What’s a ‘subprime retailer’?

A Charlotte Observer headline the other day caught my eye: “Texas subprime retailer Conn’s planning big NC expansion.” Subprime retailer? Don’t think I’d ever seen those two words used before but, as it turns out, it is a fair description of Conn’s business strategy. As the UPoR explains:

Texas-based retailer Conn’s just opened its newest Charlotte location in the University area, and the rapidly expanding company plans to open another four locations in North Carolina by the end of the year.

The store, which sells appliances, electronics and furniture, offers financing to customers with subprime credit and sees Charlotte as an untapped market. According to Experian, the average credit score of Charlotteans is 654.

Back in January, punchcardblog offered up a detailed examination of Conn’s (CONN) business model. Some highlights:

CONN is a specialty retailer of appliances, furniture, mattresses and electronics with 89 locations in Texas and the Southwest. Significantly, CONN finances 77% of customer purchases through its proprietary subprime credit portfolio.

And:

Conn’s competes against Sears, Wal-Mart, Target, Sam’s Club and Costco, specialized national retailers such as Best Buy, Rooms To Go and Mattress Firm, home improvement stores such as Lowe’s and Home Depot, and locally-owned regional or independent retail specialty. Conn’s also competes against companies offering credit constrained consumers products for the home under weekly or monthly rent-to-own payment options. Such companies include Aaron’s and Rent-A-Center, as well as many smaller, independent companies.

How’s does Conn’s survive in this jungle? It has carved out a unique niche for itself. Conn’s has a narrowly tailored strategy to serve the financially strapped working class household. These customers represent a unique segment of the middle-income market that is underserved by traditional banking institutions. The core consumer base is comprised of working individuals who typically earn between $25,000 and $60,000 in annual income. The typical customer is unbanked and has credit scores between 550 and 650. This segment of the population has limited disposable income after rent, transportation, food, health care and communications. In and of itself, this is not sufficient to set Conn’s apart from the competition. The unique feature of Conn’s strategy is the subprime financing arm. By offering in-house financing, Conn’s makes an aspirational lifestyle available where it would otherwise not be. Their competitors typically do not provide a similar credit offering.

And:

While demand has grown, the number of lenders supplying credit to this sector of the population has decreased. The competitive landscape has changed dramatically since 2008. The industry’s traditional lenders, including Wells Fargo, HSBC, Citi and AIG, have recently undergone fundamental changes, forcing many to retrench and in some cases to exit the market altogether. Tightened credit requirements imposed by banks, credit card companies, and other traditional lenders that began during the recession of 2008-2009 have further reduced the supply of consumer credit for non-prime borrowers. In addition, recent regulatory developments create a dis-incentive for these lenders to resume or support these lending activities.

Concurrently, subprime credit card providers have exited the industry. The Credit Card Accountability Responsibility and Disclosure Act of 2009 added new restrictions on late fees, interest-rate increases and other pricing tools used by card issuers before the financial crisis.

Additionally, states have cracked down on payday lenders, effectively pushing payday lenders out of many states.

As a result of the reduced output of these companies, access to credit has fallen substantially for the non-prime segment of customers. The alternatives are not particularly attractive. Many subprime borrowers have turned to title lenders and subprime auto lenders, both of which are experiencing booms. New entrants are also entering the market.

The biggest risks to Conn’s future thus would seem to be that larger existing retailers start offering subprime financing, eating into Conn’s potential market; and that Conn’s finances purchases for too many people that don’t pay on time or at all. The company had an issue with that last year, which cost its CFO his job, upset Wall Street, and inspired the punchcardblog analysis.