After the economy soured in 2008, Conn’s examined which of its locations – currently numbering 65 in Texas, Louisiana and Oklahoma – did well during the downturn selling the company’s mix of appliances, consumer electronics, furniture, mattresses, lawn equipment and computers. Conn’s found that the stores with a concentration of its core customers – those with credit scores from 525 to 650 – did better.
“The most unique thing that we do – our key differentiator in our business model – is our consumer finance program,” COO Mike Poppe emphasizes. “Credit scores from 650 down to 525 are our core customer – that is the sweet spot we play in. These customers have limited access to other credit; they generally are good payers and good stewards of the credit that they do borrow, and are typically going to be blue-collar, working-class, lower or fixed-income individuals.”
Poppe characterizes Conn’s core customers as having household incomes of $40,000 to $60,000 and living in ethnically diverse, older neighborhoods where the homes’ appliances, televisions and other furnishings require replacement.
Another key finding of the analysis was that better-quality merchandise produced a more satisfied customer willing to return to Conn’s and make another purchase. “If it weren’t for us, their alternative typically would be rent-to-own or a payday loan,” Poppe maintains. “Under our program, customer payments would be one-half to one-third of what their payment would be on rent-to-own with comparable products and prices. On top of that, if you shop a rent-to-own store and you shop a Conn’s, we are going to have a broader selection of better quality products than a rent-to-own store.
“We want to make sure two years down the road when they are still using that product that they associate it with a good experience,” Poppe stresses. “We also want to make sure two and three years down the road that they are glad they made the purchase and are still happy about making that monthly payment, so they pay their account in full and come back and make another purchase on credit with us. If they aren’t happy with the product and it is not serving their needs, they are less likely to make all their monthly payments.”
The analysis encouraged Conn’s to concentrate on product quality and higher margins instead of lower prices on lower-quality products. “We exited a lot of the smaller, low-priced, low-margin, fast-moving-type items,” Poppe reports. “So on the appliance side, we used to offer small appliances, blenders, mixers, toasters. We had small electronics, the MP3 players, musical instruments and all that kind of stuff.
“When you think about what we do best – offer our customers the ability to finance big purchases and needs for their home – these lower-priced products really didn’t fit what they shop us for,” he continues. “Those are all products they buy using cash, and they can buy on their trip to Walmart or Target or wherever they may shop. So we eliminated them and got that square footage back for more furniture and other items across all categories.”
This has enabled Conn’s to raise its average selling prices 20 to 30 percent – while remaining competitively priced in every category – and increase comparable store sales from the first half of 2011 to the first half of 2012 by 20 percent on average.
“We’re getting our primary growth out of the furniture and mattress category,” Poppe reveals. “Mattresses we’ve been in for a decade, but only over the last few years have we really focused on sales of both products and really worked on the merchandise mix, go-to-market strategy and advertising to really gain share in that market. The furniture and mattress market in the U.S. – based on the personal consumption expenditure – is about the same size as the TV and appliance markets combined. We don’t have anywhere near that market share in furniture and mattresses that we have in TV and appliances, so there is significant upside and growth opportunity there.”
Another result of the market analysis was the closure of 12 underperforming Conn’s stores. “Several years ago when we entered the Dallas market, we attempted to reach a broader customer mix,” Poppe remembers. “We ended up with some stores in higher-income areas where our financing product really did not attract enough of our core customer, and those stores struggled. So last year, we began the process of identifying and closing those stores that really didn’t fit our core customer.”
Is this an example of adapting to the “new normal,” where sales aren’t stoked by a real estate bubble? “I wouldn’t say we changed who our core customer is, but we have narrowed our focus on our core customer,” Poppe explains. “It’s not so much adapting to the times as recognition of what we do best and how we compete.”
Despite the store closings, Conn’s is still expanding in areas that match its core customer base. The company plans to open four more stores before the end of this year and eight to 12 next year, mostly in cities such as Albuquerque and Las Cruces, N.M., and Tucson and Phoenix, Ariz., as well as in El Paso, Texas, and Tulsa, Okla. Since emphasizing furniture and mattresses, Conn’s average new store size has increased from approximately 25,000 square feet to 35,000 square feet.
“With the changes we’ve made in our merchandising and location-selection processes, we really expect sales at these new stores to be meaningfully bigger than our current average sales per store,” Poppe says. “Even at 10 to 15 percent new units, we would expect the revenue growth to be more significant than the unit growth.”
Expanding into new regions will require at least one new distribution center – possibly in El Paso or Phoenix – in addition to the company’s four major distribution centers in Beaumont, Dallas, Houston and San Antonio. Conn’s also has crossdocks in Harlingen and Austin, Texas, and Lafayette, La., from which it can run deliveries and in-home product repair service.
At the same time it is opening new stores, Conn’s has embarked on a major store remodeling program. “With the change in the product mix and in the size of the furniture and mattress departments, we have taken a clean-sheet approach and completely relaid out the inside of the store and reformatted the look,” Poppe says. “As we update, we’re rebranding the stores Conn’s HomePlus to concentrate on the growth of the home products we carry.
“By the end of this year, we expect to have about 20 stores remodeled to the prototype presentation,” he adds. “We’d love to do another 15 to 20 stores a year over the next few years and remodel or relocate the stores to a usable facility and lay them out in the new format.”
Conn’s is growing its customer base by encouraging consumers to apply for credit online instead of coming to the store to apply. “Many customers who have a lower income level and lower credit score have the unfortunate experience of being turned down for credit on a regular basis,” Poppe says. “They may not be that excited about going through the application process and being told they don’t qualify for credit. But that means a lot of people who would qualify never come through the doors.”
Online application has changed that. “We’ve seen a meaningful increase in our retail sales driven by customers who applied for credit on the web,” he asserts. “A couple years ago, 5 percent of sales on a monthly basis would have been driven by customers applying for credit on the web. We’re now running 9 to 11 percent of sales driven by customers who applied for credit online.”
These customers then come into the store to make their final merchandise selection, but they do so knowing they will be able to complete the sale and not be embarrassed by being refused credit. “They can apply and get a credit decision without ever leaving their home,” Poppe notes. “We have really homed in on our core differentiation, which is delivering a unique finance product and experience to a customer who otherwise wouldn’t have access to the quality of products that we offer them and the ability to buy on an affordable monthly payment.”