Worker Loyalty, Taken to Extremes

Aaron Rents values employee satisfaction and retention, and it's rushing to scoop up out-of-work salespeople in the wake of Circuit City's massive layoffs

by Moira Herbst

Just one day after the electronics chain Circuit City Stores (CC) announced that it would lay off 3,400 workers and replace them with lower-paid employees, Charles Loudermilk, chief executive of the rental retail company Aaron Rents (RNT) began posting advertisements on recruiting Web sites: "Attention Circuit City employees: So they say you make too much and are laying you off to hire lower paid employees? Aaron's doesn't lay off our highly paid employees…. We put them on a pedestal, and show others how they can make more."

That's not just talk. The 79-year-old founder of the Atlanta-based Aaron Rents has a very different attitude about worker loyalty, an approach that some might call old-fashioned. He talks about his workforce as "family" and goes to extremes to look after them, even keeping some employees on the payroll after their stores were closed because of Hurricane Katrina. "There's a strong culture of helping each other out," says Eric Kenitzer, a 29-year-old manager of one Texas store. "We're a band of brothers."

Dueling Attitudes

It's more than altruism. Loudermilk says that treating workers well in an industry as cutthroat as retail is good business, too. At a company like Aaron Rents, which sells electronics and furniture on a rent-to-own basis, happier workers mean lower turnover and more sales. Plus, it's easier to attract new recruits—a key point for a company with plans to open 250 new stores this year. "Why [Circuit City] would let them go is beyond me," says Loudermilk. "They spent many millions of dollars training these people, and we're after them."

It helps that he has the numbers to back up his approach. Loudermilk started in the business 52 years ago "renting 300 chairs at 10¢ a piece," and now has more than 8,000 employees. Last year, Aaron Rents reported a 36% increase in net income, to $78.6 million, as revenues rose 18%, to $1.3 billion. Its stock price has surged 160% over the last five years, to $26 a share.

Circuit City, in contrast, has been struggling. Investor pressure has mounted as the Richmond (Va.) company's shares have slid from $31.54 last year to $18.21. On Apr. 4, Circuit City said it lost $12.2 million in the most recent quarter on revenues of $3.9 billion, because of restructuring charges, store closings, and slower-than-expected sales (see BusinessWeek.com, 4/4/07, "Circuit City Swings to Loss"). It didn't help that on the same day, Best Buy (BBY), a major rival, reported strong results.

The layoffs at Circuit City throw into sharp relief the varying attitudes about worker loyalty in the U.S. While certain companies such as Aaron Rents and Best Buy work hard to foster it, executives at other companies treat loyalty as a relic of eras gone by. And even CEOs who proclaim the importance of their employees can be forced into layoffs or wage caps under withering shareholder pressure (see BusinessWeek.com, 8/14/06, "The Flip Side of Wal-Mart's Pay Hikes").

Wall Street Frowns

In this context, Circuit City's decision to fire 3,400 of its best-paid employees may not be such a big surprise. But what is surprising is the company's public pronouncement that shedding these workers was not about poor performance, but expressly to replace them with cheaper ones. "It's a sort of domestic offshoring," says John Challenger, CEO of Challenger, Gray & Christmas, a global outplacement company.

Circuit City's loss, however, could be a gain for Aaron's and Best Buy. Retail experts say that having trained, committed staff could be more important than saving a few dollars on hourly wages.