Pawnshops Struggle

In an excellent article in Specialty Lender, James C. Allen explains why the booming economy has not been helpful to pawnshops. He quotes Tom Bessant, CFO of Cash America International: "Five years of a record-breaking economy means that the customer who used to come in and have four or five pawn loans now has just two or three loans." The company reported 15 cents a share loss in the fourth quarter of this year versus a 25 cents a share profit in the same quarter last year.

A basic challenge faced by the industry is that pawnshops must make a large investment in fixed assets and merchandise. When you have high fixed assets, you are likely to have high fixed costs as well. However, if the volume of loans slows, it is very difficult to make a profit, given that cost structure. It is not uncommon for pawnshops to have more invested in shops and inventory than they have in loans outstanding. Whereas finance companies might report fixed expenses equal to about half of their total revenues, pawnshops find their fixed costs almost equaling or even exceeding total revenues these days.

One tactic being considered by pawnshops is to enter the market for payday loans. Whereas the average pawn loan is about $75 and can be as low as $15, the average payday loan ranges from $250 to $300. These differences point to a sharp difference in the nature of the clients for pawn loans and payday loans. Nonetheless, in its test marketing Cash America has found that clients for payday loans are not reluctant to enter its pawnshop to obtain loans. Also, Cash America has joined with Wells Fargo to develop an automated check-cashing machine. The machine can also be used to obtain money orders and cash advances.