Al robson

The US Census Bureau reported that in 1999 there were 21.7 million businesses in this country. The census used 1999 figures because that is the most recent year for reliable numbers concerning this statistic.

The bureau also reported that of those 21.7 million businesses, fewer than 99,000 employed more than 100 people. That means that of the 21.7 million, more than 21 million employed fewer than 100 people. That is amazing!

This means that when the Labor Department reports on such things as unemployment and productivity rates, most of the data comes from small to mid-sized companies in addition to the General Motors and IBM’s. Thus, these government statistics are more relevant to drycleaners than many of us thought.

When the Labor Department reported that for the first three months of this year productivity was up 8.6 percent, all drycleaners should take notice. Why? Because more than 99 percent of the businesses in the US are like you — they employ fewer than 100 people. This huge increase in productivity (8.6 percent) followed a strong increase in the previous quarter of 5.5 percent. The 8.6 percent increase in the first quarter of 2002 was the biggest increase since 1983.

Productivity is defined as the measure of output per hour worked. Increases in productivity are good for companies, employees and the economy.

When your productivity increases you can pay your employees more and increase your profits without increasing your prices. This is especially true in the drycleaning industry because labor costs are the biggest expense. The key here is that when companies can increase wages and profits without increasing prices, we have NO inflation.

Situation: A drycleaner owns and operates one plant with a front counter located on a busy four-lane road and he operates two routes. Average weekly volume: $11,500 over the counter and $9,000 per week from the two routes.

Background: The current owner (buyer) purchased this business in 1994 when it was grossing $350,000 per year without the routes. The buyer had no previous experience in the industry. The buyer purchased the business putting 25 percent down with the seller holding a note for the balance.

The problem: After buying the business, the owner soon realized that he would have to dramatically increase sales in order to: pay the seller; pay his operating expenses (payroll, supplies, utilities, rent, etc.); and pay himself. The lease on this property was for four years with two two-year renewals.

This drycleaner did what most do to increase sales. He began a direct mail campaign featuring discount coupons. His piece volume began to grow and his cash flow problems became worse. Labor costs began to skyrocket with overtime. Claims and redos increased exponentially.

He became the victim of high rent; high debt service; high labor costs; and a high piece volume at low prices. By couponing, this owner was able to fill up his plant with work but he was still unable to pay his bills.

The owner’s life became a vicious cycle of trying to hire, train and keep employees; constantly fending off customer complaints (it seems that the less customers pay for their drycleaning the more they complain); and dodging bill collectors. Oftentimes, he wouldn’t write a check to the electric company until they came in to disconnect his service. The minute he wrote the check he had to try to find enough money to deposit in the bank to cover it!

Next, this drycleaner entered into an agreement with a company that promised riches in the pick-up and delivery business.

They would develop the residential route customers.

And, he would:

• Buy a vehicle and hire a driver.

• Buy their computer system.

• Pick up the clothes.

• Clean the clothes.

• Deliver the clothes back to the customer.

• Bill the customer at the end of the month and wait an average of 43 days to get paid.

• And, most importantly, pay this company a 20 percent commission on this new route business from day one till the end of time!

The sales pitch this company gave the drycleaner was that all the extra volume would cost him next to nothing because:

• His rent was already being paid.

• His employees were already being paid.

• The utilities were already being paid.

Therefore, they said, the only additional cost would be a few dollars for supplies and their 20 percent commission.

Under this new agreement, the owner’s piece volume continued to grow but not as fast as expenses. The increased piece volume meant he needed more square feet. At first, he was happy that the landlord had the space he needed. The bad news was he began paying for prime retail space at a rate of $28 per square foot and using it for his plant!

Next, he needed an additional drycleaning machine which he leased. This lease carried a 23 percent interest rate. Overtime costs continued to grow, productivity continued to decline and quality continued to suffer.

The solution. The owner knew that there were a lot of drycleaning pieces in his immediate market because his customers brought them in when he sent out coupons.

His challenges:

• To keep those pieces coming in without discounting his prices.

• Reduce his overhead and operating costs.

• Improve his cash flow.

Growing your piece volume with coupons is tricky business to which some owners become addicted. Seeing a lot of new work in the plant creates a state of euphoria. As more and more coupons are redeemed the owner slowly begins to think that coupons are all the customers care about.

As time goes on, the owner becomes convinced that without coupons he or she will go out of business. The biggest downside of growing your business on coupons is that you build a customer base of coupon clippers. The good news is that you can increase your average price per piece and still send out coupons.

You do this by raising your prices while reducing the discount on your coupon. Instead of offering 50 percent off, offer $2 off on a $10 order. You will lose some customers but it will not be the end of the world. Also, instead of couponing every month, coupon every other month or every three months. This gives your regular customers something to look forward to.

In order to reduce his overhead and operating costs, the owner went back to the seller and, with some hard negotiating, was able to get him to reduce the interest rate and add a few of the late payments to the end of the note.

Next, he found a vacant building that had been used as a drycleaning plant. The building had steam pipes, slick rails and the electric service in place. The building’s owner was happy to lease this space for $10 a square foot. The drycleaner went to his first landlord and he agreed to take back the square footage that housed the original plant.

When the owner moved into his new plant he established production standards and set up incentive programs. These actions helped reduce labor costs more than 20 percent.

While all these changes were going on, the owner was given the opportunity to dump the routes that were costing him that 20 percent commission. He now has his own routes with no commissions.

All of the above actions have put this owner in a positive cash position.

The lesson. Never, and I do mean never, get involved in a situation where you are paying a commission or fee on future sales. No matter how great the opportunity appears to be, never sign an agreement without the advice of a qualified attorney, CPA or business consultant. Speak to others in this industry. There are many people willing to share their knowledge. Only act on qualified advice from people who do not have a vested interest in your decision.