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Aarons Household Goods For The US Base Of The Pyramid Case Solution
Aaron’s Inc. is the second largest Rent-to-Own company in terms of market share. The company, which was established in 1955, operates on the core strategy of ‘customer first”. Management at Aaron’s believes in building customer relationships, and emphasis on customer retention, which has lead to 75% customers making repeat trips to the stores.
Aaron’s has been expanding rapidly throughout the last decade both through franchises and company operated stores. The question, which arises here is that, given the current economic conditions, should the business continue its policy of expansion through setting up new stores or is this time to re-visit the policy?
Aaron has already expanded internationally through a chain of 31 stores in Canada. Previously, the company acquired some stores in Puerto Rico but decided to withdraw from the market because of differences in the regulatory environment and culture. Aaron’s is considering further international expansion given that it can identify some markets with the regulatory framework similar to that of US.
Other important decisions which Aaron’s needs to make include; whether to continue with the customized rims business or not and how to deal with increasing pressure from legislators seeking to introduce legislation curtailing the activities of Rent-to-Own industry.
Following questions are answered in this case study solution
Appendix A: Income Statement
Appendix B: Balance Sheet
Appendix C: Financial Analysis
Case Analysis for Aarons Household Goods For The US Base Of The Pyramid
2. Company Profile
Aaron’s is the second largest chain of rent-to-own stores in United States, with around 1100 stores, serving 6 million families, and its annual revenue is close to US $ 2.5 Billion. Established in 1955, the company started its operations as a rent only company but later on got into the rent-to-own market anticipating better profit margins due a substantial increase in customer base. In a typical rent-to-own transaction, a customer pays a weekly or monthly rent for using merchandise and gains ownership if he/she keeps making those payments for a pre-decided time period.
In 1971, Aaron’s Inc. backward integrated into furniture manufacturing in order to make sure that the supply never dries up for its furniture rental business. At the time when Aaron’s initiated its furniture manufacturing business, and substantially expanded it, many industry analysts termed it as a big gamble but Aaron’s strategy of not manufacturing something new unless the one already manufactured has been rented worked well for the company.
By, 1987 Aaron’s had already established itself in 154 locations and was collecting annual revenues to the tune of 100 million dollars, but the growth had almost stagnated. The management realized that the company’s operations need to be diversified in order to stay strong in the wake of heightened competition and reduced profit margins in the traditional rental business. This led to the decision to enter rent-to-own which at that time was a relatively new, but fast emerging, idea. Aaron’s differentiated itself from other rent-to-own businesses by pioneering the idea of monthly payments in replace of weekly payment system which was a widely used method at that time. The decision to introduce monthly payment system was taken to reduce interest cost and also led to reduced hassle of visiting the store every week to make payments. The store made a conscious effort to appeal to the aesthetics of the target market by developing a unique identity of Aaron’s stores (clean and spacious).
3. Industry Analysis
The unique idea of rent-to-own initially gained prominence in 1960’s in response to customer needs of owning expensive household items like television, furniture etc without constraining family’s budget or incurring debt. This idea was for scores of those customers who wanted to own the above mentioned items but couldn’t afford them and their loan requests were turned down by the banks. The rent-to-own business model was developed in response to consumer needs and its huge success can be attributed to this very reason. The idea was to rent merchandise with an option to own it, and if a customer couldn’t keep up with the payment schedule he/she could return the merchandise, making it a simple rent transaction. 1970s and 80s was a particularly good time for rent-to-own industry as credit available to consumers dried up due to recession this coupled with a persistent demand for the merchandise offered by rent-to-own sector led to a tremendous increase in transactions.
The industry faced a downturn in early 1990s due to decrease in economic activities and another major factor was the substantial increase in interest rates at that time. This led to many owners of rent-to-own businesses pulling out cash instead of investing in upgrades and inventories. Economic recession this time around didn’t dry up the credit available to consumers; resultantly, demand for services offered by rent-to-own sector didn’t experience an upward surge. After 1990s, the Rent-to-Own sector has seen stable growth with a compound annual growth rate of 4.7%, much of this growth can be attributed to Aaron’s success.
A typical rent-to-own transaction, as discussed earlier, starts with the customer renting out merchandise for a specific time period and culminates in either customer the gaining ownership of the merchandise or the merchandise is returned to the store. The customer becomes the owner of the merchandise rented out if he/she makes regular payments during the already agreed upon period and a failure on the part of the customer leads to Aaron’s taking over the possession of the good. Customers have the option of buying the merchandise at a discounted rate by paying the outstanding amount before the end of pre-defined time period. Listed are a few benefits that a customer gets for getting into such a transaction
Free delivery and relocation
A major chunk of target market for the rent-to-own industry consists of households which earn less than $50,000 in annual income. A point of consideration is that roughly 50% of US population lies in this economic stratum. A rent-to-own transaction is appealing to those customers who don’t have enough cash to pay upfront and don’t qualify for credit cards or other traditional retain instalment programs. A major chunk of Aaron's customers comprises of people belonging to that social group who want to try a new brand, have a temporary need or have a good credit rating but don't want to incur new debt.
Rent-to-own industry in US is dominated by two major players Rent-a-Centre and Aaron’s together they account for 56% of the total stores and 75% of the total revenue generated by the industry. Both Rent-a centre and Aaron’s exhibited substantial growth during 1990s, but each followed a different path. Rent-A-Centre grew by following a strategy of acquisitions and consolidations which became a success because the company shared the business model most of the firms operating in the industry which was that of weekly payments.
Aaron’s developed a monthly model of payment to increase the affordability of the items on sale, as well as, the rate of customers who reach ownership. Historical figures state that almost 80% of the Aaron’s customers reach ownership whereas, in the case of other retailers, this number is a paltry 20-25 %.
4. Internal Analysis
The biggest strength of Aaron’s lies in its business model which emphasizes on maximum customers reaching ownership. Aaron’s had always highlighted the importance of a retail environment conducive to this kind of business which led to the company’s decision to open stores with considerably more area as compared to other retail outlets. This emphasis on attracting and retaining customers has overtime generated the kind of brand recognition exhibited in the example at the beginning of the case.
Customer needs and demands have always been at the centre of Aaron’s business strategy, and another example of this is the fact that Aaron’s never uses the phrase Rent-to-Own in its publicity material keeping in consideration the social stigma attached to a rental system. People usually don’t want others in their social circle to know that they are dealing with a rental service and Aaron’s respects the point of view of its customers. Aaron’s makes a conscious effort to help most of the customers gain ownership in comparison with other companies operating in the rent-to-own sector. Aaron’s offers its customers cuts on their monthly payments if they for some reason are unable to make the full payment instead of taking possession of the merchandize, which it is legally allowed to do. The company is aware of the fact that due to the high frequency of interactions with the customers during the sale it is very important to develop customer relations. The customers frequenting Aaron’s are those who have been neglected by the traditional retailers and have no access to institutional credit due to bad ratings. These customers already have the desire for merchandise on offer at Aarons. Therefore, the company just needs to convince these customers to purchase from its stores. It is with this emphasis on customer training that Aaron’s recently launched its own E University in order to train employees for the interactions they have with customers. The purpose of this university is to inculcate a uniform customer experience across all Aaron’s stores irrespective of their geographical location. These efforts have already paid rich dividends as 75% of the customers doing business with Aaron’s are repeat customers, and it can be expected that this trend continues in the future.
Talking about Aaron’s strengths we must consider the role of franchises in business expansion. Almost 600 franchised stores are operating around the country, and stores are regulated by Aaron's to maintain standards. These franchises operate on the basis of profit sharing with the parent company and are operated in exactly similar fashion as are the other company operated stores. Similarly, the decision to start Aaron’s own furniture manufacturing line and showrooms was a masterstroke this has given Aaron’s unique competitive advantage as Aaron’s is the entity operating in the Rent-to-Own industry with fully internal forward and backward linkages for its furniture line. Backward linkages are defined as channels through which information and materials flows between a company and its suppliers, whereas forward linkages refer to similar channels between a company and it retailers.
The fact that Aaron’s offers a diverse variety of merchandise is also a huge plus point for the company the products on offer are consumer electronics, furniture and automotive accessories. Diversity of products on offer is paramount to hedge against fluctuations in supply and demand of a particular product thus decrease in demand for one product is neutralized by the increase in demand of another product and vice versa.
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