Oct. 26 (Bloomberg) -- Scott Garber and his three partners have been opening gold-buying stores at the rate of more than one a week since they started their business three years ago.
Thanks to the rising price of gold and recession-battered Americans eager to trade jewelry for cash, the stores are on a pace to generate a total of $175 million in revenue this year, almost quadruple the $45 million in sales in 2010, Garber said. The price of gold, heading for its 11th straight annual gain, has jumped 20 percent this year, outperforming global equity markets, industrial commodities and Treasuries. Gold futures for December delivery reached a four-week high yesterday before closing at $1,700.40 an ounce, up 2.9 percent for the day.
“The higher gold goes and the more publicity you get, the more it drives business into the store,” Garber, a 30-year-old University of Chicago Booth School of Business dropout, said in a telephone interview.
The proliferation of gold shops is alarming some community leaders.
“I don’t believe that you need three gold-buying stores with the gaudy signs ‘We Buy Gold’ in the first mile when you enter the village,” said Steve Radice, chairman of the planning and development commission in Oak Lawn, a Chicago suburb. “It cheapens the neighborhood.”
Oak Lawn is one of more than a half dozen U.S. communities that have rejected applications or imposed temporary moratoriums on gold stores as the commodity’s rising price lures more buyers into the business.
While no official agency tracks the number of gold-buying shops, communities large and small are seeing an influx.
“There’s more cash-for-gold places right now than coffee shops,” said Gene Furman, the owner of New York-based Empire Gold Buyers, which has a single refinery on the west side of Manhattan and relies mostly on revenue from insured FedEx Corp. mail orders.
To try to stand out from the crowd, Garber’s group spends about $1 million a month on television commercials and print, Internet and radio advertisements, Garber said. They hired Robin Leach, the former host of television’s “Lifestyles of the Rich and Famous,” as a spokesman.
“Turn your jewelry box into your own personal ATM at GoldMax,” Leach says on the website for one of their brands. Their stores, outfitted with waiting areas and flat-screen televisions, feature large red and white signage proclaiming, “As Seen on TV.”
Garber and his partners, Jordan and Jake Sadoff, both 33, and Abraham Gray, 36, put up a total of about $250,000 in seed money to launch in 2008 and have taken on no debt or outside investment, Garber said. The businesses are split into three main entities: Southeast Gold Buyers LLC and Gold Max of California Inc., both based in Atlanta; and Midwest Gold Buyers Inc., based in Streamwood, Illinois. Most of their stores will operate under the GoldMax brand by early 2012, Garber said.
When Garber was 12 and Gray was 18, they started a business selling Beanie Baby stuffed animals to retailers, Gray said, adding that he also speculated on real estate during the housing boom by purchasing and selling homes before entering the gold-buying business.
“I always kind of get into what’s hot: Beanie Babies, flipping houses,” Gray said. “Right now, gold’s hot.”
So far, the partners have opened about 180 stores stretching from Atlanta to Los Angeles and plan to have 200 by the end of the year, Jordan Sadoff said.
Midwest Gold Buyers applied to open two stores in Milwaukee before the city enacted two temporary moratoriums on new precious metal and gem dealers in 2010. One was approved and the other rejected, said Jim Bohl, a city alderman. The temporary ban on new stores came after police found several gold buyers were breaking the law by buying stolen goods and not checking sellers’ IDs, he said.
The moratoriums gave the city time to enact new rules for the businesses. Among them: buyers have to give the police photos of items they purchase, and hold on to gold jewelry for at least 30 days. The city also prohibited new shops from being located within 1,500 feet of an existing pawn shop or cash-for-gold store.
Since the moratorium ended, the city has received only a few applications for new stores, Bohl said.
At least two California towns -- National City, a suburb of San Diego, and Glendora, outside Los Angeles -- currently have moratoriums on gold buyers.
“We want to make sure we have the proper safeguards in place because we have these things popping up everywhere,” said National City Mayor Ron Morrison. “It’s really hard to regulate it.”
Defunct Mattress Stores
Garber said his business model has been aided by a bear market in commercial real estate that Moody’s Investors Service said may last through next year. The gold-buying chain has been snatching up spaces once occupied by defunct Blockbuster Inc. and mattress stores.
“What’s really made us successful is the fact that in many cities there are high rates of vacancy in commercial real estate,” Garber said.
Those opportunities wouldn’t have existed before the real-estate crash, said Shaun Weinstock, founder of Atlanta-based brokerage firm Weinstock Realty & Development LLC.
“If this was 2005, they’d never get those spaces,” said Weinstock, who’s worked on about 100 of Garber’s leases.
Tara Cox had never sold gold before and was drawn to one of Southeast Gold Buyers’ prime locations in Marietta, Georgia. Her odds and ends included a broken necklace, two thin bracelets and a 1945 Mexican peso. Cox, 40, took the buyer’s first offer for her collection, pocketing $175.
Payouts to customers can range from 60 percent to 95 percent of the spot price of the metal, Garber said, depending on how much gold someone is selling. The acquired gold is sent to refineries on the east or west coasts, where it is melted down and sold by the refineries’ traders to investment banks and other buyers.
“We don’t really negotiate much in the stores,” he said. “The buyers don’t have the ability to go up on their own.”
To see firsthand how the process works, a Bloomberg News reporter, who didn’t identify herself as such so she wouldn’t be treated differently from other sellers, took a pile of gold jewelry to three Southeast Gold Buyer locations in metropolitan Atlanta.
The initial offers for her gold -- which included two 14-karat bracelets, a 14-karat collar necklace with a 14-karat pendant, an 18-karat wedding ring and a 14-karat gold ring -- ranged from $1,026 to $1,800 at the three stores. When she declined to sell, the buyers began to bargain: they asked what price she would like to get for her gold and then said they would need to take increased offers to their managers. When the negotiating ceased at the customer’s request, bids had increased by between 33 and 94 percent, depending on the store.
Garber said the buyers periodically commit to ship more gold to the refineries than they can deliver, and have to negotiate higher prices with customers in order to avoid paying the difference to the refinery.
In August, for example, Garber said volume surged almost three-fold as gold jumped 13 percent to $1,834 an ounce. Business plummeted by about half in September as the metal fell 12 percent, and the stores began to negotiate with customers to close a 10,000-ounce gap from what they had pledged to refineries, he said.
Not everyone is convinced that a national chain of gold-buying stores has staying power.
“It’s just inevitable before it actually blows up,” said Furman, the owner of Empire Gold Buyers. “If gold crashes, the profit margin that you were expecting at $1,800 does not exist anymore.”
Garber said he and his partners have anticipated that possibility and have begun to hedge. They’re starting to deal in diamonds, watches and antiques.
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