Rent-to-own booming in bust economy

Rent-to-own booming in bust economy

July 14th, 2011 by Ellis Smith in Business Around the Region

The Bestway Rent To Own store is located at 3530 Brainerd Road.

Photo by Tim Barber /Times Free Press.


What is rent to own?

* Rents out furniture, electronics, appliances, computers, wheels, jewelry, even musical instruments

* $7 billion a year industry

* Average store has annual revenue of $736,000

* More than 8,600 stores in 50 states and Canada.

* More than 4.1 million households served per year

* Originated in 1970s

Source: Association of Progressive Rental Organizations

Industry growth

2007 - 3.2 million customers

2008 - 3.6 million customers

2009 - 4.1 million customers

Source: Association of Progressive Rental Organizations

Industry revenue

2007 - $6.3 million

2008 - $6.6 million

2009 - $7 million

Source: Association of Progressive Rental Organizations

The saying, "I will gladly pay you Tuesday for a hamburger today," started off as a catchphrase by Wimpy, the burger-starved cartoon character whom one could often find in the company of Popeye the Sailor Man.

Some businesses have turned this mindset into a profitable enterprise and are counting on the Wimpys of the world not to pay up front as they expand into the Chattanooga market on a recession-fueled bounce.

Thanks to modern financing, if Wimpy were still around today he could easily find a new TV or an entire bedroom set without paying so much as a dime upfront, though he could pay much more in the long run.

Even if Wimpy had terrible credit, stores like Bestway Rent-To-Own or Buddy's Home Furnishings allow customers to simply rent a 50-inch LG plasma TV for under $100 per month, with the option to eventually buy it for roughly double the manufacturer's suggested retail price.

Other businesses that target credit-challenged customers have come under fire for what opponents perceive as taking advantage of those with no other options. Though a customer's credit won't be dinged if they miss a payment, failure to pay could land a renter in jail for theft, according to news reports.

But economists say that taking away a legal option of last resort would force customers into illegal options, such as a black market economy with even harsher terms. And customers are relatively satisfied with the service they receive.

"We really don't have that much complaint activity in that arena," said Jim Winsett, president and CEO of the Chattanooga-area Better Business Bureau. "People pretty much understand what they're getting into."

That's because people know that these options exist for them as a choice, said David Kraemer, president and CEO of Dallas-based Bestway Rent-to-Own.

No one forces customers to buy a new entertainment center; no one forces them to shop at a specific store and no one forces them to keep an item they can't afford, he said.

"People will use us as a bridge between what they have and what they're getting, and other people are looking at us as a viable way to purchase their goods," Kraemer said. "There's always a need for our goods and services."

Boom times

A recession-proof business model and declining real estate values also allow for quick geographical expansion.

Kraemer recently bought three underperforming stores from Buddy's Home Furnishings in Chattanooga, which puts the rapidly-growing chain at 90 stores, soon to be 91, he said.

"We're in working-class neighborhoods serving blue collar folks, people that don't want to or don't have the capability to tie up their credit," he said.

Even though customers know they're going to pay twice the item's value to own it after a few years, sometimes there's simply no other choice, said Bruce Hutchinson, professor of economics at the University of Tennessee at Chattanooga.

"The question becomes, is the typical higher cost that results for the customer worth avoiding the front-end down payment," asked Hutchinson. "In a number of these cases, the individual's credit is not that good, so this may be a back-door way for them to get what they need."

Aside from the perceived flexibility, there are other advantages to the system, proponents say.

If a TV stops working, Bestway will replace it with a loaner while the old one gets repaired.

And if the customers can't afford to continue leasing the item, they can pick up right where they left off within two years.

"If you're washer is out, for $40 to $70 per month you get a washer and dryer, that's a heck of a lot better than going down to the laundromat," said Kraemer, who has formerly worked at Rent-A-Center, as a salesman and as a coal miner.

"it's the economy, stupid"

Cory Fox, director of operations for Shadowstone Investments, owner of Tampa, Fla.-based Buddy's Home Furnishings, said the rent-to-own business is only going to get bigger.

"I think the rent-to-own market is definitely expanding," Fox said. "We do some retail, but 98 percent is rent-to-own."

The pool of potential customers is always growing larger, thanks to millions of former homeowners who lost their job and were foreclosed upon, ruining their ability to buy merchandise with a traditional credit card, he said.

"We're an attractive option for someone who wants to pay it off on a six-month timeframe, or somebody who doesn't have the credit criteria to go to a Sears or Best Buy," Fox said.

Customers who pay an item off within half a year pay no interest, but if they stretch the timeframe out to 18 months, they pay about twice the cash price, industry officials said.

"But on the flip side, if you put that same TV on a credit card at Best Buy and make the $25 minimum payment you're gonna pay four times what the cost of that TV was," Fox said.

Shadowstone plans to add an additional rural store this year, and "probably" two next year, he added. Nationwide, Buddy's has 105 locations with another 10 set to open this year, he said.

As the abysmal job market drags on, "people still need a refrigerator if theirs goes out, they still need a new living room, they still need bunkbeds for the kids," Fox said.

But the key for consumers is to study their options and keep their eyes open going into any transactions, Winsett said.

"It comes down to being an educated consumer," he said.