Progressive Rentals June-July 2006

Bridge Over RTO by Cindy Ferguson
Double Your Profit by Sidney Burton
Correct Collections by Ed Winn III
You Can Go Home Again: An APROfile of Wayne Chambers by Kristen Card

Bridge Over RTO
by Cindy Ferguson

In our industry, the link between the vendor and the rent-to-own dealer is crucial. APRO’s Vendor Advisory Committee serves to bridge these two important communities and also address APRO suppliers’ needs and issues. The committee also sets the direction and helps with many of the specifics of APRO’s annual Convention and Buying Show, rent-to-own’s premier industry event. In 1986, the Vendor Advisory Committee was formed to serve as a bridge between industry vendors and the APRO board of directors. It is made up of 12 vendor-elected members who serve staggered two-year terms.

The committee consists of vendors representing various categories of industry suppliers, such as appliances, jewelry, furniture, software and special services. In October 1999, the APRO board of directors,which is comprised of rent-toown dealers, changed its bylaws to allow the vice-chairman of the Vendor Advisory Committee to serve as a full, voting member of the APRO board. Currently, RSSS’s Ellison Crider is the committee vice-chairman and APRO board member.“It is important that we receive input from all types of industry suppliers as we plan for future APRO conventions and events,” says Crider. “There is no other industry association that listens to its vendors like APRO does.” Membership on the vendor advisory committee is open to any APRO associate member. “It’s an honor to serve on the Vendor Advisory Committee,” says John Blair, executive marketing and sales representative for M&B Jewelry and a longtime member of the committee. “It is committed to the APRO vendors to search for additional ways to make sure their investment and participation as an APRO vendor is profitable. The goal of the Vendor Advisory Committee is to assure that the vendors will add new rent-to-own dealers to their account base and provide better service for all dealers.”

This year, at the APRO exhibitor breakfast/business meeting held during APRO’s Convention and Buying Show in Orlando,APRO associate members will hold an election to fill seven positions on the vendor advisory committee. Half of the positions on the Vendor Advisory Committee become available each year at the convention.All associate members are eligible to vote for candidates. There will be one ballot per member company and proxy ballots from those unable to attend the Convention and Buying Show will be accepted. The Vendor Advisory Committee meets three times a year: once at the conclusion of the convention, once in the fall and again in the spring. All committee members participate of their own free will and assume responsibility for their expenses for travel and accommodations. “It is a pleasure to have such an outstanding group of men and women serving and volunteering their time,” says APRO’s 2005–06 President Shannon Strunk.“Each meeting provides valuable ideas and results that are carried into the APRO board meeting, many of which are implemented.” If you’re a vendor interested in serving on the Vendor Advisory Committee, contact Cindy Ferguson at 800/204- 2776, ext. 107, or e-mail cferguson@aprovision.org.

Double Your Profit
by Sidney Burton

In 2004, APRO commissioned Trenholm Research to conduct an image survey for the rent-to- own industry. This survey revealed that we are doing business with only 6 percent of our potential customer base. During the past 12 months, I have given seminars exploring the nature of the elusive 94 percent of our potential customers. In this article, I want to address how many more customers you need to… …double your profit Let’s assume that your store netted 6 percent pre-tax profit on total revenue last year.You may think you made 6 cents out of every dollar of revenue. This is a misconception. If you believe this, then you probably conclude that you need to double your revenue in order to double your profit. (I do think that it’s possible to double your revenue, but I realize that I may be alone in this belief!)

Some think it might be impossible to double revenue, so they conclude that it is impossible to double their profit and fail to do anything to improve their profitability. That’s unfortunate, because most dealers need only increase revenue between 10 percent and 15 percent to double their profit. First, the expenses Understanding the difference between fixed and variable expenses is the key to understanding the doubling of profit with only a small increase in revenue. Variable expenses are those that vary directly with revenue. As revenues increase, so do these expenses. Advertising, selling and delivery are variable expenses in a rent-to-own store. Total variable expenses should be between 8 percent and 12 percent of revenue.

Let’s throw around some numbers. If your cost of rentals is 33 percent, then your gross margin is 67 percent. By adding 12 percent variable expenses to your 33 percent “cost of rentals,”we arrive at a total “cost of rentals” of 45 percent. This leaves 55 percent as your “contribution margin.” It’s called contribution margin because it is that portion of every revenue dollar that contributes to covering fixed expenses. Once your fixed expenses have been covered and you are past your break-even point, this 55 percent is then contributing to profit. In other words, a rent-to-own store that nets 6 percent of revenue doesn’t make 6 percent out of every dollar. The store is losing money until the fixed costs are covered and the break-even point is passed. Once past the break-even point, they don’t make 6 percent from every subsequent revenue dollar— they make 55 percent! Now let’s take a look at fixed expenses, such as occupancy costs, insurance and property taxes. Of course, all expenses are variable in the long term, but fixed expenses are either static over a range of revenue or they vary based on some other factor, such as inventory levels.

If you have more than one store, you may also have allocated expenses. These are support costs that are necessary for the operation of a rent-to-own store, but the costs of which may be shared by more than one store. Some examples are home office costs, distribution costs and service costs. For our example, we will use 11 percent of revenue as our allocated expense amount and, to simplify matters, we’ll add this in with our fixed expenses.

The break-even point Your break-even point equals fixed expenses divided by your contribution margin. In the example below, I’ve used an average monthly sales figure that might be higher than what is typical just to make the math easier. Let’s take a look: Average monthly revenue ...$100,000 (100 percent) Cost of rentals .........................$33,000 (33 percent) Gross margin...........................$67,000 (67 percent) Variable expenses ....................$12,000 (12 percent) Fixed expenses.........................$49,000 (49 percent) Net profit before tax ...................$6,000 (6 percent) Break-even revenue ......................................$89,091 (fixed expenses/contribution margin) In other words, it takes $89,091 of sales at a 55 percent contribution margin to cover the fixed expenses of $49,000. Incremental revenue (revenue received after you’ve passed your break-even point) equal average monthly revenue minus break-even revenue. ($100,000 – $89,091 = $10,909). Net profit = incremental revenue times contribution margin. ($10,909 x 55 percent = $6,000) Consequently, we can see that the last $10,909 of revenue produces all the profit! The rest of the revenue went to pay the fixed expenses. The good news is that in this situation, it will take an increase in revenue of only $10,909—or a little more than 10 percent—to double the profit to $21,818. At an average yield per customer per month of $150, the $10,909 amount represents about 73 new customers.

Just think of it: 73 new customers to double your profit! That’s all it takes! Do you know where you’re going to get these 73 new customers or how you’re going to convince them to rent something? Well, I have some ideas on this subject. If you want to find out what they are, come to APRO’s 2006 Convention and Buying Show, September 20–23, in Orlando.We’ll be addressing these ideas in a seminar entitled RTO Strategies: Pricing, Marketing and Keep Rates. I hope to see you there!

Correct Collections
by Ed Winn III

Rental dealers with customers who fall on hard times and are honest about it are usually pretty good sports. They do not want to give their stuff away, but they will work with customers toward a solution that satisfies everybody. Not so with customers who are less than honest, who move with no notice, who quit returning telephone calls, who threaten the store, who generally make the collection process the dreary ordeal that it occasionally is. 3 Once communication between the store and the customer has broken down irretrievably, for whatever reason, the dealer’s goal becomes recovery of the merchandise. There is always a magic moment when the store employee in charge of the file realizes that there is no way to salvage the account. Now the mission is to retrieve the product with as little cost and trouble as possible.

It can be infuriating to know that some irresponsible rental customer is out there lying on the store’s sofa, watching the store’s nice new big screen TV, drinking beer paid for with money that could have been used to make a rental payment and leaving rings on the store’s coffee table, all the while too lazy, indifferent, ashamed or downright dishonest to return a telephone call. Blame it on the entitlement society fostered by advocates of big government. Blame it on bad parenting. Blame it on the erosion of values and the decline of western civilization. Blame it on Eve and the Fall of Man. Lay the blame wherever it feels right to lay it, but blaming will not get the merchandise back. Regardless of whose fault it is, there remains the tedious and unpleasant chore of getting the stuff back in the store and ready to re-rent. Every dealer has his or her own strategies for dealing with such a situation. Some are very aggressive; others less so.

This piece will review the rules about calling other people about the situation— people like family members of the customer, references listed on the rental order, the customer’s employer or neighbors. Some dealers will find the rules too confining for their profitable pursuit of the RTO business. Others may be pleasantly surprised.Whatever one’s view of the rules, it is useful to know what they are so that the risks of collection behavior can be accurately gauged. The theory of the Fair Debt Collections Practices Act Rental dealers should know by now that there is a federal statute on the books relating to the collection of debts owed by consumers and that the act only applies to collection agencies and not to rental dealers. It is, nonetheless, the most comprehensive writing about fairness and integrity in the collections process, giving consideration to the lawful payment of debts and to consumers’ rights to privacy.

It is useful to review what the FDCPA has to say about calling third parties if only as a reference point and not as a statement of how rental dealers must act. Here is the pertinent language from the federal law: “…[A] debt collector may not communicate, in connection with the collection of any debt, with any person other than the consumer, his attorney, a consumer reporting agency, if otherwise permitted by law, the creditor, the attorney of the creditor, or the attorney of the debt collector.” The statute defines “consumer” to include the consumer’s spouse, parent (if the consumer is a minor), guardian, executor or administrator. Here is the reasoning underlying this rule, as taken from the Senate report on the FDCPA: “This legislation adopts an extremely important protection…It prohibits disclosing the consumer’s personal affairs to third persons.

Other than to obtain location information, a debt collector may not contact third persons such as the consumers friends, neighbors, relations or employers. Such contacts are not legitimate collection practices and result in serious invasions of privacy as well as loss of jobs.” State rent-to-own and collection statutes Four state RTO statutes have debt collection provisions in them that relate directly to rental dealers: Arizona, California, Minnesota and West Virginia. Each contains a prohibition against contacting third parties similar to the language in the FDCPA. The Arizona statute, for example, provides that “a lessor shall not communicate, in connection with the collection of money or repossession of property under a rental purchase agreement, with any person other than the consumer…”

In addition, 26 states have debt collection statutes that apply to primary debt collectors, such as rental dealers attempting to recover their own property or collect money from a customer. Most, but not all, of these statutes, have similar prohibitions against contact with third parties for any purpose other than to obtain location information about the customer. Consumer consents and waivers All of these statutes, however, expressly allow for the consumer to waive the protections afforded against having creditors or debt collectors contact third parties. The FDCPA prohibition is prefaced with this language: “Without the prior consent of the customer given directly to the debt collector…” The Arizona statute provides the following exception to its rule: “on the prior consent of the consumer given directly to the lessor…” If a rental customer can consent to allowing the rental company to contact third parties if need be, how exactly can they give this consent? The general rule for the waiver of any right is that the waiver must be “knowing, intelligent, and voluntary.”

A federal court reviewing an FDCPA case changed the wording but retained the essential concept when it ruled that a customer could consent to third-party contacts if the consent was “meaningful, voluntary, and direct.” [Killian v. Professional Bus. Serv. Inc. 21 Clearinghouse Rev. 1108 E.D. Ky. 1987.] This means that a rental dealer is at risk if he or she makes the assumption that the customer gave consent to contact third parties based on the customer’s conduct or the conduct of some third party. That a family member makes a rental payment for the customer or several rental payments does not necessarily mean that the customer has consented to allow the store to dun the family member for additional payments or for the return of the rental property. The easiest way to get the customer’s consent is to put it in writing, make it easy to read and impossible to miss and then get the customer to sign it before renting the merchandise. Such consent could be put on the rental order form or on the rent-to-own agreement, itself. The only limit to an individual’s ability to consent to a waiver of rights is if such consent is void because it violates public policy.

A customer could not consent to a public beating for failing to return the rental property on time, for example, no matter how evident the consent was on the rental agreement. Rental dealers have tried this in the past. Some dealers used to have language in their rental agreements attempting to make the customer agree to allow the dealer to enter the customer’s premises to recover the dealer’s rental property at any time and under any circumstances. This language was challenged in at least two court cases, one in Ohio and another in Louisiana, and in each case, the language was ruled void because it was attempting to have the customer authorize criminal conduct: breaking and entering. Therefore, getting the customer’s consent to contact third parties may still raise issues for the dealer depending upon what the dealer says to the third party. For most dealers, the contact will be enough.

The dealer will be able to explain the existing situation to the relative, neighbor or friend of the customer, but will not be able to harass, oppress or abuse the person. The dealer can discuss the customer’s account with the third party once the customer has agreed to allow the dealer to do so. The dealer will need to remain factual during the contact and also unemotional. After all, the person on the phone, who is not the customer, has not done anything wrong, and does not owe the dealer any money and usually does not have the dealer’s property. Finally, just as consent can be given, it can be withdrawn. The reason that the dealer wants to get the consent in writing to begin with it to be able to prove that the customer did, in fact, give the consent knowingly, intelligently and voluntarily. It is a matter of proof. The law does not require that the consent be in writing. Nor need any withdrawal of consent be in writing. The customer can merely tell the dealer, “I do not want you calling my references about my account any more.” The dealer is legally bound to comply with the request.

A word about calling customers at work If the dealer wants to be able to call the customer at work, then the safest course is to have the customer agree in advance that the dealer has permission to do so. That language can be worked into the consent concerning third parties. The Arizona RTO statute, for example, expressly provides that: “Without the prior consent of the customer given directly to the lessor…a lessor shall not communicate with a consumer in connection with the collection of any payment or the recovery or repossession of rental property at…the consumer’s place of employment.” Similar logic would apply if the dealer wants to talk to the employer instead of the employee. Get the customer to agree to such contact in advance and make sure that the customer’s consent is knowing, intelligent and voluntary. If these rules disappoint some rental dealers, so be it. If these rules cause some dealers to revise their paperwork to get meaningful customer consent in advance, then maybe future collections efforts will be just a little bit easier. This author certainly hopes so.

You Can Go Home Again: An APROfile of Wayne Chambers
by Kristen Card

"Let me tell you a story," begins Wayne Chambers, with a tone of discretion. “In 1976, my wife, Susan, and I packed everything—and I mean everything—we owned in a 5x10 trailer, and along with our small daughter and her dog in a pickup pulling the trailer, we all went to Houston on a wing and prayer. For two kids from Kansas, it was quite a dramatic change; in fact, when I interviewed for the Houston job, it was our first time ever to fly on a plane. Since then, we’ve traveled to five continents and visited almost every major city in the U.S., including Alaska. And now, after 30 years, we’ve been able to come home. For 57-yearold Chambers, the newly tapped president of rent-toown software leader High Touch Inc. (www.hightouchinc. com), his literal hometown is Wichita, Kansas, where he grew up. But in accepting his presidential position from High Touch, Chambers agreed to more than just moving back to the familiar heart of the Midwest; he also agreed to return to his rent-to-own roots. And he plans to make sure this story has the happiest of endings.

Born on a farm just east of Wichita, Wayne Chambers’ family moved to the city by the time he was ready for school. Chambers spent all of his schooling years in Wichita, eventually graduating—twice—from Wichita State University; first, with his bachelor’s degree in business administration, with an emphasis on business and accounting; and then, with his master’s of science in accounting, with an emphasis on economics and finance. That’s when Chambers was offered the opportunity to go to work for Remco Inc., a privately held rent-to-own company headquartered in Houston, in its accounting and finance department. He accepted and made the 600-plus-mile move with his wife, child, dog, pickup and 5x10 trailer.

It paid off; Chambers stayed with Remco for 10 years, then owned his own stores—spread across several states, including Ohio, Kentucky and Oklahoma—as a Remco franchisee, from the early 1980s until 1995, when he and his partners decided to sell. Chambers went on to a succession of jobs with rent-toown companies that eventually sold to other rental companies. He went to work at Amigo TV Rental Inc., in Albuquerque, New Mexico, which sold to RTO Inc. RTO later changed its name again to HomeChoice Holdings, and Chambers moved to Dallas to work for HomeChoice. But when HomeChoice sold to RentWay, Chambers moved from RTO to payday loans, going to work for Advance America Cash Advance Centers in South Carolina.

And that’s where he was when he got the call from High Touch. Chambers joined and began transitioning into his new position at High Touch last October, while his predecessor, Lyle Jones, began his transition out of the company and into retirement. Jones officially left High Touch at the close of 2005, ending a 15-year stint as leader of the 22-year-old company. “Lyle gave me 15 years of historical perspective,” Chambers says about their cross-over time. “He provided me with insight on internal personalities and outstanding client issues. Essentially, he provided me with an understanding of the underpinnings of the business, and that gave me a faster, smoother start.” One of Chambers’ first decisions was to spend about 90 days on the road, talking with clients, industry colleagues and employees. “I met with clients and vendors, traveled to trade shows, went to association functions and events,” recounts Chambers. “My purpose was to learn, to hear what was happening in the industry; I had to refresh myself. And from our clients, I wanted to know what they thought was good, bad and otherwise, and get a sense of what all that might mean for High Touch going forward.” The “good” that Chambers found—some of the company’s greatest strengths—involves the solid foundation that High Touch and its products are built upon. “High Touch is about 70 percent employee-owned, and that promotes employee longevity,” Chambers says. “I think our stability and the structure of our business model mean we’re going to be around for a long, long time. “Secondly, it creates a detailed working knowledge of our programs, systems, hardware and a continuing personal relationship with our clients,” he says. “The approach High Touch took many years ago in developing software was very analytical. The company founders developed a system that’s very functional. So what you get is not all the bells and whistles you might see with somebody else’s product; what you do get is when you go to the store every morning and punch your computer to turn it on so you can operate your store, it comes up just as regular as the sun. A lot of reliability, a lot of redundancy, a lot of practicality—that’s worth a lot in my book, when it comes to operating a store.”

Chambers refers to High Touch’s key seller, PRO/Systems, a comprehensive software system designed especially for the rent-to-own industry. PRO/Systems is a point-of-sale system that simplifies and tracks the receipt and rental of inventory, payment transactions, rental agreements, customer information and collections. The system compiles all data, produces relevant statistics and lets the store print daily reports. PRO/Systems also includes completely integrated home office capabilities, connecting home offices and stores via high-speed Internet, so that information is entered into the system only once. Integrated PRO/Accounting software helps clients easily perform all of their accounting functions—paying payroll and bills, compiling and calculating financial and profit/loss statements, etc.—also with no re-entering of data. High Touch also offers FUND$, software designed for payday loans/check cashing businesses, and, through its RSSS division, tire-and-wheel rental software and Maestro Music Business Software for retail and rental music businesses.

Chambers is ready to begin building on High Touch’s solid foundation, with both horizontal and vertical growth. While software has brought it successfully thus far, Chambers wants to enhance High Touch’s offerings in online and security services and video surveillance solutions. “There’s opportunity out there to generate more market share,” insists Chambers, “and I believe there’s just as much opportunity or more to create market share in other industries, working with the clients we already have. “What I’m trying to impress upon our clients and our employees is that we’re not just a software company,”

Chambers continues. “We’re a business solutions provider. And what that means is, our job is not just providing clients with software; our job is to provide them with the best technology and services to meet their needs, every day.” The not-as-good that Chambers found during his travels— some of the company’s challenges—involve improving High Touch’s communications, evaluating the architecture of the company’s software system, and possibly reexamining its pricing model. But the one facet of the business Chambers seems intensely focused on is speeding up the delivery of new products into the marketplace. “We’ve got a backlog of enhancements and customer requests,” notes Chambers. “I think there are things we can do to improve our ability to address customer requests. “In today’s world, I think it’s speed that makes the difference between a company winning and losing,” he says. “If you’re small, but you’re nimble, innovative and very progressive, then I think you can do well, from a business point of view. It’s not the big that eat the small; it’s the fast that eat the slow.” That maxim, which Chambers dubs his “unofficial motto,” leads into another story—a simplified version, Chambers assures; the setting is the Serengeti: “When the gazelle wakes up in the morning, he knows he must run faster than the lion or he won’t survive—he’ll be eaten.

When the lion wakes up in the morning, he knows he must run faster than the gazelle, or he won’t survive, he’ll starve. So what’s the moral? When you get up in the morning, you better be runnin’.” Chambers chuckles, but it’s clear he passionately believes in this need for speed and quality in today’s business environment. He intends to apply that concept at High Touch, even as he continues to climb a learning curve of his own. “I’m still learning,” confesses Chambers. “I’m learning a lot about information technology, which I’m no expert at, but I bring other things to the table. I’ve got good people all around me who know quite a bit about the technological side, but who may not be as knowledgeable about the business side. I need to get a little bit higher up the curve in terms of technology and help them get a little bit higher on the curve when it comes to the pure business aspects. “There’s still a lot for me to learn, and there’s still a lot for us to do, and I think we’ve got the tools to do it with,” Chambers concludes optimistically. “Things are going good and I’m having fun—that’s the important thing.” The pun is almost too easy—the guy who’s all about speed is driven, ha ha. But for Wayne Chambers, it happens to be the truth. Even a conversation with Chambers feels like it’s on a trajectory; his pace isn’t racing or erratic like a too-much-coffee man, but there’s little room for pauses here; not many “uhhhs” or “ummms” can creep in. Hemming and hawing simply aren’t part of Chambers’ world.

Driven toward solutions and forward movement, he prefers to tackle problems head-on. “I believe there’s no problem without a solution,” says Chambers. “I’ve got my opinions, but I’m fairly flexible. I try to take the time to listen, learn and figure out how I can best fit myself in the situation to help bring about a solution. I’m very tenacious—not ambitious, necessarily, but tenacious. And I think if you’re not willing to offer a solution, then don’t offer the problem. You don’t have the right to complain if you’re unwilling to get in there and do something to make a difference.” This philosophy is likely what spurred Chambers into what turned out to be the fight of his career—and the future of the rent-to-own industry. In the mid-1980s, the Internal Revenue Service began challenging RTO on two specific tax issues, with gigantic implications: whether rent-to-own products are depreciable; and whether RTO should characterize its transactions as sales, as opposed to lease or rental. A few rent-to-own companies were audited and were challenged by the IRS on those issues. “If they lost, then it would literally put them out of business,” Chambers remembers. Several of us decided, ‘We’ve got to do something about this. It’s not the right thing, that’s not what we believe. And we definitely don’t want to see our brethren put out of business, because eventually, the whole industry will be out of business.’”

Through the Association of Progressive Rental Organizations, Chambers helped create a Tax and Accounting Committee, which he chaired, and they began to raise awareness of and interest in the issue among rental dealers and vendors. “We formulated a plan, raised money to fund the plan, researched experts in the field—attorneys, accountants and the like—and retained the best we could find,” says Chambers. “Then we spent about 10 years doggedly working our side of the fence, against [industry] opponents and the IRS.” As one might expect, going up against the IRS is an overwhelmingly consuming task, and for a decade—during which he served two terms as APRO president— Chambers essentially turned his professional life over to this fight. It is, he concedes, the real reason he ended up selling his rent-to-own business. The turning point came during the early ’90s, when two U.S. circuit courts ruled in opposite directions on the issue. Chambers and his team went to Congressional lawmakers and requested their help in clearing up the contradiction. “I can remember the morning—it was March of 1993,” Chamber says. “I got a phone call from our attorneys saying the IRS had capitulated on the sale-versus-lease issue.

Two years later, the IRS added depreciation rules to the actual Tax Code, so we could depreciate our property. That ultimately offered us safe haven on both issues. It was tremendous; it was a billion-dollar win for the industry and the highlight of my entire career.” APRO Executive Director Bill Keese says the value of what Chambers sacrificed in order to ensure the continued success of RTO is immeasurable. “Wayne has given more to this industry than anyone I can think of,” says Keese, “and we are all immensely grateful to him.” And Wayne Chambers is grateful to be home again. He and his wife of 30 years, Susan, both still have siblings around Wichita, as well as two of their four grown daughters and seven of their nine grandchildren. They also own some acreage east of Wichita, which, after 30 years on the road, is where Chambers prefers to spend his downtime. “I return to my roots every weekend,” he says. “I enjoy the outdoors, but the urge to travel has passed. I just go out to the farm and I go work cattle or sit on a tractor all day long. It takes me back.” As for coming back to the rent-to-own fold, Chambers couldn’t be more pleased about it. His years away from the industry don’t seem to have tempered his passion for it at all. “I am a true believer,” says Chambers. “I truly believe we offer a possible solution that otherwise our customers might not have. The American Dream is based on material wealth.

Capitalism is a beautiful thing. Unfortunately, some people at the lower end of the capitalism spectrum get left behind. RTO gives them a chance to own that big screen, refrigerator or whatever. We’re an alternative, pure and simple. And I’m a true believer in allowing that alternative to live and to exist. I’m a fierce supporter of it. “My response to criticism about our industry is, ‘We provide a service, take a risk no one else is willing to take. If you want to take the risk or do something different to meet the needs of those tens of hundreds of thousands of people, then get after it. I’m out there doing it.’”