Amid the retail industry’s doldrums, one particular retail business not only is thriving, but its business model promotes steady performance regardless of swings in the economy.

Scott Rosenberg

Scott Rosenberg

Purchasing Power is a 16-year-old company through which employers can provide their workers the opportunity to purchase some 50,000 products and services — everything from consumer electronics to jewelry to vacations — through payroll deductions.

End users of the service essentially get interest-free loans. The purchase price for an item is not padded with interest or fees, even though the payroll deductions are made over a 12-month period following a purchase. Users are also not subject to credit checks.

Because Purchasing Power is therefore heavily laden with receivables at all times, growing the business requires CFO Scott Rosenberg to perpetually seek new financing.

“It’s the biggest thing I focus on,” he says. “We’re the opposite of a typical business-to-consumer commerce environment, where you get paid in two or three days after credit-card clearing transactions. From a cash-flow perspective, we have payables that come due before we collect on receivables. The operational challenge for the business is just staying ahead of our growth.”

Making sure sufficient financing was in place was a strategic initiative Rosenberg launched after joining the company in September 2012. Most notably, the company did its first rated securitization in 2015, receiving an “A” rating on its collateralized receivables from Kroll Bond Rating Agency. It was a seasonal capital raise, as a large share of Purchasing Power’s payables are due during the year-end holiday season. Rosenberg repeated the exercise in 2016.

More capital became available late last year as a result of a change in ownership, with prior owner Rockbridge Growth Equity selling the company to another, larger private equity firm, Flexpoint Ford.

Purchasing Power’s 285-plus customers include companies, associations, and government agencies, all with at least 1,000 employees. Following its 2001 launch, it took the company 13 years to reach $1 billion in cumulative total revenues, but it crossed the $2 billion threshold just three years later. Annual revenue grew by almost 15% in 2016 and has swelled by 74% since Rosenberg joined the firm, while EBITDA has surged by 95%.

Rosenberg became president of the company at the beginning of this year while retaining the finance-chief role. CFO recently spoke with him about his role and Purchasing Power’s growth and business model. An edited transcript of the discussion follows.

You certainly have an interesting business.

Yes. People don’t ordinarily think about replacing their broken refrigerator by going to an HR benefit.

What’s driving demand for the service?

There are a couple of macro trends that create the viability for the business. First, there’s a growing trend of financial fragility in the United States. There are probably 100 million-plus people who can’t put their hands on $600 in savings. Also, companies are now taking more interest in the financial wellness of their people to help drive productivity, engagement, and differentiation.

Are there competitors?

There are a few ankle-biters. They’re smaller. It’s hard to gain traction in this space because you have to be credible, and a lot of that comes with experience and a long track record. We’re advantaged by having created the space.

It’s a relationship business. B2C companies may have millions of customers but don’t really have relationships with them. This is sort of a B2B2C model, but it starts in the B2B environment, trying to get companies to offer our program. So first and foremost you have to have a relationship orientation. And it’s hard for companies that started in B2C to initiate that B2B mentality.

Now, the ante to play is that you have to be really good from a commerce-execution standpoint, because that’s where the customer satisfaction comes from. But if you’re bad at relationships, you’ll have no commerce.

What’s the revenue model? How do you get paid?

We operate as a retailer. We buy goods wholesale and mark them up. We are a merchant of record just like any other retailer.

How do you manage the inventory?

Here’s the beauty of it: We are a virtual e-tailer. The only inventory we own is an outcome of returns. We do not have warehouses or stock products. We do not cut a purchase order until an order is in hand.

You make it really easy to buy things. No interest, no fees, no credit checks. Doesn’t it tempt people to buy more stuff than they can afford?

Maybe they would if they could, but there are guardrails in place to prevent that from happening. There’s a spending limit that’s indexed off a person’s pay so they can’t get into a lot of trouble. It averages from 7% to 9% of their annual pay. And people rarely utilize all of that.

But the nature of consumerism in the United States is that when people have a need or want for something, they will find a way to get it. We provide a more affordable alternative to direct-to-own markets or payday loans. Whatever the price is when you ordered an item is the price you pay over 12 months. If you take a two-month leave of absence, the price will remain the same over 14 months.

What happens when an employee leaves the employer before a purchase is paid off?

The obligation travels with the former employee. We work with them to repay the obligation.

So you’re protected while someone remains employed, but you do have some degree of bad-credit writeoff. How significantly does the employment rate affect business results?

Our loss performance has been flat almost from the beginning. Yes, we are kind of underwriting against overall turnover. But in high employment cycles, more of the turnover that happens is voluntary, because there are job opportunities, while involuntary turnover tends to go down. So overall turnover stays fairly flat.

The inverse is true as well. In recessionary economies, involuntary turnover tends to rise and voluntary turnover tends to dip, and again overall turnover stays fairly flat. So through the various economic cycles our performance has varied only in the single-digit basis points.

The other thing that helps is the diversification of our clients, which creates a portfolio effect. Health care, one of our higher penetrated sectors, keeps rolling throughout economic cycles, as do the government sectors. It really helps buffer the ebbs and flows, like what the retail industry is going through today. We have retail clients, don’t get me wrong, but we’re insulated.

Give us some flavor of the diversity of products you offer for purchase.

When I got here we had about 2,000 products, and now it’s more than 50,000. We started with computers then grew into all things electronic. But now we have almost everything. For example, there are automotive solutions — the consumers that engage with us don’t save much, but they need their vehicle to get to work, aren’t in a position to buy a new car, and need to make sure their car is maintained.

We have home appliances, furniture, handbags, sports equipment, fitness products, and health and beauty products. And jewelry — someone who wants to get engaged and can’t afford a ring can buy it from us and pay it off over 12 months. A lot of [the purchase activity] is aspirational.

How do you determine what products to offer?

We partner with our suppliers to tap into marketplace trends. We also have a merchandising organization that reports up to me that’s really in tune with what’s going on in the market. They’re at trade shows throughout the year, looking at what’s new and what’s hot.

But we also use our existing consumers as a sounding board. That’s how we got into things like jewelry and handbags. People were asking to buy that stuff through us.

How have you been able to absorb the role of president on top of your CFO duties?

I probably came here with a broader, more influential role than my title suggested. I’ve influenced a lot of the activities of the business. Under the presidency is what we call our commerce vertical, which includes consumer marketing, creative services, merchandising, and supply chain operations. I ran marketing at J. Crew, so I have marketing experience.

The financial management stuff works fairly routinely now, because we’ve had four years of really refocusing those efforts. I made some strategic hires in controllership and FP&A. I’m more able to split my time and attention.

Do you ever have any conflicts of thought, such as, here is what I would do as a CFO, but here is what I would do as an operational executive? Is there a bit of rub there?

I had a similar dilemma at J. Crew. When I took over as [vice president] of marketing, I was also the CFO for the direct-to-consumer channel. It takes a bit of getting used to, but if you have the right mentality those conflicts fall off very quickly.

What helps navigate them, when they arise, is a business-first focus. My CFO hat ensures we don’t do anything that would be unethical or unscrupulous. But I also can make the tradeoffs that help the organization connect operating decisions to their ultimate financial impact.

And it’s not always a quantifiable dollar decision. I can have a rich conversation with someone about, say, the business benefit of an investment opportunity in our supply chain. If it costs a little bit more to offer a better customer experience, that should pay off in the long run.

If I want to invest in something like that, I have the CFO hat and can look across the organization, see where we can shift money around to [accommodate that] investment opportunity.

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