Is This the Death of the Pawn Industry?

For more than 10 years we have grown accustomed to watching TV shows that glorify the pawn industry and how much money that could be made in that business. During this time frame, it seemed like everybody wanted to open a pawn shop or for those that were already owners, wanted to expand. Fast forward to the current day, it appears that that growth has slowed down dramatically and even stopped in many cases. The fact is, most of the pawn companies that we speak to regularly are fighting to make ends meet and have seen a major decline in profitability. But why the decline? Every week, we talk to a new chain that seems to be struggling and they all say the exact same thing. “We used to do really well and then about five or six years ago we started to see a change.” “It has now snowballed to the point where we are straining to pay our bills and even if we grow our business, we won’t have enough money or capital to put more loans on the street.” From our experience, working with many companies all over the United States and internationally, we believe we have uncovered what the basic root cause of the problem is and we would love to share that with you here.

While we do not believe that this is the death of the pawn industry, we do believe that major change is happening and will continue to happen in this business and if you cannot or are not willing to change, you will struggle to stay relevant.

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How to Cure What Ails You

It has been said often in the business world, that revenue cures all ills. Sales and revenue hide a lot of sin in your business and masks a lot of operational issues. When that revenue and sales decline, profit goes away and a giant light is shed upon your business and your deficiencies. I believe that in the pawn world there are five major reasons why this industry is lagging currently in this present day and age. But how do you know if your business is healthy?

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Growth Without Planning

Even though pawnshops are cool and unique, and created to have high profit margins, they are not exempt from the basic rule in business. That rule is if you are going to grow your business you need to have a strategic plan in place. I believe this was the number one area where most of these chains and those who grew at this time went wrong in the beginning. It is a little-known statistic, that the vast majority of businesses that fail (and historically 90% of them do over time) do so in a growth period. Numbers show as high as 66% of the 90% that fail do so in this growth period. So back to the original question, how can you fail when revenue and customer counts are at record highs? First and foremost, we believe that not enough strategic thought and planning in most cases by these owners was given to the fact that this industry would not always be at the record-breaking pace that we saw years ago. Seasons always change, business always fluctuates, markets stabilize and competitors move in. This will always be the case regardless of the industry. Next, we believe that these businesses became accustomed to a revenue flow that was not long-term sustainable. And what about the change? We will speak about that in more detail later. In addition, when this industry became more mainstream, it garnered the interest of regulators at the federal, state, and local level. This often times created more or different regulations and restrictions on the business model and at times new laws. It also hurt banking relationships for this industry with nationwide providers. We will also discuss the banking portion in detail later. For your business to be successful, especially during rapid growth, you need to have a solid people and personnel development plan. Think about it from this perspective. Let’s say you had one store that had 10 great employees. Business is great and you want to expand. You open a second store and you move five of those great employees over to the second store to help it take off and open properly. Essentially what you have done is weakened the talent pool and your rock star store which enabled you to grow your business successfully to the point of opening other locations. Also, because of a lack of planning and training, more than likely you failed to set the table properly for the second store to be as successful as the first one. So your false expectations are that the first location will continue to perform like it used to, and the second one will be almost as good or as good as the first one. Inevitably and sadly you will turn out to be wrong in both areas. Then staff turn over inevitably always happens along the way and because of that you dilute that talent pool even further. A thorough growth and development plan and simple execution of that plan would have prevented this issue, saved tons of issues and staffing problems as well as tons of wasted resource and money. We help stores with this all the time and this makes for a much smoother transition.

Fat, Happy and Complacent …

We always say that a business that isn’t evolving and changing, is dying. Complacency is the next killer on this list and a major contributor to why pawnshops are struggling now. Managers and owners became content on the profits and bonuses they were receiving years ago. They were OK with receiving record prices for scrap gold in the past and didn’t monitor the health of the rest of their operation. Gold at the time reached record levels per gram. What inevitably ended up happening was that the price of gold obviously went down sharply to a more normal level. If you couple that with the fact that competitors moved in, doing all the same things like you did in the past, now brought you in less customers and less profit. Sprinkle in the fact that your competitors came in hungrier than you and they fought harder for customers, creates a recipe for potential disaster. Coming from the pawn industry, our experience is that most managers and owners did not know how to fight for customers because they never had to before. Gold prices fell, customers stopped coming in at the rate they used to due to online sales or competition, and profits went down. In addition, a major shift happened where customers began to search online for the same gently used products elsewhere such as craigslist, amazon and E-bay (and now 6 years later, many others had popped up). All of these major shifts dramatically changed the customer experience and the industry and even though all of those are true in most scenarios, managers still ran the business the way they did before and didn’t deviate. Ultimately they were unable to compete with the newer fresher looking stores and competitors that may have been popping up in their market. A simple market analysis and forecast discussion and plan could have helped predicted the vast majority of this and saved tons of money and frustration. Our Group of Pawnshop Consultants help with these issues and many others on a regular basis.

No Processes and Wrong Incentive Plan

At first glance, people say that the pawn business at its core is not incredibly difficult to understand, but it can be incredibly difficult to execute well and is very different than other business models. You bring in an item from a customer, you give them cash for it either in the form of a buy or a collateral loan. If it is a collateral loan, you should make anywhere between 3%,- 30% interest per month based on the state or city that you are in. In any scenario, you want to bring the item in at a cost that when you go to sell, you make at least 2 to 3 times your cost on that item. It seems simple enough, but as these chains and these businesses grew and expanded, more and more of these transactions were done by new employees and employees that did not have industry experience. In addition to that, many locations adopted a common industry commission plan (and layaway plan) that incentives staff to grown loan balances and inevitably it backfired with more loans being done with much less profit margin when they defaulted. All in the name of growing the pawnbook and “cash flow”. So in reality, most of these transactions now days are done by folks that didn’t grow up in this business. As a direct result, the health of the business is being put in the hands of a $10-$12 an hour pawnbroker employee that didn’t get the training needed to be successful. That employee needs to understand stellar customer service, how to valuate an item, what they would price it for to sell it, how long that item will take to sell once it hits the sales floor, and how to get the customer to possibly part ways with the item for less than what the customer believes it is worth. I have never seen a business before we worked with them that had a process to manage all of these issues. We offer a process, tools, and a training program that is being patented right now as we speak. The tools will help you address these issues mentioned here and many more. If you lose the transaction at the pawn counter, done by the pawn broker, no matter how good your sales staff are, they can never reverse the lack of profit generated by the poor decision upfront; often times done months before. The fate of your business literally is in the hands of an hourly employee.

To try to fix this issue, many owners came up with, adopted and or created a commission structure that focused predominately on sales. For example, a very common one in the industry is to payout 2-3% of all sales made. As mentioned above, even though your salespeople can sell, if you sell an item at a loss or for not very much profit you are still losing in the business. And paying commission on top of it…. Another thing that is common in the industry was for owners to create a productivity based commission. That commission is a combination of sales and pawn transactions such as buys and loans. Often times the transactions were as simple as do more pawn loans and sell more merchandise and you make more bonus. But again this only true if the pawnbrokers take in the item at the correct price and often all it did was incentive the staff to take it more items regardless of whether or not the cost was correct. If they took in a lot of items at a horrible margin, and then you had to sell them at a low profit or a loss, you paid out commission on the front end and on the sale and washed all the profit away. This is so common that in almost every chain we have worked with today they use one or both of these programs. It is a recipe for failure and closed businesses.

Over the years, we have created a commission structure that we believe works in every model whether you have a 38,000 square-foot palace or the 2,000 square-foot hole in the wall that we referenced above. It reinforces the behavior we want our staff to have and a processes that we put in place, and ultimately helps your business to make money like it used to back in the good old days.

Banking Relationships and Regulations

With fame comes notoriety. With notoriety comes attention. Not all attention is a good thing. Especially in this industry. One of the challenges created by this business becoming mainstream was that bankers and politicians got more and more involved in the business. Unfortunately, some politicians muddied the water and believed that these businesses were the same as check-cashing and payday loan companies. When in fact our businesses are collateral based and complement those businesses very well, but are indeed very different businesses. Because there are many people that believe we still bleed our customers and charge too much money on loans, and then sprinkle in the new regulations on the military lending act and the CFPB, you have bankers very very scared to have a relationship with this industry. Because of these facts and different regulations and penalties many banks that used to do business with us have gone the way of the dinosaur. That coupled with our lower profits and lower revenue, made banks scared of us and even drop us when we need them the most. If you did not have a rock solid relationship with your bank, more than likely you suffered in this area as well during the decline of your business. When you needed your bank and your lines of credit more than ever, they were not there for you to fall back on. We discussed above that revenue and profits went down and then you do not have the money to reinvest to put more loans back out on the street which is a slow death in the industry. Is it vicious cycle that is played over and over and over again and every business that I have ever spoken to in this industry in the last six years.

Because this is such a major issue, we have several alternative lenders, multiple individual investors, and several other banking relationships that are open and love working with this industry. This can help your business immensely.

Missed Opportunities Left on the Table

Often times you have heard the old saying, “you are leaving a lot of profit on the table.” That has definitely been my experience working with individuals in this industry. Above we reference that many in this business believe their traffic to their stores went down dramatically over the years. While that is sometimes the case, there are just as many or more missed opportunities that come into our location every single day that we fail to capitalize on or grow. And we failed to execute on them. Let me give you a real world every day example that we see every day in a pawn shop. A customer comes in with an iPad. They believe that that iPad is worth $500 because they paid $600 for it a year ago. We know that they are selling used online for $300 based on our research and we are not going to offer the customer any more than $100 or $150 in most cases unless we really need that item or the customer has a stellar pick up ratio. We have created an issue and possible conflict, one in which our staff does not know how to overcome unless they have had proper training. What often happens, is the customer gets disgruntled over the price difference and leaves the store because no relationship was built with them. They do not do a loan with us or sell us the item. Not only that but they never bring us in anything else again because they may feel slighted and went to a competitor. We lost that opportunity often times forever. What if we could have talked to the customer in a way that disarms them? If we educated them about what the item was really worth and explain how a pawn loan works (especially the pay back)? What then if we could have taken in that item at $100? What would have happened was that the customer would have left with money that they needed badly. We would have collected in most cases $20 a month or more in interest, and ultimately had the customer not paid any interest or it was bought from them, we would have sold it for more than twice what we paid for it. Every single day I see literally dozens of these missed transactions. If you do the math and realize the full missed potential, it is hundreds of thousands of dollars in missed profits. And the worst part is that it costs us nothing to capitalize on because the customers are already coming in.

We do not have to market more to capitalize on the people that are coming in our stores already. What if we promoted our sales items to those getting cash today? We cannot assume that our loan customers will never purchase items from us. If we close those deals, we make more money and put more loans out on the street, or have more merchandise to sell. We discussed above what also can happen if the employee pays too much for the items just to do the deal because he’s commissioned on it. We have examples of actual case studies that shows where we are and were able to make the pawn companies hundreds of thousands of dollars or more simply by capitalizing on what we currently have coming in.

What about those interest payments every single month? Often times what I see in most states is that interest is allowed to accrue every 30 days and the customers have a “60 to 90-day grace” before we can turn around and sell the item should no payment be made to us. What that means is this often these items are taken in and sits in our warehouse and never takes in any interest payments until right before it gets pulled for sale if at all. We pull the item and we price and sell it. We are missing an opportunity to make revenue in the form of interest which used to make this business sing (and all pawn veterans used to know). If you were a payday lender and that loan was overdue, you can rest assured we would make a phone call to get our cash back. The exact same principle and process applies even though it is a collateral loan. Our process that we train on also addresses and fixes this issue. How much money is your business leaving on the table here? Like mentioned above, we have case studies of a current client right now that has over $1.5 Million in unpaid interest on those loans. What if you could collect on ½ or even 1/3 of that amount? Your profitability issues and the cash needed to re loan can be fixed just on this alone….

We mentioned above that sales cure all ills. The challenges that the vast majority of businesses in this industry provide little or no sales training to their staff. And it also doesn’t matter how much training is done if the item is not priced correctly or we took it in a horrible cost before it ever hit the store, we cannot be profitable. If you have fixed your process and are bringing in items profitably, it makes sense for you to train your staff on how to sell. Every day in the pawn world we do this for our clients and there are also tons of other resources out there to help you improve this in your business.

Lastly, did you know that most of our customers only use us in one way? They do not view us as all-encompassing with seamless multiple services to offer them. Let me explain in more detail. All locations in this industry typically have regulars that come in and need cash. They are regulars at our pawn counter. Next the same stores also have regulars that come in just to shop and visit our retail floor to see what is new. They want to see the new cool things that have gone on the floor this week from last week. They regularly shop but almost never ever get cash from us. Let me share some numbers with you. From our experience, referencing research on our own, and independently, and viewing raw data with our clients, we have discovered the following: In the average store, folks that get a loan or sell their items with us that cross over to the retail sales floor (buys something) only between 5 and 10% of the time. That means for every 100 customers that gets a loan only 5 or 10 of them will ever buy anything in your store and as many as 95 of them will not! It gets worse….. Our data indicates that only 3% to 5% of customers that shop our merchandise ever sell us anything or get a loan or cash from us. That means for every 100 of those folks that come in the shop, 95 to 97 of them will never ever do a transaction at the pawn counter! Are we to assume that customers that shop never ever need money? I think most people would agree that would be foolish to believe that. Are we also supposed to assume the customers that are coming into get money never have money to shop? That would also be a foolish assumption. What I see is that this is true in every company that I am ever worked with or for in this industry. Our process teaches you how to fix that within your business and so much more…..

In Summary, this is not the death of the pawn industry, but instead a rebirth. One that needs to happen to keep this industry strong and successful. If you are not changing, you are dying. The definition of insanity is doing the same thing over and over again and expecting a different result. Are you willing to change?

What Are the Possibilities?

How much more money could you make if you got the customers to cross over? And the best part is, you didn’t have to spend any marketing dollars to do it. If you want to know more about how we help businesses in this industry and why we love our pawn clients the most, please contact us directly at 727-580-5876 for more information about us! The industry has clearly changed in the last few years. How certain are you that you are ready for what is still to come? If you want to find out please take our FREE pawn assessment and see where you stand