Is Thorn Group Ethical?

I’m not an ethical investor. I’ll own just about anything, providing that the company has the right goals at heart (aims to improve every day) and is open and up-front about what’s going on. Treat me the way you would like to be treated, and all that. I do however, prefer that the company not profit from human misery:

a) because I try to maintain strong moral standards

b) I think that misery is not a successful long term business model

c) more to the point, since I am investing, how can you sell more misery? (let us ignore for the moment the debt-fuelled consumption binge/ ‘ i am so broke’ self-loathing that most of Australia seems dead keen on inflicting on itself)

So, now-delisted asylum seeker centre operator Broadspectrum Ltd (ASX: BRS) was out of the running for the start. (I applied to be a guard on Christmas Island once, but that’s a story for another time). No, the business I was thinking about last night before I fell asleep was Thorn Group Ltd (ASX: TGA).

After the introduction of recent pricing caps, the company leases items to consumers for up to 1.8x that item’s value in payments per annum, typically a 2-4 year lease. The final payment is easily 3-5x that item’s value compared to if they bought it outright. I do not have the latest figures to hand, but I understand that something like 50% of Thorn’s customers use Centrepay, the Centrelink deduction system that ensures payments are deducted from Centrelink payments before the Centrelink receipients get access to the money.

Thorn’s own customer surveys say that 70% of clients could not have afforded the item without a lease. So is this ethical, or unethical? Thorn is providing fast credit to consumers who likely would not qualify for it otherwise, and would have no way of accessing those items themselves. Let’s face it, if your fridge breaks and you’re getting $400-odd a fortnight from Centrelink (from which you subtract rent, food, phone, transport, etc) it’s not getting replaced in a hurry – unless you take a lease.

Is Thorn unethical?

Now, if a person can afford to pay $16/week for a fridge, they could also save enough money for that fridge in ~50 weeks or so. Of course a fridge is a critical item that can’t be lived without, but Thorn also sells home theatre systems, Playstations, and all other sorts of non-essential gizmos. By definition if the pricing cap is 1.8x per annum, Thorn customers could simply put aside their weekly payments for 0.55 years (~28 weeks) and buy the item outright. So I suspect that Thorn also makes a lot of money subsidising the consumption levels of individuals with low levels of financial discipline/literacy.

Is this ethical? Or is Thorn simply keeping its customers in debt for as long as possible? I think many would agree that it is far easier to manage a small weekly payment than it is to save a lump sum.

I can think of several demographics that could require access to Thorn’s services, including the unemployed/disabled, pensioners, and also university students. If you’re on that type of wage, unless you’re very diligent about saving, you won’t have a lot of money sitting around. In fact even if you are diligent about saving, there are plenty of lump sum expenses like car registration, monthly health insurance, and so on that regularly takes a big bite out of those savings.

Importantly I note that although 70% of customers (let us accept for the purpose of this debate that this figure is completely accurate) can’t afford the items without Thorn’s services, this figure doesn’t tell me anything about what type of items are being leased. I would be interested to see a break-down by category, because if half of the customers are using government payments for these items, the government is not going to be overly pleased to find Centrelink spending going to Playstations and home theatre systems. We all know the stereotype of the low income earner with the $15,000 car stereo system or some other boondoggle.

Cutting Centrelink payments to dole bludgers who spend their payments on stereos is just the kind of thing that wins votes in some most all parts of Australia. I don’t have a stance on that either way. But I do want to know for sure that the government isn’t going to be cutting Thorn’s revenues by way of Centrelink reductions, and one way to know that is to evaluate whether this money is mostly going to essential or non-essential goods.

Importantly, this also will help give me an idea of whether Thorn’s customer demand is resilient in a downturn, or if it’ll fade away if unemployment or household debt gets out of hand. Strangely enough I’m currently inclined to believe that Thorn’s customer demand will be fairly resilient.

People in a better financial position will prefer to buy the items outright because it is cheaper and/or those people have access to other, cheaper sources of credit like a credit card or personal loan (i.e., Thorn customers don’t have the choice to shop elsewhere). The flip side of this is, of course, maybe Thorn’s customers are all incredibly financially irresponsible and they have 3 maxed out credit cards and have turned to leasing as a way to continue funding their outrageous consumption. The 50% (if I recall correctly) of Thorn customers that are on Centrelink would suggest that this is not the case, at least for a significant chunk of Thorn’s customer base. So I have developed a few questions:

  1. What percentage of Thorn’s customers have no other access to finance?
  2. What percentage of Thorn’s customers shop there because they are irresponsible consumers and their access to other sources of finance has been cut off (eg maxed out credit cards)?
  3. Why don’t Thorn customers simply save for 6 months to buy the items?

How does this impact my investment?

For the purposes of my Thorn thesis I currently believe that most Thorn customers don’t have a choice to shop elsewhere or delay their consumption – anyone that does uses an alternative source of credit or saves for the item . I also question whether this is even a fruitful line of thought to follow – I already know that the business model works. But the gist of it is that I believe that Thorn provides a useful and valuable service to certain segments of the market and thus is unlikely to be regulated out of business, or outcompeted by the likes of Amazon or other consumer goods businesses, at least in the near term. Of course those companies are free to start their own leasing services but if and when that happens I expect it will take them some time to gain traction (enough to exit the investment if I am concerned).

To be frank I don’t have access to the kind of data I’d need to make a perfect evaluation, but those are my thoughts so far. My Thorn post the other day attracted an unusually large amount of traffic, so if any readers/Thorn followers have any thoughts please do leave a comment.

Disclosure: I own shares in Thorn Group.

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