Turning over a new lease Featured

10:10am EDT November 29, 2005
Charles Loudermilk started Aaron Rents 50 years ago by renting out 300 folding chairs at 10 cents a piece for an estate sale.

Today, his 1,050 stores rent and sell electronics and furniture to consumers in 45 states, Puerto Rico and Canada and produced more than $946 million in revenue in 2004.

And he’s not done yet.

Loudermilk’s long-term goal is 3,000 stores. He plans to get there by adding a combination of company-owned stores and franchisees, and by understanding the psychology of his customers.

Part of that psychology is understanding where customers shop and how Aaron Rents can benefit from that.

“We’re saying we should be near every Wal-Mart,” says Loudermilk, chairman and CEO. “A lot of Wal-Mart customers are our customers. Wal-Mart doesn’t handle the type of goods that we handle — the high-end Sony televisions and the leather sofas and chairs, stainless steel refrigerators. Our customers want the best. There are close to 4,000 Wal-Marts around the country. And we should be as near to them as we can.”

While there is no relationship between the enterprises, Loudermilk has learned they share a customer base. That helped Aaron Rents to better gauge how many stores can be successful in a given market.

“We’ve been constantly surprised about the smallness of the market we can be in,” Loudermilk says. “At first we thought, for example, Columbus, Ga., (population 185,000) was a one-store market. We now know it’s a three-store market, if not more. Macon, Ga., (population 97,000) the same. We gave these two cities to franchisees. They were (each) going to open one store. We now know that they ought to have three stores in those towns.”

Loudermilk has taken advantage of these new, if smaller, markets.

“We’re in a lot of markets (that) I couldn’t tell you the state they’re in, the towns are so small,” he says. “They might have a 15,000 to 20,000 population. We thought it had to be a minimum of 50,000.

“The market has expanded greatly, just like it has for Wal-Mart. We’re lucky that we can kind of piggy back on Wal-Mart’s locations. They have very sophisticated site selection and data and everything, and if a Wal-Mart does well, we’ll do well.”

But Loudermilk, whose five-year goal is to reach the 2,000-store mark en route to 3,000 long-term, knows success means more than just opening down the road from the local Wal-Mart.

Part of mastering customer psychology is recognizing that the rent-to-own industry carries a stigma. Too many schlock operators have cheated or conned too much money from consumers for too long.

Loudermilk wants Aaron Rents to be the agent of change for the industry. And while the difference between renting and leasing may seem like semantics, for Loudermilk, it is what separates his company from those other operators and is the first step in changing consumer attitudes.

“We’re more of what we call sales and lease-ownership,” Loudermilk says. “Lease (and) ownership are the (important) words. We’re not a weekly pay, small and dirty, rent-to-own operation.

“You never see ‘rent to own’ on our building, our literature or anything else. The words you see are ‘sales’ first and ‘lease ownership.’ Our parent company is Aaron Rents, but you don’t see ‘rents.’ Leasing is an acceptable word.”

By using different words, Aaron Rents removed a consumer stigma that might prevent a sale.

“What we found out early on is that people who come in to rent, they wouldn’t want the truck to pull up to the front door and let their neighbors see that they’re dealing with a rent-to-own company,” says Loudermilk.

Company vehicles are labeled with ‘Aaron’s’ and ‘sales.’

“So when we go in to deliver a living room suite, the neighbors don’t know whether it’s bought or rented,” says Loudermilk. “There’s a lot of psychology in that. The rent-to-own business has a very bad stigma and reputation, most of it is deserved.”

Loudermilk also helps ensure the quality of many of his products by controlling the manufacturing. The company has its own furniture division, MacTavish Furniture, which manufactured $70 million in furniture at cost for Aaron in 2004, accounting for the majority of the furniture rented or sold through its stores. This vertical integration helps the company ensure not only its costs and delivery times but also the functionality and durability required for multiple rentals.

“We get a product built the way we want it built,” says Loudermilk. “We have to be careful what we buy in the rental business because there is a good chance it is going to come back on a truck and go out again. We know the price and we know the quality. We’ve been in this 50 years. We think we know the furniture business.”

Delivering a consistently quality product differentiates the company from its competitors and helps garner repeat business with customers.

Keeping satisfied customers is important to Loudermilk and to the continued growth of the company, and Hurricane Katrina showed how far he’s willing to go to keep them.

The hurricane closed or otherwise affected about 30 Aaron Rents stores.

“The merchandise that we have in the store is insured,” Loudermilk says. “The buildings themselves were insured. The trucks were insured. What we don’t have insured is the merchandise that is out in the customers’ homes. We think about 90 percent of that in some areas is going to get wiped out. The people that had a television 2 feet under water, we don’t want it back. That’s a loss for us.”

Loudermilk expects hurricanes to cost the company between $5 million and $10 million this year.

“It’s a loss because we charge the customer 10 percent — we call it service plus,” he says. “That covers delivery, pickup, the free month and other things, as well as what you might classify as insurance. We call it waiver of risk. One store had 1,200 customers with active accounts. We don’t think any of that merchandise will be brought back or paid for, and it shouldn’t be, because that 10 percent they pay covers this damage.

“Say they’ve got a 24-month (payment plan) for a product. Say they’ve paid 20 months (when the storm hit). We’ll give them a (new) product, they’ll pay four more months and it’s theirs.”

Satisfying the customer also takes talented individuals running the stores. Figuring out how to find enough talent to manage hundreds of new stores may seems like a challenge, but it doesn’t concern Loudermilk.

In fact, the bigger the company gets, the easier it is, he says. Every new location provides the perfect place from which to pluck future leaders.

“Each store has one or two potential general manager trainees,” he says. “If you’ve got 1,000 stores, you’ve got 1,000 potential managers to open 300 stores. They prove themselves by being an assistant manager.”

Assistant managers learn on the job, then can move up to manage their own store. And the company’s fast growth attracts people looking for opportunities for rapid advancement.

“The opportunities for general managers, district managers, regional managers, vice presidents, regional vice presidents and so forth is big,” says Loudermilk. “They can see people getting promoted above them all the time. We’re not a stagnant company.”

Of course, that doesn’t mean that every manager trainee will make it to the next level.

“It’s a hit or miss thing,” he says. “I would say half the people that we hire to be potential store managers will make it, maybe even one-third. You get people in that don’t understand six days a week. Families don’t want to give up weekends. If they’re working hard or get behind, they might come in at 7 or 8 o’clock at night.

“It’s a specialized thing. The ones of us who have been in this industry of serving the customer, of making the customer happy, getting joy out of the transaction — that is what you have to have in running these businesses.”

And while some managers drop out of the program because of the time commitment, the issues facing franchisees are more complex. When things don’t work out with a franchisee due to things such as divorce or partnership troubles, the company buys back the store to make sure the loss of the franchisee doesn’t affect the customers.

“Every store we’ve bought back has been a profitable store, but they say, ‘This is not the business for me. I want to be a fireman, I want to be a stockbroker, I want to be something else,’” Loudermilk says.

The Aaron Rents corporate office keeps a tight rein on franchises to make sure the stores are on track for profitable growth.

“Their computer system is on our computer system,” he says. “We micromanage these stores. We get a 6 percent royalty, and of course we want them to do better and better. We want them to be a big success. We want them to make a lot of money and be very proud.”

With that kind of corporate backing and the overall success of the company, finding franchisees hasn’t been difficult, either, which will help the company meet its ultimate growth goal.

“We have more stores on backlog to be opened by franchisees than we have stores opened by franchisees,” says Loudermilk. “We’re selling more than we’re opening. It’s very close, anyway. It’s over 300 (franchises) opened and over 300 backlogged.”

Franchisees are a big part of the company’s growth plans and will account for at least 30 percent of all new stores.

“I’m comfortable with that (two-thirds company-owned ratio),” says Loudermilk. “We’re learning a lot from these franchisees, and of course, we’re teaching them a hell of a lot. That’s what they’re paying their money for.”

Loudermilk continues to learn and to innovate. And as long as he’s doing that, he’ll be running Aaron Rents.

“I work every day, though I’m 78,” he says. “I’d rather be here than anywhere else. I enjoy being right at this desk.”

HOW TO REACH: Aaron Rents Inc., (404) 231-0011 or www.aaronrents.com