Knox Econ 2010: The Pawn Shop Economy

Even here, a recession is bad for business

Mike Ferguson knows that people suspect his business of prospering when the economy takes a dive.

"A lot of people think that pawn shops, ‘Oh, you must do great in a recession,'" Ferguson says, sitting behind the counter at Atomic Pawn on Kingston Pike near Ebenezer Road. "But it's not necessarily true."

Ferguson, an amiable, bearded guy who is one of the managers at the chain of three Atomic stores (the other two are in Fountain City and Maryville), says the hock-and-loan industry generally tracks the broader economy. Although it by definition relies on a financially strapped customer base, it works best when those customers aren't too strapped.

The pawnbroker business has two basic components, loans and retail. The loans are what people get in exchange for collateral (the guitars, home electronics, jewelry, guns, and household odds 'n' ends that line the aisles of Atomic and the dozens of other local pawn shops). People have up to 30 days to repay the loan plus interest and fees—Tennessee state law sets a maximum of 2 percent interest per month, plus a 20 percent fee for handling, storage, etc.—and reclaim their property. If they don't, the pawn shop has to hold onto the merchandise for an additional 30 days before putting it up for sale.

But in a recession, Ferguson says, fewer people are able to repay, which cuts into lending profits. And fewer people are looking to buy anything, which hurts the retail side. The result is a lot of unclaimed collateral sitting on the shelf.

"We're just starting to see it turn a little bit, where people are starting to come back and pick up their stuff," Ferguson says. "We suffered last year tremendously." Atomic Pawn didn't make any new hires in 2009 and had to trim its operating expenses by $30,000 to $40,000, he says, including cuts to employee benefits.

But Christmas of '09 was better than the year before, and Ferguson says he hopes the summer months will see a real pick-up this year.

As for how the recession has affected Atomic's inventory, Ferguson says he has seen more workman's tools come across the counter as unemployed laborers try to make ends meet. "We get a lot of construction people that are really hurting for work," he says.

And in the last few years he has seen a good many unfamiliar faces—people who are new not just to him, but to the whole pawn process.

"We have added a lot of new people to our computer," Ferguson says. "People come in looking around, and they'll come over and whisper, ‘I don't know how this works.'

I tell them, ‘You don't need to whisper.'"