National Clothesline

As the U. S. economy continues to stumble around in the dark, the drycleaning industry continues to lose volume. This loss in volume is directly related to the uncertainty people feel about their future.

The bad news is that no one knows — not even the experts — when the economy will rebound or how strong the rebound will be. The good news is that the drycleaners with an action plan will not only survive, but will prosper. The best way to plan your future is by understanding your past and by analyzing the strengths and weaknesses of your competition. The old adage is “All is fair in love and war and this ainít love!” Today is the day to make your office the war room.

An entrepreneur purchases an existing drycleaning business and proceeds to increase sales volume (in dollars) by more than 50 percent over five years.

At the same time this owner manages to reduce his “return on sales” from 17 percent to less than 4 percent. A case study in how more is less.

Drycleaner with 22 full- and part-time employees.

Current owner purchased the business in 1997. Actual sales at time of purchase were $520,000.

Sales last year were $780,000.

Year-to-date (YTD) sales last year, January through August, were $490,000.

YTD sales this year through August were $509,000.

YTD sales this year are 3.9 percent greater than last year.

Please note that this company has not added any new locations or routes since June 2000.

The above information shows a company that has increased annual sales by $260,000 over the past five years and has increased year-to-date sales this year over last year.

On the surface, this appears to be a company that is doing quite well. Comparing dollar sales volume from one period to another is only one measure of performance. When comparing sales volume, you should always track dollars, pieces and pounds.

The drycleaner in this case study also compared piece volume for the period of January through August 2001 compared to 2002. He found that his piece volume decreased 3 percent. The dollar increase in sales volume was the result of a 7 percent price increase that our cleaner implemented on January 1 of this year.

The question now is: “Was the piece volume decrease a direct result of the price increase, or would this cleaner have experienced a 3 percent decrease in piece volume without the price increase?”

The answer is twofold. The occasional customer — the two weddings and a funeral crowd — are wearing their suit or dress one more time between cleanings. More importantly, many regular customers are doing likewise. The bottom line is piece volume is down because customers are having their clothes cleaned less frequently. Therefore, in order to survive and prosper, you must attract and retain more of your competitors’ customers.

When the new owner purchased the business five years ago he paid himself a $50,000 a year salary and was retiring more than $40,000 a year on the loans he took to pay for the business. Five years later, with sales up more than 50 percent, his salary is down to $26,000 a year and he is paying “interest only” on his loans.

Many business owners live by the philosophy (or foolosophy) that more sales at any cost is a good thing. Nothing could be further from the truth.

To increase sales volume, our Case Study drycleaner purchased an existing drop store that was doing $2,000 a week in sales. He thought that this drop store would be a good purchase because it would add to his dollar volume.

The monthly rent was only $800.

He could grow the sales with good customer service.

It wouldn’t cost much money to process the extra work.

What the owner did not consider was that his drop store labor costs would add $500 a week to his payroll (25 percent of drop store sales) and that it takes more time and more money to clean, press, inspect, bag and distribute those additional pieces.

Furthermore, to provide excellent customer service at the drop store, new customer service personnel had to be hired and trained. The new employees made some costly mistakes and garments got lost.

From the start, this drop store began to drain profit dollars from the plant. Although sales were up (dollars and pieces), cash flow began to suffer.

Chasing dollar volume can become an obsession and the more dollars you get the more dollars you need.

The worst part of this scenario is that owners convince themselves that more dollar volume is the answer — the only answer.

First, the business owner must identify and analyze the profit centers of the business. Profit centers for this industry are: drop stores, routes, hotel work, etc. The direct costs associated with operating each profit center should not exceed 35 percent of profit center sales.

Direct costs for a drop store include: rent; common area maintenance fees (CAM); electric; insurance; phone; counter labor costs; etc.

If these costs are 35 percent of sales or less, this profit center is making a contribution to the main plant. If the direct costs of this profit center are 35 percent to 45 percent of profit center sales, you have some homework to do to determine whether or not this center is making a contribution to the plant.

When direct costs are greater than 45 percent of profit center sales, the center is not making a contribution and it should be closed.

Can there be exceptions to this rule? Yes, but very few.

In our Case Study, the $2,000 per week drop store is costing the owner more than 60 percent of drop store sales. Costs include: advertising; wages; rent; electricity; security; claims; etc.

The drop store is being rented for $800 per month and there are 11 months left on the lease. In this situation, the owner can save money by closing the store and paying the rent for 11 months. If the real estate can be sublet, so much the better. If it cannot be sublet, the owner is still better off closing the doors.

Now is the time to enter the war room.

Shop your competition to find out what their strengths and weaknesses are. If they are strong in customer service, improve yours and beat them. If they do an excellent job in spotting and finishing, improve yours. Promote your strengths through advertising. Let the customers in your market know you are the best.

If you have competitors who are on the ropes financially, it is your responsibility to put them out of their misery.

You know your competitor is on the ropes when he starts to lower his prices. Also, you will hear through the grapevine whether or not he is paying his bills. If you know he’s getting behind, don’t wait for his landlord or his supplier to pull the plug.

Begin promoting your business. For your advertising to attract new customers, you need to offer a discount of at least 20 percent. Design your offer to bring in more drycleaning pieces per order and make it easy for the customer to understand. When you advertise “$2 off your next $10 drycleaning order,” your customer knows what $2 off $10 means, but they have no clue what $10 worth of drycleaning actually is.

If, on the other hand, you advertise $4 off any four items of drycleaning or $5 off any five items of drycleaning, they will understand your offer. Also, this type of promotion will increase the number of drycleaning pieces per order.

To survive and prosper in today’s economy, you must capture and keep more of your competitors’ customers. September is an excellent month to increase your prices while promoting your strengths and offering some incentives to attract new customers.