Retailers, such as Best Buy and independent Abt Electronics, are giving customers with subprime or no credit history alternative lease-to-own options, and it is quickly becoming one of the industry’s trending things to do.
“There is another suite of customers who just might not be able to qualify for the branded cards, or frankly, might not want to, and would like to look at something that's a little bit different,” Corie Barry, Best Buy’s finance chief and strategic transformation officer (who will take over as CEO on June 11) said on a May 23 earnings call. “The customers that are engaged with this program do seem to be incremental to Best Buy...We like what we are seeing. We feel like we really are addressing a customer need.”
More importantly, Best Buy doesn’t bear the risk over the longer term of the agreement. "History has shown “very few” of these types of customers go delinquent...This genuinely is a whole new tranche of customers that would not be able to purchase products with us,” Barry added.
Through a partnership with Progressive Leasing after a pilot test, Best Buy has unveiled lease-to-own offerings to almost 700 stores, nearly two-thirds of its store base, across 36 states this year. Best Buy plans to roll the program out to another nine states before this year’s holiday season.
Just how big is the potential growth promise for retailers like Best Buy? Assuming that Best Buy sees an incremental four transactions per day per store, with an average spending of $400, that could add $144 million in sales for the company this holiday quarter, UBS analyst Michael Lasser stated in a May 23 report. "This should be a (sales) driver for Best Buy," said Lasser. "The benefit from Progressive Leasing should pick up.”
64-year-old rent-to-own retailer Aaron’s purchased Progressive Leasing for $700 million in 2014 to gain “an important entry point” to the fast growing online lease-to-own market, the company said at the time.
The lease-to-own market is estimated to be $25 billion to $35 billion in size where “total addressable market” includes 25% to 35% of US population, Aaron's reported in a presentation this past April.
"With about half of the rent-to-own market concentrated in consumer electronics and appliances, that suggests a segment opportunity of up to $17.5 billion," commented UBS’s Lasser.
Extra business is helpful for the electronics industry, where growth can be uneven and subject to the cycle of hit products. Annual sales from U.S. “consumer electronics stores” have declined 2.6% on average the past five years and are expected to dip 0.1% this year to $84.2 billion, according to IBISWorld, adding the sector’s performance has trailed even the broader retail trade.
Indeed, electronics and appliances stores’ sales for the first four months of this year declined 2.8% from a year earlier, in comparison with a 3% increase for total food and retail service sales, according to Commerce Department data.
In April, Aaron’s reported its first-quarter sales topped $1 billion in quarterly revenue for the first time, driven by Progressive Leasing. Additionally, Progressive Leasing customers jumped 19% to 863,000 at March 31 from a year earlier.
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According to its website, Progressive Leasing works with over 30,000 retail stores nationwide and generated 1.6 million leases and over $2 billion in revenue in 2018. Retailers can approve up to 75% of primary financing denials through its service.
"(There’s) a big group of our population that's underserved,” Ryan Woodley, Progressive Leasing CEO, said in Aaron’s April earnings call. “The market’s really large. There's a lot of green space.”
Other major retailers are getting in on the lease-to-own market and have already seen benefits. Overstock.com began offering its customers the option to lease products for up to 12 months last September through Progressive Leasing, expanding its financial services offerings, which already include lending, investment, credit cards, and insurance services.
Regional retailer Conn’s said in a March presentation that its long-term goal is to have lease-to-own increase to 10% of its sales from 7.5% in fiscal 2019.
“This is a way for retailers to bump the sales,” Brad Bernstein, co-founder, CEO and president of online lease-to-own marketplace FlexShopper, said in an interview. “The economy is doing well, but it’s still not doing well for a lot of people. We are enabling them to shop online like everybody else. This is the consumer that’s aspirational. Retailers need sales. We help them increase sales with customers that don’t have sufficient cash.”
But how does it work? When FlexShopper’s lease-to-own customers buy a TV on its site from its fulfillment partners including Amazon, Best Buy, Walmart and Overstock, for instance, the retailers ship products directly to those customers and FlexShopper takes on the full financing risk and pays retailers in full for those products.
Traditionally, “for people who didn’t have sufficient cash to get durable goods, they were relegated to these brick-and-mortar rent to own centers where a very high percentage of those goods is used,” Bernstein said. “Technology allows us to address this market online...we are able to underwrite consumers instantly. Retailers love the concept of being on the marketplace and just get a free sale. They all seem to know they need to address these consumers. And these consumers are important to increase their sales.”
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According to its May report, FlexShopper has seen gross revenue rise an annual average of 33%, adding it assumes about a third of bad debt. As of May, its service is also available in 1,100 brick-and-mortar locations at both national and regional retailers, up from 50 locations a year earlier.
Half of the over 250,000 products consumers can purchase via FlexShopper's offering are electronics. Also, according to Bernstein, FlexShopper has developed an internal scoring algorithm for consumers without the need to pull the traditional FICO credit scores.
“There’s increasing adoption by retailers,” said Bernstein. “The lingo in the industry is ‘Save the sale.’ There’s tremendous opportunity for the business to go around.”
Abt, the Glenview, Ill.-based independent retailer in the Chicago market, is among smaller retailers, such as Adorama and ElectronicExpress.com, that have also embraced lease-to-own. In addition to being a fulfillment partner on FlexShopper’s marketplace, Abt’s own website offers FlexShopper at checkout as a payment alternative, and for good reason.
While the company’s brick-and-mortar location typically attracts a more affluent customer base where 98% of customers are approved for regular credit card financing, online, where customers come from all over the country, about half of them would get rejected.
“We are giving customers a different option," Co-President Jon Abt said in an interview. “Nobody likes to get turned down. It’s a viable solution and a way for us to gain new customers who may not necessarily know us. We are definitely seeing incremental business through this marketplace they offer….There’s no risk for us. It’s definitely helped us. This is an opportunity.“
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