On the Shop Floor with...BrightHouse chief executive Leo McKee
There is a widespread misunderstanding of rent-to-own retailer BrightHouse that its chief executive Leo McKee is keen to put right. By Glynn DavisWith BrightHouse having been branded a “vulture” by the News of the World, McKee is keen to put the record straight and probably not just because the tag rubbishes the work he has put in but also possibly because it is a sensitive time for the private equity-owned retailer that will soon be looking to raise extra funds to crank up its store opening programme.
“It's a market people do not understand in the sense that there are 5.2 million adults in the 'alternative credit market'. These are people who cannot get a credit or debit card and being a responsible-lender to them is one of our mantras. Our customers are local and we know them so we are six months ahead in knowing that they will not be able to pay whereas with the credit card companies itis six months later,” says McKee.
The accusations thrown at the company relate to the high level of the payments, which are made weekly over a three-year period and based on an APR of 29.9 per cent. It doesn't take a mathematician to work out that the total payment for goods will be significantly more than if it an item was bought outright from Argos or Comet.
To McKee the proof that the BrightHouse proposition is fair to shoppers is the level of recommendations: “There is a perception versus reality with the business. The reality is that 40 per cent of our new customers come to us by recommendation. So it is vital that we have a good reputation. If we ripped people off then we'd be going backwards,” he says.
This is certainly not the case as the numbers he has delivered since joining the business in September 2005 have shown continued progress. One of the key metrics is customer numbers, which have gone from a net loss of 1,000 people in 2005 to a net gain of 21,000 for 2008/9, which has taken the customer base up from 92,000 to a current record 150,000.
This has helped BrightHouse increase its revenue by 16.9 per cent to £170.6 million for the financial year to March 31. And contrary to many media reports McKee does not attribute this growth to the tough economic situation and the rising levels of unemployment.
“The current climate does not make much difference to us. The price of utilities and staple products affect our customers the most, with core foodstuffs the biggest slice of their wallet, and since they are time-rich cash-poor they have been shopping around and are finding they are better off because of the supermarkets responding vigorously to the hard discounters,” he explains.
What has made the biggest difference to the performance of the business are the changes brought in by McKee who found out early on in his tenure that the company had a “poor reputation among customers, the community, the media and most significantly the staff”. Although the proposition was clearly defined and had a specific target market he says it was being “executed very poorly”.
One key issue was the ticket price of products that were much higher than in other stores. A product priced at £699 might be available in Comet at only £450 and McKee says “customers knew it”. The quality of the refurbishments (of returned products) was also poor and the choice of goods on offer was not the greatest.
To address the latter McKee hired the former buying director of Comet to head up the buying function as well as a professional furniture buyer and they have both helped to crank up the quality levels. Out went the seven foot tall wardrobes (because none of his customers had such high ceilings in their houses) and in came the likes of better quality harder-wearing sofas (many of the customers have children) that would at the least last beyond the three-years of the payment terms.
This focus has helped furniture sales increase on a like-for-like basis by a hefty 35 per cent over the past financial year, which compares with a lesser three per cent gain for electrical, resulting in an impressive overall group like-for-like increase of 14 per cent.
McKee hopes this trend will see furniture grow from its current 17 per cent of total sales to something nearer 40 per cent, which is the level achieved by the major rent-to-own retailers in the US including Rent-A-Center and Aaron's.
What is also helping drive revenues at BrightHouse is its extended warranties, which unlike the equivalent at other retailers allow customers to return their goods should they wish to simply upgrade to a newer model.
Return rates are 30 per cent and this is an attractive aspect of the business model as these goods can then be refurbished and sold-on to new customers under new three-year payment terms. Meanwhile the purchase cost of the goods can be written-down by the company over the three year period beginning with the initial purchase.
With the company's plans to grow beyond its current 183 outlets to a potential 646 units McKee says the decision has been made to spend £10 million on upgrading the infrastructure such as the IT systems as this will help support a larger portfolio of stores.
To reach this number of outlets anytime soon he admits there needs to be an accelerated level of openings from the current 20 per year and additional funding: “From self generated cash we can probably open 30 per year so we'll need extra funds at some point
Whether this will come from existing investors is questionable because there is some concern over whether Vision Capital is under pressure to liquidate any of its holdings to raise funds. This is because it may need to sort out the difficult financial position of one of its other retail investments Thresher that came as a package with BrightHouse but is now in a troubled position.
For now, McKee says Vision (who invested in July 2007) has “indicated they are believers in the business and are staying with it...they recognise the explosive growth potential”. Despite this concern and the negative media articles swirling around in the background McKee's 13 per cent stake in the company will no doubt help keep him firmly focused on running the business.
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