I guess I would say I’m a retailer. But if you ask my background, it’s service. But I think in a few years, the way my rental business is growing, ask me again and I’ll call myself an RTO dealer.
Lynn Reed, President, Suburban Service Center

Lynn and Jan Reed, faced with shrinking margins and increased competition from national “big-box” retailers, branched into RTO with surprisingly strong results. The Reeds were featured in the September, 2006 issue of RTO Magazine.

Faced with shrinking margins and increased competition from national “big-box” retailers, one independent retailer branches into RTO with surprisingly strong results. Is this a trend dealers need to watch?

Lynn Reed is President of Suburban Service Center, Inc. dba The Appliance Center. He might look like just another independent business owner in Salina, Kansas, but upon closer inspection it becomes clear he is prepared to give traditional RTO stores a very literal run for their money. Cause for concern or healthy competition? You decide.

Reed has been in the service business since 1980. For nearly two decades, selling replacement parts and fixing broken appliances, electronics and television sets was the only business Reed knew. But in 1998, Reed divided up the business with a co-owner, leaving Reed with just the appliance side. Needing another revenue stream, Reed began selling appliances from his showroom floor.

Reed was impressed with the results on his bottom line, and about a year later crossed paths with Bill Rogers, a longtime RTO guy from Wichita.

“Bill Rogers had been with Curtis Mathes and some other stores in Wichita that may have been at the very epicenter of the creation of rent-to-own. You hear so many stories about that, it’s hard to know who to believe. But he certainly knew the business well and he helped me manage and grow some rental agreements I bought in McPherson, Kansas.”

Reed learned the rental ropes from Rogers, and within about a year folded those agreements into his Salina location, some 30 miles from McPherson. At that time, Reed decided to pursue RTO as a third line of income with his already-established service and still-growing retail sales business.

Some seven years later, Reed has mastered a business model where service, retail and rental peacefully co-exist in one 3,600 square foot showroom. So what does he call himself?

“I guess I would say I’m a retailer. But if you ask my background, it’s service, and if you ask what I know best, it’s service. But I think in a few years, the way my rental business is growing, ask me again and I’ll call myself an RTO dealer.”

Reed says he believes RTO dealers should be aware of companies like his, since he knows of more and more independent business owners who are looking for ways to keep their business locally-focused and profitable.

“The future threat to the rental business is not the new Rent-A-Center coming into town. It’s guys like me who are looking to improve margins after being forced to compete with companies like Lowe’s and Best Buy. I know lots of smaller companies who are jumping into the rental business. And frankly, our service background gives us a unique competitive advantage. Refurbishing merchandise is already second nature to us. Plus, when we go on a delivery, there is an experienced technician hooking up the customer’s laundry set or setting up the ice maker in the refrigerator. I can’t tell you what a great impression that makes.”

Reed’s key performance indicators seem to show his service-heavy model is onto something. Reed says the average agreement goes out on a 78 week term, and stays in home for 12 months – way more than the typical rental agreement. He collects an average of $40 per week per customer, and most customers have more than one agreement. Reed ties payments to customer pay days, and as a result 50-60% pay biweekly, 30% pay weekly and the rest make monthly payments.

It wasn’t all so smooth, however. Reed learned the hard way that just because someone is not a retail customer doesn’t automatically make them a good rental prospect.

“Oh, was there ever a learning curve. When I first added the rental business, if you came into the store I rented to you. I’d deliver an item one week and pick it up the next. It’s a game you can play, I guess, but I’m not interested in that type of business.”

Since Reed began screening his customers more closely, his card close has shrunk from 50% past due customers to closer to 10%. He also has increased his keep rate to that amazing 12 month average.

“We now ask for six different references, and we like to have some family members among them. We don’t always get six, but we require at least three and we call every single one to make sure these are customers who pay their bills on time.”

Reed most admires Aaron’s lease-to-own model, and feels they have done a good job positioning the transaction in a positive light.

“Where I’m from in the Midwest, ‘lease’ is a more palatable term than rent. On the one hand, we’d like to set up more monthly payments like Aaron’s does, but I do like to see my people as often as I can. When customers come in each week or every other week there is more opportunity to sell or rent them other items they need for their homes.”

Currently, a little more than 70% of The Appliance Center’s customers have more than one item on rent. Is Reed ever concerned about overloading them?

“Yes, you can overload a customer. You’ve got to follow your gut instinct. When you see a customer start to struggle to make their payments, it’s time to reevaluate their situation. That’s where we feel we can be more flexible than a rental store owned by a large company. We’re not trying to hit a predetermined number – we’re trying to help our customers improve their quality of life. That being said, we are well aware that it is a fact of this business that if a customer really wants an item, and you don’t provide it, they will go to your competition and get it. So we try to make the situation fair and beneficial for everyone.”

Reed says his rental revenue has increased by 10-15% or more each year since 2000. Reed’s business is pretty evenly spread among retail sales (40%), rental revenue (35%), and service income (25%). His eleven employees are cross-trained in different areas, but Reed says getting the sales team to make the mental shift from retail to rental or vice-versa can pose a challenge.

“When you’re on the showroom floor with customers, it’s absolutely critical to be able to qualify what they’re looking for and how we can best fill their needs. What they want might not be what they can afford. (Qualifying customers) is not always easy to do. After doing this a number of years, I really believe retail sales at the big rental chains are more accidental than not.”

Reed says a small percentage of his customers will cross over, purchasing items from him at retail and also taking out rental agreements on other items.

“Maybe 15-20% of our customers will do both (rent and retail). Economics seems to have a strong impact on this. Family history seems to play a role, too. We have some customers who were just crossing the threshold to retail, but $3 a gallon gasoline has kept their financial situation such that renting makes more sense.”

Reed says it is not unusual to have a mix of customers in his store at once, with one customer making a rental payment, another purchasing a new appliance and yet another buying an over-the-counter part – all along the same (very long!) cash wrap. That sort of split-business-personality poses a challenge to Reed’s marketing program.

“Print is our largest advertising expense. We run newspaper ads multiple times each week for the retail side, and we run ads for the rental side in the local shopper. We go to the expense of inserts just a few times each year, and split their distribution the same way. The newspaper gets the retail-service version and the shopper gets the version with rental-retail-service messages. To emphasize our knowledge of the merchandise we rent, our print ads include a ‘service tip of the week’ like running a cup of bleach through your washing machine to prevent mold and mildew build up. We want to keep people focused on our background in service. ”

Reed says they run radio ads to support the newspaper promotions, and estimates 60% of his budget is spent on retail and 40% on rental advertising. He says most of his customers are women, and couples who are either married or live together. He says it may be unique to his town, but when a couple comes in he sees women lean toward renting and the men more predisposed to purchasing. So who wins that disagreement?

“Do you even have to ask? It’s almost always the woman.”

Reed currently carries appliance lines such as GE and Frigidaire with some Maytag and Amana items. His electronic merchandise comes from RCA, Sanyo and Zenith. And he has started to branch into furniture, with the United Furniture line set up and doing well.

Reed says he feels one reason he has been able to successfully compete with much larger companies is his ability to buy merchandise through his alliance with buying group Nationwide RentDirect.

“I’ve been a Nationwide member for five years on the appliance side. I can tell you RentDirect was sorely needed. James MacAlpine really sees the future of the rental industry and both he and Dennis Willich have been instrumental with getting smaller dealers like us on board and giving us a competitive playing field.”

“I will also be a member of the Kansas Rental Dealers Association. I was at a meeting in Topeka and they told us they only show 26 different dealers in the state of Kansas. They’ve got to be missing people like me. I really didn’t even know until recently that there was an association like this, so I’m glad to be getting involved.”

Reed feels a lack of knowledgeable financial lenders may keep other independent dealers from following his lead.

“Thankfully, I had a strong long-term relationship with a lending institution that knew my business well. I was able to convince them that a lending me the money to buy the necessary inventory would be a good thing. But not every banker sees the opportunity when you’re asking for hundreds of thousands of dollars to acquire inventory that will earn you just tens of dollars each week.”

Reed calculates his store’s success by the obvious measure – profit – but also by customer and employee satisfaction.

“Sure you need to make money, but you also need to treat your people right so they treat the customer right. That may be oversimplifying it, but that’s what works.”