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., 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.”
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.
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.
The 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.