Aaron - Household Goods for the US base of Pyramid

16 Pages   |   4,221 Words

Executive Summary 

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.

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Table of Contents
Executive Summary. 2
Company Profile. 4
Industry Analysis. 4
Internal Analysis. 6
Strengths: 6
Weaknesses: 8
BCG Matrix. 9
Cash Cow: 9
Dogs: 9
Question Marks: 9
Stars: 9
External Analysis. 10
Opportunities: 10
Expansion within US: 10
Managerial Talent as a constraint: 10
Increase in Product line: 10
International Expansion: 11
Threats: 11
PEST Analysis: 11
Political: 11
Economic: 12
Social: 12
Technological: 12
Recommendations. 12
Appendix A:  Income Statement. 14
Appendix B: Balance Sheet. 15
Appendix C: Financial Analysis. 16

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).

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
•           Free maintenance
•           Lifetime re-instatement
•           Credit Enhancement
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 %.

Internal Analysis

Strengths: 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.
After the recent economic crises, it has become even difficult for customers to get credit from the banking sector which would be beneficial for companies operating on the Rent-to-own model. The demand for household durables is never going to dry out, and since the customers now no longer have the option to buy on credit they are bound to turn towards Rent-to-Own industry in scores.
Weaknesses: Let’s now focus towards weaknesses which might inhibit future growth. If we analyze historic numbers one trend, which should be considered is that the revenue growth in the past has been achieved through opening up new stores. It is believed that the Rent-to-Own industry has reached the point of saturation in terms of the number of stores which can profitably operate in a given time frame. Aaron’s might face declining revenues if it fails to address this issue. One possible solution would be to get into strategic partnerships with other stores in a similar fashion as developed by Rent-A-centre for its RAC program. After implementing RAC program, Rent-A-Centre’s employees would keep in touch with traditional retailers to tap the customers which have been turned down by retailers for credit sales.
Another thing, which should be considered, is that although the furniture business is a huge plus in terms of backward integration, but it has a downside too. The market dynamics have been constantly changing, and now they increasingly reward those who possess the flexibility for Aaron’s maintaining a furniture inventory can become a problem in the future. Since furniture is an item which loses its touch with every passing season, due to innovation in design. Similarly another problem with the furniture business is that it has extremely low rental revenue making it not a highly desirable entity in one’s portfolio under current economic conditions. Aaron’s can deal with these problems with its furniture business by selling off its manufacturing units and take the role of a middle man between the manufacturer and the final customer. Another way forward would be to introduce the concept of a middle man in its furniture business. This middle man would be responsible for storing and supplying furniture and would be made a party to any losses incurred due to mishaps in storage or due to the inventory losing its value because the design has become obsolete. Aaron’s major concern should not be about the later factor ‘the design becoming obsolete’ because Aaron’s is not selling to premium customers who are in a rat race to decorate their drawing rooms with the latest furniture.

BCG Matrix

The BCG matrix (aka B-Box, B.C.G. analysis, BCG-matrix, Boston Box, Boston Matrix, Boston Consulting Group analysis, portfolio diagram) is a chart that had been created by Bruce Henderson for the Boston Consulting Group in 1970 to help corporations with analyzing their business units or product lines.
Below is the BCG Analysis for Aaron’s

Cash Cow:

For Aaron’s, the furniture business can be categorized as a cash cow. This business has been generating steady cash flows over the years, but it is not an area which is expected to generate a lot of activity in the future.


Aaron’s has previously experimented with jewellery and lawn tractors businesses. Both of them generated positive cash flows in the beginning but eventually became a drag on operations.

Question Marks:

Rimco, the tyre and rims business has witnessed moderate success so far. Aaron’s will have to eventually decide the fate of Rimco stores. Rimco stores can be repositioned to target the high end customers (the ones with deep pockets) or the company can decide to sell off this business.


Household Durables business, the traditional business of Aaron’s is still the star of the show generating most sales and revenue.

External Analysis


Expansion within US:

Growth opportunities for Aaron’s can be categorized in two ways the physical expansion and expansion in terms of increase in diversity of products on offer. The most important growth opportunity as pointed out by Loudermilk in the case is that Aaron’s should open a store near every Wal-Mart in USA. Since, the customer base to which both Aaron’s and Wal-Mart appeal is somewhat similar. Aaron’s can have a store near every Wal-Mart by the year 2015 if it grows at a rate of 10% per annum. Aaron’s should continue with its expansionary policies as supported by the sales figure from last 3 years. The sales revenue has been increasing for the past three years with a compound annual growth rate of 12%, which means the decision to continue expansion, especially by means of franchises, has worked well for the company. One thing which must be kept in mind here is that, at current growth rate, the number of Aaron’s stores might reach the saturation level soon after which it would be difficult to justify further expansion. Therefore, expansion within US might be a good strategy in the short run but the company must keep looking for other growth opportunities.

Managerial Talent as a constraint:

Growing through Franchises has a downside to it which is the quality of Human Resource. Management at Aaron’s should roll out a nationwide strategy making it mandatory for the franchise owners and their prospective employees to take training for a particular duration or work at an Aaron’s store before starting their operations. Customer relations is the core of Aaron’s business strategy and now after the initiation of Aaron’s E University it should be able to address this problem of quality HR for franchises.

Increase in Product line:

Another growth opportunity for Aaron’s is to increase the product and service offerings. Aaron’s has previously experimented with different product and service lines with moderate success. If we take its experiment with the Rimco stores, involved in selling custom tires and rims, which has been described as moderately successful. According to data, the custom tires and rims sector are a niche market, and the majority of Americans don’t even bother to get the original rims changed. Aaron’s should not expect the Rimco stores to become a cash cow. Instead, Aaron's can consider making Rimco a premium brand name targeting customers from the upper higher economic class. These car enthusiasts are willing to spend a great deal of money for customized tires and rims and might be interested in a Rent-to-Own transaction. With these customers, it can be expected that they might want to upgrade to a new rim design after a certain time say one month. Aaron’s can design a business model in which there is a provision for an upgrade in the Rent-to-Own contract. Aaron’s can charge a premium for such a contract or something like that.

International Expansion:

The best growth opportunity for Aaron’s can be the international expansions especially if it can identify some markets where similar business models are non-existent. A factor, which should be considered, is that the international markets where Aaron’s eventually decides to expand must have similar labour and credit sale laws as US. From the examples given in the case, Peurto Rico and Canada, it can be infer that Aaron’s is expected to operate more successfully in an environment similar to US rather than expanding into a market with completely different dynamics.
Threats: The biggest threat faced by the Aaron’s is the persistent regulatory uncertainty; it has been facing in United States pertaining to the company’s core business. The company must come up with a way to convince legislators that it is providing a productive service to the society which is beneficial in the long run. Many people are of the opinion that Rent-to-Own industry is exploiting people and making them buys goods which they don’t afford thus spreading the consumer culture. It is this perception which needs to be worked upon if Aaron’s has to survive in the future. The company should invest in a marketing campaign highlighting how the services provided by it touch lives and why the society absolutely needs them.
Similarly, another aspect of the business, which needs to be highlighted upon, is the fact that the Rent-to-Own is an altogether different model as compared to leasing schemes. Therefore, it should not come under the regulatory legislation devised for the leasing sector.

PEST Analysis:

Political: Aaron’s business would be most affected by a change in regulations related to the core business of the company. The Rent-to-Own business model is under debate with its opponents proposing a heavy regulation on the industry. It is widely believed that Rent-to-Own industry is exploiting its customers by charging them extremely high rates and selling them goods which they don’t need in the first place.
Economic: A reduction in economy wise interest rates would considerably reduce the demand for services provided by Rent-to-Own sector. A cut in interest rate would lead to an increase in available credit for all borrowers such a move can prove highly damaging for Aarons.
Social: If people start believing what is being propagated by the opponents of Rent-to-Own industry, it can lead to a considerable decrease in demand. Similarly, if Aaron’s starts a media campaign projecting the good it is doing for the society, by increasing, in a way, the purchasing power of the people.
Technological: Changes in technology wouldn’t have a big impact on the way Aaron’s conduct business. This is because the majority of items are sold by Aaron’s are manufactured by third parties.


  • Aaron’s should not take the attention of its core strategy of customer first. Since, this is the strategy which has worked well for the company and has generated considerable brand equity. 75% of customers visiting Aaron’s are repeat customers, which is a testament to the fact that Aaron’s strategy of focusing on customer needs is paying rich dividends.
  • Aaron’s should continue with its expansionary policies as supported by the sales figure from last 3 years. The sales revenue has been increasing for the past three years with a compound annual growth rate of 12%, which means the decision to continue expansion, especially by means of franchises, has worked well for the company. One thing which must be kept in mind here is that, at current growth rate, the number of Aaron’s stores might reach the saturation level soon after which it would be difficult to justify further expansion. Therefore, expansion within US might be a good strategy in the short run but the company must keep looking for other growth opportunities.
  • International growth is something which should be considered seriously especially if the company manages to identify some international markets where Rent-to-Own model isn’t already present. With international expansion Aaron’s must consider the regulatory environment of the country it is planning to expand to, as well as the labour laws and other similar legislations. Aaron’s can also consider expanding into developing countries since these are the countries which would be leading the future economic growth.
  • The company should reposition Rimco stores, possibly as high end stores selling premium brands. Rimco stores have previously witnessed moderate success. If the company redesigns the way business is conducted at Rimco stores and manages to introduce a business model which gives  customers a provision to upgrade the accessories they purchase from Rimco stores, after paying a premium, this can lead to expansion into a new target market, the automobile enthusiasts. Aaron’s, if it manages to successfully implement this strategy, can expect to earn considerable higher profit margin from this business in future as compared to the margins on its traditional businesses. This is because automobile enthusiasts are generally less worried about budgetary constraints.
  • Whether to expend the product line or not is a very complex question. Management must consider the pros and cons of it before taking a final decision. If Aaron’s eventually decides to roll out a new set of products it must take into account the affect it would have on the current operations. Diversifying into a business, for example financial services taking the lead of Rent-A-Centre, would mean taking the focus away from the core business of the company. My recommendation in this case would be to focus entirely on the household durables business for the time being. Aaron’s should keep an eye on the opportunities which might arise in future.
  • Maintaining the quality of Human Resource is a big hurdle in the path of achieving companywide goal of uniform customer experience at all Aaron’s store. This is an issue which further aggravates in the case of franchises, which are not company operated. Aaron’s should make it mandatory for all employees, including franchise owners, to attend a training program before they start handling business at an Aaron’s store.

Appendix A:  Income Statement

Income Statement     2007 2008 2009
Lease Revenues and fees     $1,045,804 1178719 1310709
Retail sales     34591 43187 43394
Non Retail Sales     261584 309326 327999
Franchise Royalties and fee     38803 45025 52941
Other     14157 16351 17744
      $1,394,939 $1,592,608 $1,752,787
Cost and Expenses          
Retail Cost of Sales     21201 26379 25730
Non Retail Cost of Sales     239755 283358 299727
Operating Expenses     617106 705566 771634
Depreciation of lease Merchandise     391538 429907 474958
Interest     7587 7818 4299
      1277187 1453028 1576348
Earnings Before Taxes     $117,752 $139,580 $176,439
Income Tax     44327 53811 63561
Net Earnings from Operations     $73,425 $85,769 $112,878
Earning from discontinues operations     6850 4420 -277
Net Earnings     $80,275 $90,189 $112,601

Appendix B: Balance Sheet

Balance Sheet       2008 2009
Cash and Cash Equivalents       7376 109685
Account Receivables       59513 66095
Lease Merchandise       1074831 1122954
Less: Accumulated Depreciation       -393745 -440552
        681086 682402
Property Plant and Equipment       224431 227616
Goodwill       185965 194376
Other Intangibles       7496 5200
Prepaid Expenses and other Assets       67403 36082
        1233270 1321456
Liabilities and Shareholders' Equity          
Account Payable       173926 177284
Dividends Payable       910 0
Deferred Income Tax Payable       148638 163670
Customer Deposits and Advance Payments       33435 38198
Credit Facilities       114817 55044
        471726 434196
Share Holders Equity          
Common Stock       24220 24220
Class A common stock       6032 6032
Additional Paid-In Capital       194317 211795
Retained Earnings       585827 684689
Accumulated Other Comprehensive Loss       -1447 -101
        808949 936635
Less Treasury Shares at Cost          
Common Stock       -29877 -18203
Class A Common Stock       -17528 -31172
        761544 887260
Total Liabilities and Shareholders' Equity       1233270 1321456

Appendix C: Financial Analysis

Financial Analysis      
Liquidity Ratios   2008 2009
Cash Ratio     0.02 0.29
Current Ratio   1.91 1.8
Profitability Ratios 2007 2008 2009
Gross Profit Margin 0.08 0.09 0.10
Net Profit Margin 0.058 0.057 0.064241
Operating Profit Margin 0.053 0.054 0.064
Return On Assets   0.07 0.09
Return On Equity   0.12 0.13

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