Retailers Lend Repute to Pawnshops

There goes the neighborhood.

Pawnshops, which have a reputation for profiting off the downtrodden in poor neighborhoods, are increasingly setting up next to mainstream retailers in leafy suburbs to sell to more upscale consumers and capitalize on the booming economy.

With 1998 capping off five years of growth, the nation’s biggest pawnshops have found a way to make money off people who have money.

In the process, they have trashed the traditional idea that the businesses--and their share prices--thrive only in times of economic turmoil.

“We’re not in the typical pawnshop part of town with a typical pawnshop-looking store,” said Carson Thompson, chief executive of PawnMart Inc., the industry’s third-largest company, which is based in Fort Worth, Texas. “Ours looks like a specialty retailer.”

Pawnshops historically have bought and sold used goods like clothes, cameras and guns, and they have taken merchandise as collateral on small loans of around $75 or $85. Many items are in good condition and are sold, after the pawn period is over, for less than new products at discount retailers.

Now three public and one private chain have emerged to inject what they call “professional management” into the business. They hope to attract middle-class customers who might otherwise find bargains at Kmart.

Cash America International Inc., First Cash Inc., PawnMart Inc. and privately held EZ Corp. all boasted steady growth in 1998, which economists say may be one of the most impressive years of U.S. economic advance in the decade.

Analysts are not surprised at the bullish results of the pawnshop business--even in a healthy economy--because they see most people, whether middle class or not, as overspenders.

“Most people live beyond their means,” said Tim Stobaugh, an analyst with Stonegate Securities. “When people have a job and are working, they tend to extend themselves financially and they use the pawnshops.”

Indeed, pawn operators claim their average client has an annual income of more than $31,000, well above the national poverty level.

Company executives say that while they command only a 7% share of a market totaling 10,000 to 15,000 small-time shops, they plan to keep profits growing with aggressive acquisition strategies.

“A little consolidation in the industry, a higher class of management will add more to the bottom line,” said Joe Kercheville, an analyst with Kercheville & Co.

But doubts remain about the industry’s ability to weather basic changes. The concern is how to keep pawn store shoppers from buying pricier new goods as they grow wealthier in a healthy economy.

Cash America’s chief executive, Jack Daugherty, shares that concern, but it is tempered by his view that the number of Americans who make do with cash and no credit cards is growing.

“The pie is getting bigger,” he said.

Stobaugh agrees that the pawnshops’ target market is growing as the number of people with incomes ranging from $18,000 to $35,000 actually expands.

“There are people who always have a need for money. And while that may vary with economic times, it’s always there,” Stobaugh said.

But excluding a grand analysis of whether the country’s wealth reaches all Americans, what remains is the need for pawnshops to diversify their business, change their image and position themselves as mainstream retailers.

PawnMart brazenly attacks the image problem by opening shops next door to retail giants, betting its lower prices will win out. Oh, and PawnMart is the one that doesn’t sell guns.

PawnMart calls itself anticyclical, resisting major economic downswings because it sets up its pawnshops near such discount retailers as Kmart and Wal-Mart, the kind of retailers that do better than most others in tough times.