Rent-A-Center Beats Wal-Mart to Financial Services, Provides Warning

Rent-A-Center has been getting a boost in the recession, seeing higher comparable store sales as consumers turn to it for furniture, appliances and electronics, but it has been tripped up a bit by an expansion into financial services, which might be an object lesson for Wal-Mart as it looks for new ways to serve lower income consumers.

Rent-A-Center has been developing financial services for its customers since 2005, when it began offering short-term secured and unsecured loans, debit cards, check cashing and money transfer services in a limited number of its stores under the designation Cash AdvantEdge. By the end of 2007, it had 276 in operation among its almost 3,100 stores, and it reached 350 earlier in the current fiscal year.

Now, though, Rent-A-Center has essentially stopped adding financial services operations. They have been money losers, but the company estimated that customers found them attractive enough to add about a half a percentage point to its comparable store sales figures, those covering stores open for a least a year. However, loan delinquencies went up and operating results fell short of company expectations, Mark Speese, Rent-A-Center chairman and CEO said in a third quarter conference call. In fact, losses have been costing the company $1 million a month. Mitch Fadel, the company’s president and coo, said the company won’t resume the roll out of new financial service operations until it hits at least break even on them, which it still hopes to do next year. Among other things, Rent-A-Center has to fix its underwriting function to assure Cost AdvantEdge is providing loans prudently, Fadel said.

Rent-A-Center is becoming more attractive to consumers as demonstrated by a same store sales advance of 2.3% for the fiscal year completed Dec. 31, 2008 and net earnings gained. Observers lately interpret retailer additions of goods and services targeting bargain shoppers as efforts to gain sales from consumers who are trading down because of the recession. However, another way of looking at it is that many retailers are finding lower income consumers to be more attractive customers now that middle class and affluent consumers have shut their pocket books tight.

In a way, those retailers are hedging against a potential future where frugality turns out to be a lifestyle rather than a fad. In that case, serving needs as they arise rather than aspirations will become more important because consumers may become stingier about using credit to purchase luxuries beyond their means. On top of that, many high wage earners among the Baby Boom generation will be retiring soon becoming fixed income shoppers whose habits will fall more in line with those of the less well fixed. Under those circumstances, developing programs to reach lower income consumers can become more attractive to retailers. Rent-A-Center’s experience, though, demonstrates that expanding goods and services to consumers who have limited savings and credit cushions comes with a risk that should be well considered.