How Aaron’s figured out its challenge: attracting wealthy investors to a business they’ve never heard of that serves credit-challenged customers
Rent-to-own stores aren’t something credit-worthy individuals routinely visit. But about half the population does rely on these types of businesses for essentials. Here’s the story of how one company reimaged itself into a buy-buy situation for everyone.
The first time we called Charles Smithgall III, he couldn’t talk because he was sitting in his private plane, waiting for his pilot to go through the preflight check. He had flown up to Pinehurst Resort in South Carolina for a round of golf and was heading back to Atlanta that evening.
Owning 105 Aaron's stores is the fourth career for Charles Smithgal III.
The next time we called Charles Smithgall III, he couldn’t talk because he was in Scotland shooting pheasants in the morning and struggling to get in 18 holes of golf before dark.
Not every Aaron’s franchisee has his or her own plane or vacations in Scotland or fly fishes in Venezuela. Spencer Smith, a 40-plus store franchisee out of Cortez, Colorado, listed his hobbies as working. “I’m not a golfer,” he said. “I just turned 40 and I have a few years left. My expectation is to work into my 60s.” Another expectation is that he will continue to amass Aaron’s locations.
Smithgall’s 105 Aaron’s lease-to-own stores make him the largest franchisee in the system, with the second closest at 40-plus. He has two more under construction and is working on a 13-store acquisition. Aaron’s is his fourth career, he said, when we finally did catch up with him. But he knew about the company long before he invested in it. His college roommate was one of the experts who took the company public, and he knew the founder, Charlie Loudermilk Sr., because he sold him advertising when Smithgall owned an FM/AM radio station in Atlanta.
Smithgall, 72, was a reluctant franchisee 20 years ago. He admitted to being a bit of a silver-spoon baby. “I was well off,” he said, unapologetic. It wasn’t until he was drafted into the Army and onboard a train heading toward basic training, that “I found out everyone didn’t wash their feet.”
It was his old roommate who insisted he check out the stores, but when he looked at the ones in the Atlanta market, he wasn’t impressed. He called his friend back and told him he was going to pass, only to be informed it was too late, he already had an appointment with Loudermilk.
“Charlie said he was going to clean up the industry,” Smithgall said. Loudermilk compared rent-to-own industry to the unkempt video store industry with its overstocked porn section in the back, before Blockbuster came in with its bright colors, clean floors and family-friendly approach to renting movies.
Smithgall, who was 53 at the time, said he’d work for Aaron’s, but he jokingly claims Loudermilk told him he was too old to be an employee, but he’d sell him a franchise. He bought in—several times.
Aaron’s franchise offer is a paradox. The investment requires a “high-net” person, like Smithgall, and yet leasing furniture to people who can’t afford to buy it outright is not the type of business these wealthy investors have on their radar. Unlike other franchises, the potential candidates are not the actual customers.
Take Smith, for example. He heard about Aaron’s while he was trying to take a nap. Although he’s not a NASCAR fan, for some reason on this particular day, he had the races on his television for background noise. “I kept hearing Aaron’s ads,” he said. Intrigued, he called and when he heard it was rent-to-own retail, he tried to hang-up. That may have been the end of the conversation, but Smith was talking to Greg Tanner, national director, franchising, for Aaron’s. When he tried to get off the call, with a thanks, but no thanks response, Tanner just laughed and replied, “I’ve heard that before,” Smith said. After Tanner explained the concept and the income possibilities, Smith still hadn’t hung up. “He was persuasive enough for me to go to Atlanta,” Smith said.
Spencer Smith abandoned his tire stores and plans for motels when he woke up to the income possibilities of Aaron's.
In nine years, Smith opened 40 stores. And he’s not done. When you don’t have hobbies, it’s easy to spend your nonfamily time growing your business into a multi-state operation.
Another franchisee in Texas sold his Aaron’s stores back to corporate for $17 million and then started looking for another business to invest in. “He came back (to us) and bought them back,” said Todd Evans, vice president, franchising. “He couldn’t find another business with those returns.”
Based in Atlanta, Aaron’s started as a folding chair rental company. Loudermilk and a business partner took out a loan to buy 300 folding chairs that they turned around and rented for 10-cents each to auction houses. Chairs morphed into sofas and electronics, refrigerators and beds, and by 1984, Aaron’s was a full-fledged furniture-rental company. It started franchising in 1992, and in 2009 changed its name from Aaron’s Rents to Aaron’s Inc. The chain’s last official count was 1,227 company stores and 742 franchises.
The company has gone through a bigger transformation than just from folding chairs to sofas. Two decades ago, Aaron’s was modeled after its competition in the rent-to-own market. The problem with that model is it’s not customer-friendly, according to Evans, who was brought in 22 years ago to “make the concept more palatable for Middle America and to franchise it.”
Evans did all that and more. He humanized it.
“Aaron’s is a classic find-a-need-and-fill-it business,” Evans said. A good example of this type of approach, he said, is Netflix. “It was started by a guy who got mad when he had to pay late fees to Blockbuster,” he said.
With Aaron’s the “need” is working-class people who require furniture and appliances, but can’t afford to buy them outright. The dilemma is how do you “upscale” a business that caters to the cash- and credit-challenged customer in order to attract the right investors? Although it didn’t seem fortuitous at the time he was growing up, Evans’ family was the very customer who would benefit from a neighborhood Aaron’s. Because of his upbringing, he understands customers want to be treated with dignity, pay reasonable prices and not be hounded unmercifully when they are a few days late with a payment.
But rather than assume they knew what the customers wanted, Evans and his staff started asking them. Not through surveys, by one-on-one meetings out in the field.
Here’s what the customers told them:
• They wanted more selection. Rather than just one blue or one brown sofa, they wanted at least a couple of different styles, plus other color choices.
• They wanted a better price. Traditionally rent-to-own stores marked up the prices because the renters were a credit risk. This worked for the stores, but it meant customers were being penalized for making all the payments over time.
• They wanted an assurance that if they were caught short one paycheck, that Aaron’s wouldn’t come and repossess their furniture or appliances.
So here’s the fix after reviewing customers’ comments: “We opened bigger stores, 8,000 to 9,000 square feet; brought in name-brand products, as opposed to off-brand; and adjusted pricing,” Evans said. To continue to make their margins, they also began manufacturing their own furniture.
By highlighting the upholstered items, where the margins are higher, they were able to lower prices on the electronics and appliances. “We got it down to one-third less than our competition,” Evans said.
They also improved the financing end of the equation. It’s easy in this kind of business to get the first payment, Evans said, because the person needs the item. It’s harder to get the second and then the third payment. “We developed a kinder, gentler back-end” process, by developing tools to work with the customers who were having trouble paying, Evans explained. The emphasis was no longer on turning inventory, but on developing a customer for life. For instance, once the customer acquired the television set, the sales department tried to interest them in a washer and drier, or a larger refrigerator. Since many customers come into the stores to make their payments, there’s ample opportunities to sell to them.
The model for rent-to-own retail is the customer pays weekly, so payments are smaller and if the renter does default, the merchandise can be picked up sooner. Aaron’s went to monthly payments, eliminating the weekly calls on late payments, and added some options, such as bridge payments, to help when emergencies arose requiring the funds elsewhere.
But there’s no getting around it: Rent-to-own is a heavy collection business. If an item is returned, it’s cleaned, serviced and put back on the floor for a lower price as a pre-leased item. Their write-offs of damaged-beyond-repair items is about 2.5 percent, Evans said, adding that’s significantly lower than the write-off major credit cards have to do for their credit-worthy customers. “People are generally good,” he said.
Bob Gappa of Management 2000, who has worked with the Aaron’s team for the past 20 years, said he was impressed by their ability to change behaviors that aren’t working and replace them with ones that do. Management will spend entire sessions with Gappa on how to make the franchisees more successful or how to engage both the franchisees and the general managers of company-owned stores, Gappa said. “They don’t hesitate to bring in technology and new ideas,” he added.
Earnings claims in ads
But what Aaron’s did that was even more revolutionary was putting earnings claims in its ads in order to attract people in that coveted high-worth category. “This was in the mid-‘90s and it was pretty cutting edge stuff,” Evans said.
Todd Evans joined Aaron's more than 20 years ago to develop a franchise program that produces millionaires.
The franchise model works best for multi-unit ownership, even though they want the franchisees “doing business in the shadow of their flagpole,” Evans said. Before going to earnings claim ads, Evans said they closed four out of five deals, “but we weren’t getting a lot of phone calls.”
Once they put the numbers out there, “we were pretty close to picking up trash in our little orange jumpsuits because the FTC (Federal Trade Commission) called us,” Evans said. Thanks to a crackerjack accounting department, however, they could defend their numbers. “We have pristine numbers,” Evans said.
The ads have worked, bringing in the level of investors they want.
For instance, their most recent ad (full disclosure: it ran in the October issue of Franchise Times) boasted in headline-size font that $287,607 was the 2012 average annual pre-tax cash flow. Franchised stores tend to do better than company-owned, Evans said.
Smith’s stores are contributing to that high number in Aaron’s earnings claim. His store in tiny Cortez, Colorado, is among the top 30 stores in the nation, he said. They may not be located in densely populated areas, but his stores have the right demographic mix to draw from. For instance, the Cortez store is close to an Indian reservation, while others are close to mining or oil operations.
One of the benefits of going with Aaron’s, Smith said, is their fulfillment centers deliver all the merchandise in one truck, saving him having to deal with multiple vendors and the inconvenience of scheduling multiple deliveries.
The monthly payment model also means not having to hound customers weekly for late payments, he said.
Smith isn’t content with the number of stores he has now. His goal is 60 by the end of 2017.
And our reluctant franchisee, Charles Smithgall III, is not only adding units, he’s also grooming his son to take over the business in 2015. Apparently there’s still a lot of niches waiting to be filled.