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New Kmart Rent-to-Own Program Turns $300 TV Into $415 Buy

(Corrects share price in eighth paragraph.)

Kmart is introducing a rent-to-own program charging the equivalent of 100-plus percent annual interest, a move into a business that has drawn criticism for hurting low-income consumers.

The Lease-to-Own program touts instant gratification -- customers without credit take a product home right away, make biweekly payments, then decide whether to buy out or return the product. A typical deal could turn a $300 television into a $415 purchase. Sears Holdings Corp. (SHLD), which owns Kmart, debuted a similar program at its namesake stores earlier this year.

“The rent-to-own industry promises consumers the American dream of ownership,” said Ed Mierzwinski, consumer program director at U.S. Public Interest Research Group, a Boston-based consumer group. “But its contracts provide for very high-cost payments, and it is difficult to complete the contract.”

Jai Holtz, Sears Holdings’ vice president of financial services, says the Sears rent-to-own program has grabbed new customers who don’t qualify for credit, allowing them to buy televisions and other big-ticket items.

“I’m not here to convince you lease-to-own is not more expensive than a credit program,” Holtz said. “Our total cost of ownership, for a customer who otherwise cannot get credit, is much lower than the others in the industry offering these types of products. This is really coming from consumer demand.”

Photographer: Jin Lee/Bloomberg

A shopper carries a flat screen television at a Kmart store in the Bronx borough of New York. Close

A shopper carries a flat screen television at a Kmart store in the Bronx borough of New York.

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Photographer: Jin Lee/Bloomberg

A shopper carries a flat screen television at a Kmart store in the Bronx borough of New York.

Kmart’s lease-to-own program, which begins Nov. 22, comes as U.S. retailers brace for a tough holiday shopping season, during which sales are projected to rise 2.4 percent, the smallest gain since 2009, according to Chicago-based researcher ShopperTrak.

Struggling Chain

Sears Holdings has been struggling since hedge-fund billionaire Edward Lampert orchestrated the merger of Kmart and Sears in 2005. Last month, the company said same-store sales, a key gauge of performance, slid 3.7 percent in the 12 weeks ended Oct. 26 and that its third-quarter adjusted loss before interest, taxes, depreciation and amortization widened.

Sears rose 2.9 percent to $61.70 at the close in New York. The shares have gained 49 percent this year, compared with a 24 percent gain for the Standard & Poor’s 500 Index.

The company already attracts poorer customers than many of its rivals, with the median income of shoppers near its stores below that of Home Depot Inc. and Target Corp., according to Matt McGinley, a managing director at International Strategy & Investment Group in New York.

Photographer: David Paul Morris/Bloomberg

Kmart’s lease-to-own program comes as U.S. retailers brace for a tough holiday shopping season, during which sales are projected to rise 2.4 percent, the smallest gain since 2009, according to Chicago-based researcher ShopperTrak. Close

Kmart’s lease-to-own program comes as U.S. retailers brace for a tough holiday shopping... Read More

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Photographer: David Paul Morris/Bloomberg

Kmart’s lease-to-own program comes as U.S. retailers brace for a tough holiday shopping season, during which sales are projected to rise 2.4 percent, the smallest gain since 2009, according to Chicago-based researcher ShopperTrak.

While the move could help boost the struggling chain’s sales, Kmart risks hurting an already damaged brand, said Michael Stone, who runs Beanstalk, a New York brand-licensing agency that’s part of Omnicom Group Inc.

Brand Value

“I think it probably lowers the brand value of Sears,” Stone said. “The question is, survival or brand?”

The company’s move into rent-to-own financing is unusual for a mainstream retailer. Typically these deals are offered by such chains as Aaron’s Inc. and Rent-A-Center Inc. (RCII)

Holtz says Sears’s and Kmart’s programs differ from the national rental chains in several respects. His company doesn’t mark up the initial price of the product, as some rental chains do, making Sears and Kmart’s base cost of an item as much as 40 percent cheaper, Holtz estimates. Sears also limits its lease term to 18 months, where rent-to-own contracts can run for two or even four years.

That doesn’t necessarily make the service a good deal for Sears and Kmart customers, said Margot Saunders, of counsel to the National Consumer Law Center, a Boston-based non-profit that works on issues affecting low-income consumers. Saunders calculated that if customers made the minimum number of payments on a $300 television, they’d pay the equivalent of a 117 percent annual rate.

Mr. T’s

The rent-to-own concept, first known as hire-purchase, started in the 1800s when companies such as the Singer Sewing Machine Co. began offering the service. R. Charles Loudermilk Sr. founded Atlanta-based Aaron’s in 1955, and a decade later, Ernie Talley opened Mr. T’s TV Rental in Tulsa, Oklahoma, which eventually grew into Rent-A-Center, the largest U.S. chain with more than 3,000 stores and $3.1 billion in sales last year.

Over the years, the industry has drawn scrutiny and limits from most states, although Saunders of the National Consumer Law Center calls most existing legislation “not the least bit protective” of consumers.

Typically, rent-to-own customers make payments on a product before deciding whether to return it, keep leasing it or buy it. Many don’t have a minimum payment period. The Sears programs have a minimum lease requirement of 10 biweekly payments in most states, at which point a customer can pay a lump sum to own the product, continue to lease it, or return it.

Biweekly Payments

In an example provided by Sears, customers could buy a $400 item or group of items by making 10 biweekly payments over five months of $33, then decide whether to keep making payments, return the merchandise, or spend $220 to buy out the lease for a final cost of $553. That would be the equivalent of a 114 percent annual rate, according to Mierzwinski.

Saunders questions whether a customer who can’t afford an item’s original purchase price would be able to make the balloon payment at the end.

Holtz said the portion of Sears customers who end up owning the product is “much higher” than the rental chains. He declined to give a figure, saying the program is too new to calculate one.

About 75 percent of rent-to-own customers return their products within four months, according to the website of the Association of Progressive Rental Organizations, an Austin, Texas-based trade group.

Mierzwinski said he found the Sears lease-to-own website, operated with its program partner, Whynot Leasing LLC, “opaque,” with the true cost of products not easily discernible. That’s typical of rent-to-own programs, he said, which appeal to cash-strapped consumers because they focus on the individual payment amounts, not total cost.

“It deceives consumers about the true price,” Mierzwinski said. “Consumers are just going to see $25. The trick of rent-to-own is to show you the weekly payment.”

To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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