Choosing from a menu of bad options

Consumer behavior can often seem mystifying and crazy. I admit to not understanding a wide range of spending patterns. Too often, I find myself thinking that people are just crazy and insist on throwing their money away.

But this outlook is usually a mistake.

What might seem totally irrational from one person’s perspective could be completely rational to someone else. We are all products of our life experience and background.

It is fashionable to refer to “checking our privilege” these days, but if you put aside the politically loaded baggage, it quickly becomes apparent that we must be cognizant of our background when thinking about consumer behavior in groups with different life experiences. A choice made by a person facing financial stress might very well be suboptimal, but it could still be the best decision on a menu of terrible choices. 

This week, I’ve been reading about America’s Car-Mart, a company that I have followed at times in the past. Car-Mart is a publicly traded automotive retailer operating 154 dealerships located in small cities mostly in the south-central United States. The company’s target market are drivers earning below the median income who have poor credit or no credit and need basic transportation. Financing is provided to nearly all customers regardless of credit, so long as they can provide at least a small down payment and show evidence of employment.

The catch? The interest rate is a sky high 16.5%. 

Who would be crazy enough to pay that kind of an interest rate?!

To understand why it might not be crazy to pay such a high interest rate, you have to shift your perspective to someone who might be earning far below the median income who has almost no savings and lives in a rural area near a small city where there is no viable public transportation. For such an individual, an automobile is not an optional possession. It is absolutely needed to get to work.

Used car prices have skyrocketed over the past year, as we can see from the used cars and trucks component of the CPI-U:

Source:  St. Louis Federal Reserve

Car-Mart has historically sold automobiles at relatively low price points. The company’s average retail sales price was just $11,794 in its fiscal 2020 year, but rose to $13,621 in fiscal 2021 and $16,649 in fiscal 2022.1

As inflation has skyrocketed over the past year, real hourly earnings have decreased despite workers receiving nominal wage increases. The wage increases workers have received simply have not kept up with the overall CPI, to say nothing of the even more rapid rise in used car prices:

Source: Bureau of Labor Statistics

Now imagine that you are the head of a single income household near a small city like Rogers, Arkansas where Car-Mart is headquartered. You received a small raise recently, but your real wage, adjusted for the rapid rise of the cost of living over the past year, has actually fallen in line with the national average. Although you had no savings prior to the pandemic, you managed to save $1,000 of your stimulus payment.

You are ready to go to work on Monday morning but your 2005 Impala with 275,000 miles won’t start. You have it towed five miles to the nearest garage where the mechanic tells you that the engine is blown and will likely cost at least $3,000 to rebuild, but even worse, the supplies needed to do the job are not available for at least six weeks. It is already noon on Monday, and you’ve lost four hours of work.

You have very few choices. Your credit score is terrible due to a recent bankruptcy. You have the $1,000 in savings, but you cannot buy even a halfway decent car for that price. You live almost ten miles from work and there is no public transportation in town. Your boss is already irritated and is texting you to see if you’ll be in that afternoon. You could probably get another job if you’re fired, but not right away and certainly not without transportation. Meanwhile, you have bills to pay.

A Car-Mart is located half a mile from the garage where your broken down car is sitting. You know that credit is not going to be a problem there because your friend recently purchased a car from the sales manager. He went to high school with the manager who is known to be a decent guy. You walk over to the Car-Mart. 

Although they have very limited inventory and the prices seem too high, you are able to negotiate a deal on a 2016 Ford Focus with 75,000 miles for $12,500. You put $500 down and are approved for financing for $12,000 for 40 months. You can handle the monthly payment of just under $400. In fact, they’ll let you pay $200 twice a month coinciding with your payday. You take the deal. You’ve lost a day of work but have transportation for the next day.

This is the reality for the target market of America’s Car-Mart, and the same target market for the dollar stores and other retailers catering to people of modest means. 

You can shake your head at the “insanity” of paying 16.5% for a loan. 

You can say that being in a bad situation with poor credit was the result of bad choices, you can judge the person in a dozen other ways, and your criticism might even be justified. But that’s all irrelevant and totally beside the point.

To that consumer at that moment in time, the decision was the best one from a menu of very bad options, and perhaps the only option that was even available. 

In order to analyze a business, you must try to understand its customers even if you cannot relate to their situation. 

Of course, if you find it impossible to understand the logic behind why a particular business attracts customers, you can always just pass. But if the business has been around for a long time, chances are that there is a logical reason for its existence. To see that reason, you might have to make an effort to shift your perspective.


Note to Readers: I am planning to publish a write-up of America’s Car-Mart in the near future. The article will be part of the Business Profiles series. Paid subscribers of Rational Reflections receive a minimum of twelve business profile write-ups per year. 


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No position in America’s Car-Mart.


Irrational … Compared to What?
  1. America’s Car-Mart’s fiscal year ends on April 30. Fiscal 2020 and 2021 data was taken from the company’s fiscal 2021 10-K. Fiscal 2022 data was taken from the company’s Q4 Fiscal 2022 earnings release. []
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