises, 299 of these through its Color Tyme subsidiary, and 12 under the Rent-A-Center name.

The market’s second-largest operator in revenue terms is Atlanta-based Aaron Rents, which anticipates about $950 million in revenue for 2004 ($1.2 billion including franchises), up from $766.8 million ($1 billion including franchises) in 2003.

Aaron plans to have about 1,000 stores operating in 43 states, Puerto Rico and Canada, after 200 new stores are added this year, says CFO Gil Danielson.

The other major figure is Erie, Pa.-based Rentway, which runs 1,117 stores in 41 states and expects to post about $40 million in revenue in 2003, according to financial reports. Smaller, independent operators carve up the remaining half of the market, says May.

These businesses lease furniture, appliances, home electronics and sometimes computers.

According to APRO research, a U.S. rent-to-own customer is likely to be leasing about 2.5 items simultaneously (not including cars), at a total monthly payment of about $67.61.

Movin’ on down
While the shopping center industry spends considerable energy catering to the wealthier end of the economic spectrum, rent-to-own companies focus on those with more-limited means — people with annual household income ranging from $15,000 to $50,000, according to APRO. The association says 45 million American households fall in that bracket, but the U.S. rent-to-own industry’s 8,300 stores are so far only serving 2.9 million of them. Seeing this as a major opportunity, Rent-A-Center says it aims to have 4,000 stores up by 2010.

“We will continue to open 80 to 100 stores per year and pursue acquisitions where it makes sense,” said Brown. The stores average about 4,400 square feet and draw between 400 and 600 customers weekly, he says.

Acquisitions account for a healthy share of the company’s recent growth. Just this spring Rent-A-Center acquired two chains: Rainbow Rentals (with 124 stores in 15 states) and Rent Rite (90 stores in 11 states). The company also went international, by buying five stores in the cities of Calgary and Edmonton, in the western Canadian province of Alberta, early this year.

Rent-A-Center is a staple of the neighborhood strip centers it favors for their visibility and steady traffic. And the feeling is mutual.

“We’ve been doing business with them a long time, and they have a solid place in the merchandise mix,” said Johnny Hendrix, senior vice president and director of leasing at Houston-based Weingarten Realty Investors, which has 25 Rent-A-Center stores in its portfolio.

“They generate traffic,” said Brad Quine, president of Quine & Associates, Richardson, Texas, which manages at least 10 centers with Rent-A-Center units in them. “They’re a clean use. There are no hazardous materials you’ve got to worry about. They don’t eat up lots of parking.”

In addition, Rent-A-Center advertises heavily. According to Brown, the company spends some $65 million annually for ads.

Despite Rent-A-Center’s reliance on mid-to-low-income consumers, business is steady, not cyclical, observers say. After all, people always need to frequent the supermarkets in the strip centers that Rent-A-Center occupies, even during economic downturns, says Gregory H. Clough, director of national accounts at Boston-based Heritage Property Investment Trust. Heritage contains about 20 Rent-A-Center stores in the centers it manages.

Less is much, much more
The lease-to-own business seems to be gaining popularity despite the significantly higher prices consumers pay over the long term by buying this way rather than by conventional means. Lake Elsinore’s Rent-A-Center charges $486 to buy a new, full-size Whirlpool washing machine, for example. Long-term leasing, up to 91 weeks at $12.99 per week, tacks $696 onto that, so a customer going that route winds up paying $1,182, more than twice the cost of buying the item outright. (In-store signage details all this.) Meanwhile, Whirlpool’s Web site offers the same machine at a suggested retail price of $299.

Rent-to-own proponents point out that lower-income families, or people in a temporary bind, such as Villa, can’t always afford to make a large, one-time payment for big-ticket items. In fact, Aaron and other companies initially rented by the week, says Danielson, because many consumers couldn’t manage even a monthly installment.

So these companies offer a welcome financing vehicle, says Hendrix.

If a moderate-income person feels inclined to change their furniture every year, says Quine, these companies help them do that as easily as if they were leasing a different car every three years. Further, he adds, it is a service to people who live in small towns where the local Wal-Mart, say, doesn’t carry recliners or refrigerators.

Rent-to-own chains generally enjoy better status with the public now than in the past.

“Yes, they had a bad rap, absolutely, for a number of years,” said Arvind Bhatia, an equity analyst who studies the rent-to-own chains for Southwest Securities. “It started to change in the mid-1990s.”

Consumer complaints of overcharging prompted state regulation, Bhatia says, adding that most states now have consumer-protection laws that benefit retailers, too. “It’s a safe haven for these guys to do business,” he said. Many rent-to-own companies have gone public, hired better managers and generally gained some polish. That burnished their image with shoppers and pleased shopping center managers, who want large stores with a clean look, May added.

A 2001 Federal Trade Commission survey found that 70 percent of rent-to-own customers ultimately buy the items they lease, and though some are dissatisfied with the prices, most feel they are treated fairly.

Industry observers cited no major problems for Rent-A-Center specifically or for the rent-to-own business at large. Bhatia says the industry is growing at a healthy 5 percent or so annually.

Rent-A-Center is certainly humming along nicely enough, sources say. Regardless of the economy or the amount of extra cash in consumers’ pockets, this retailer is expected to supply a growing share of America’s refrigerators and big-screen TVs.

“I like how you test the product,” said Villa, meaning that she can return an item to the store if she finds she is dissatisfied with it. “It’s a pretty good deal.”