Stan Windham walked into the newest Coes store in South Tucson. As CEO of the lease-to-own chain, he was eager to see how his 1,000th location was performing. Aubrey Merrin, the store manager, met him at the door.

Mr. Windham, so good to see you, sir. The new employees are real excited to meet you. And of course I want to update you on how everythings going, Aubrey said as he ushered Stan inside. Were doing great so far. Open for less than a month and over 100 customers already. Its a real good start, sir, a real good start.

You dont have to call me sir, Aubrey, Stan said, realizing it was probably hopeless. Congratulations. Ive said it before, but Ill say it again: I appreciate your taking this on.

Aubrey had transferred from the Coes up in Flowing Wells, where hed been the store manager for 10 years. He was raising three kids on his own, and although this location meant a slightly longer commute, hed jumped at the opportunity.

Im honored, sir, to be opening a brand-new store, he said. And with the economy as it is, Im just happy to be working for a growing company. He pointed up at the celebratory banner that still hung in the front of the store. Everyone else I know is talking about layoffs, not grand openings.

Stan felt lucky, too. When his father, Terry, opened the first Coes back in the 1950s, he certainly hadnt set out to enter a countercyclical industry. Hed invested $600 in 32 chairs to rent out to auction houses, and the business expanded from there into party equipment and sickroom gear. In the 1970s he shifted to residential furniture and other household goods. Terry prided himself on conservative growthwhen he was starting out, he wouldnt buy a second item in a category (say, a sofa or a refrigerator) until the first one had been rentedand he took a tough love approach with his employees, especially with his son. When Stan started as an assistant manager, in 1984, the same year Coes went public, Terry had expected him to work harder than everyone else to prove his worth. And Stan had. Coes now took in over $2 billion a year in revenues.

Stan looked around at the room displays. We thought this might be a tricky location for us with Mr. Rental all over South Tucson, he said.

Aubrey nodded. Yes, sir, I was worried about that, toomarket saturation. Ive read about it. But were different from Mr.Rental.

Unlike many of its competitors, Coes had always emphasized ownership: More than half of its customers became owners by the end of their leases, compared with 25% for Mr. Rental. Coes offered a monthly payment schedule and a shorter contract period (12 months versus four or five years), which meant higher fees each month but a lower cost of the eventual purchase. Also, Coes managers were trained to approve lease agreements only for people who could afford the payments.

Are we getting any of Mr. Rentals customers? Stan asked.

Some. But I think our strong opening is thanks to the recession more than anything. Were seeing people in here whod never have considered Coes beforewealthier folks who are nervous about committing to big-ticket items outright.

Aubrey greeted a customer, shaking the young womans hand and offering balloons from the Grand Opening display to her two toddlers. He really had a way with people. Ten years ago, Stan had debated about hiring him, put off by his lack of sales experience. But Terry had said, as he always did, You can teach people to sell, but you cant teach them to smile. And hed been right. Managers like Aubrey, who fostered immediate trust with customers, were much more successful when it came to collecting the monthly payments.

Once Aubrey had introduced the customer to a salesman, he returned to Stan.

Can I ask you a question, sir?

Yes, Aubrey, as long as you stop calling me sir, Stan said with a laugh.

Ive been thinking about how well Coes is doing here, with all the new stores. And I think theres a market that you should consider: Mexico. Aubrey was shifting back and forth on his feet. So many of our customers are from there originally, and theyve all got family back home.I just, I think it would be a good, er, strategic move for the company, sir. And I would be more than happy to go down and train the staff there. You know I speak Spanish, and my kids do, too. My late wife was Mexican.

As a matter of fact, thats a conversation weve been having at headquarters, Stan said. Weve been considering Mexico, and Europe. Our investors expect us to keep growing. Still, we need to do it smartly. Stan had led a successful expansion into Canada in the 1990s when he was the COO, and Coes had over 100 stores there now. But a venture into Puerto Rico a few years before had failed miserably: Hed been forced to close the pilot store after only 12 months. Too many customers had skipped their payments and walked away with the products, and the store manager hadnt been able to handle the massive amount of collections. Several analysts had downgraded the chains stock as a result, and its share price had plunged. Stan didnt want to make the same mistake twice. Its a good time for us and potentially a great market, he told Aubrey. But its also a risky time.

A venture into Puerto Rico a few years before had failed miserably.

A Second Opinion

On his way back to Phoenix, Stan stopped at a Circle K off Route 10 to grab a cup of coffee. The woman behind the counter noticed the Coes logo on his shirt and smiled.

Coes! Do you work there?

I do, Stan said. This was exactly why he wore the shirt instead of a suit.

My whole house is from Coes. My daughters, too.

Which one do you shop at, Carmen? Stan said, reading her name tag.

Down on East Florence Boulevard. Right next to the Walmart. Cesars my guy. I go to see him every month, make my payment. My TV is from you, my couch. Every morning I think, Gracias por Coes, she said, quoting one of the companys Spanish-language commercials.

Im glad to hear it. Stan handed her two dollars for the coffee.

You need to open a store in Mexico! My mom is down in Hermosillo. She cant believe all the things we can get up here. Plus free delivery, free repairs. Shes telling all her friends about it. Carmen passed him his change. Theyve got nothing down there like it. Walmart is there, but they only take cash or credit, and my mom doesnt have either. Other stores will give you credit, but nobody will rent stuff to you like Coes.

Stan smiled. First Aubrey, now a customer: Mexico was popular this morning. And a few people at headquarters were on the bandwagon, too. His business development team had gotten some good market data about the border citiesMatamoros, Monterreyand some leads on potential partners.

Stan left the store and grabbed a Coes hat from his trunk.

When he returned and handed it to Carmen, she laughed: It said Gracias por Coes! in big white letters.

A Prudent Path

Back at the office, Stan stopped by to see his CFO, Carl Amirault. He wanted to be sure everything was ready for the executive team meeting later that day. They were set to discuss the firms five-year growth strategyagain. Stan told him about Aubreys suggestion and the chatty cashier at the Circle K.

Are we letting employees and customers dictate our expansion strategy now? Carl joked. If youd run into an Irishman, would you be pushing for Europe?

Well, Europe is on the table, too. But Mexico might be easiermaybe starting small with two or three stores in Jurez and testing the model. Your own teams analysis showed how many people dont have access to credit there.

Yes, but were still mapping the regulatory environment, Carl warned.

The two men often sparred like this. In fact, whenever one of them took a stand, the other tended to push harder in the opposite direction. Stan knew his father had wanted that kind of tensionin fact, had nurtured it. As he mentored both of them up through the ranks, he had fostered debate between them, always telling Carl to be prudent while encouraging Stan to think big and trust his gut.

The environment has to be better than here, Stan said. In the height of the recession, U.S. consumer protection advocates had attacked the rent-to-own industry, claiming the total price of goodsoften 60% to 90% higher than that of traditional retailersamounted to predatory financing and caused undue hardship for customers. Stan and other industry CEOs argued they were providing a much-needed service: giving people without access to credit a chance to acquire household items, in a way that suited their cash flow, preserved their credit, and allowed them to eventually own the item outright. It worked just like a car leaseand those werent seen as predatory. And if at any time leaseholders couldnt make their payments, they could return the items with no penalty and resume the contract where they left off whenever their financial situation improved. But he knew the fight was far from over.

Karen says Congress is going to be all over this in the spring, Stan said, thinking of his discussion with Karen Werner, the general counsel of Coes, the previous day.

I doubt it. They have bigger fish to fry, Carl argued. Besides, you cant legislate what customers want.

Thats true. Still, Im just concerned. The bottom line is we need to diversify our risk. And Latin America might be a relatively inexpensive place to do that, considering the lower transportation, labor, and real estate costs, Stan said.

There are plenty of growth opportunities right here in the U.S. We should be putting a store next to every Walmart. We have the same customer base, and people need an alternative when theyve been turned down for credit. Or we could experiment with our product line, try the rent-to-own concept for goods beyond basic household items. Weve got lots of options without taking a risk abroad. Were not seeing shrinking margins yet, Carl said.

Yet, Stan shot back.

But why would we add the complication and risk of international expansion when its not necessary? In this economy, investors want growth, but they also want to play it safe, Carl said. And I dont need to remind you about Puerto Rico.

Stan expelled a deep breath. Im worried that things are going to get too restricted here, and if that happens, we may regret not having gone elsewhere to continue growing.

The Voice of Experience

Back in his office, Stan asked his assistant to get his father on the line.

When Stan had taken the reins, two years earlier, Terry had promised to stop coming into the office every day. Hed said the company was in good hands and he was looking forward to retirement. But Stan knew that wasnt entirely true. His dad loved the business and missed it. Hell, he wouldnt be surprised if Terry still put on his Coes shirt every morning.

Hi, Dad, Stan said.

There isnt an emergency, is there?

Nope, nope. I was just checking in. I was down at the South Tucson store this morning.

A thousand stores. Its hard to believe. Hows business?

Good. Aubreys doing great. Listen, I need some advice about a strategy meeting we have today. Ive been giving serious thought to Mexico. The more I look into it, the more attractive it seems. The market is large, and the competition is weak. People dont have a similar alternative.

OK, Terry said. But dont forget about Puerto Rico. We had the trouble with shrinkage, and we couldnt find the right personnel. It was a tough market. Stan gave an exasperated sigh, but not loud enough for his father to hear.

We certainly learned some lessons, Stan acknowledged. But to tell you the truth, Im concerned about building a growth strategy solely on U.S. revenues. Weve been talking about going international for a long time. The analysts are all over us about future growth.

What about Europe? Terry asked. The culture and the regulatory environment there are a lot more like ours.

Thats not necessarily a good thing. Besides, the cost of opening stores is just as high as here.

What does Carl say? Terry asked. Stan smiled. His father was so predictable.

His teams analysis says we have a 35% chance of success in Mexico, but I think they were too conservative. Carl feels that the U.S. is the only market we know well enough and that we havent fully tapped it, especially with the down economy, Stan said. He wants us to focus on increasing profitability, not go into uncharted territory. Its too risky, he says.

If only you had a dollar for every time Carl said Its too risky, Terry joked. But he has a point, he added more seriously. Were doing so well in the domestic market. Why wouldnt we stay focused and see what happens with the economy?

Because its a crowded, expensive market. It makes a wide-open field where theres a real need for our business look very appealing. Weve always said we wanted to help as many people as possible get access to the things they need. An affordable path to ownership while still making a profit, right?

Right. We just need to be sure we dont hurt the company trying to do that. There was a long pause. Of course, its your company now, son. Your company, your call.

According to the HBR case study, "Play It Safe at Home, or Take a Risk Abroad : Comment upon some of the problems Coe faced when they expanded into Puerto Rico? (4 marks)