Managing Your Margins

By Bob Nieman, CLA Member posted 02-26-2018 10:43

  
How Laundry Owners Can Maximize Their Profits Despite Today’s Ever-Changing Economic Landscape

Southern California laundry owner Art Jaeger recently was scheduled to have state officials visit his laundries to conduct a workers’ compensation classification audit.

And, clearly, this upcoming meeting – as well as all things employee-related – was on his mind. In addition to workers’ comp insurance, minimum wage has been a hot topic in Jaeger’s market for a few years now – going from $10.50 an hour on July 1, 2016, to a minimum of $15 an hour on July 1, 2020.

“For me, having attended stores and operating in major urban areas, workers’ compensation and minimum wage are two issues that I constantly have to stay on top of,” Jaeger explained.

“That is a 50 percent increase in wages,” he continued. “And how are you going to pass along all of these costs to your customers, and how are you going to try to recover those costs? What are you going to do to just maintain your status quo – never mind putting more money in your pocket?”

On the other coast, Danville, Va.-based multi-laundry operator Michael Finkelstein shared a common store owner lament of a different kind.

“I had a landlord who was going to double my rent, because my lease was up and he noticed that I had just installed newer equipment,” Finkelstein explained. “I asked him to justify this, and his answer to me was, ‘You’re two blocks from the beach, and I know I can get a realtor or a tanning salon in here that will pay more.’ I replied, ‘A tanning salon? Two blocks from the beach? I don’t think so, but have at it.’

“I pulled out. I had been there for more than a dozen years, but when people want to see how high you can go, you have to be able to say no. I ended up going about 10 minutes away and putting in my new equipment there.”

Labor costs and rent.

No doubt, those are two of the “biggies” when it comes to the external factors chipping away at the edges of many of today’s laundry owners’ profit margins.

However, first things first: what are we talking about here?

What is a ‘Profit Margin?’

Typically, profit margin is a profitability ratio calculated as net income divided by revenue, or net profits divided by sales. Net income or net profit may be determined by subtracting all of a company’s expenses, including operating costs, material costs and tax costs, from its total revenue. Profit margins are expressed as a percentage and, in effect, measure how much out of every dollar of sales a company actually keeps in earnings. A 20 percent profit margin, then, means the company has a net income of 20 cents for each dollar of total revenue earned.

While there are a few different kinds of profit margins, including “gross profit margin,” “operating margin,” (or “operating profit margin”) “pretax profit margin” and “net margin” (or “net profit margin”) the term “profit margin” also is often used simply to refer to net margin. The method of calculating profit margin when the term is used in this way can be represented with the following formula:

Profit Margin = Net Income/Net Sales (Revenue)

Other types of profit margins have different ways of calculating net income so as to break down a company’s earnings in different ways and for different purposes.

Profit margin is similar but distinct from the term “profit percentage,” which divides net profit on sales by the cost of goods sold to help determine the amount of profit a company makes on selling its goods, rather than the amount of profit a company is making relative to its total expenditures.

OK, but what exactly should vended laundry owners be keeping an eye on?

“I keep pretty good financial records with QuickBooks,” Jaeger said. “I’ve developed a good chart of accounts early on, which allows me to separate my revenue items and my cost of sales items. In my case, my cost of sales items are utilities, because I believe that’s my cost of sales. Then I track my fixed expenses, which are primarily my rent, trash collection and other items that won’t vary in cost. After that, I have all of my variable expenses, which include payroll, telephone costs, marketing costs and so on.”

Jaeger will review his profit and loss statement every month. In addition, at least quarterly he will compare his current P&L to the previous year’s numbers to identify any emerging trends and to analyze why certain numbers may be a certain way, either up or down.

“I look at my margins at that point,” he explained. “Overall, what we’re really talking about is all income generated from operations, less all expenses related to operations. Some laundry owners might have items in their expenses that aren’t directly related to the continuation of the business – and the quickest way to gauge that is to ask yourself, if you were handing this business over to someone else, what expenses don’t go with that? For example, a personal vehicle lease would not. On the other hand, if you have a van that is used in your pickup and delivery service, that vehicle would be going with the store, so the van costs should be included. Also, operating income needs to be measured before EBITDA – or interest, taxes, depreciation and amortization.”

For Finkelstein’s multi-store operations, he refers to his balance sheet and P&L statements, as well as store collection comparisons.

“You should have a budget,” he said. “And you should have data that pertains to the current month, versus the previous month, as well as the current year to date, versus the prior year to date. When you do that and you’re looking at your profit margin, the numbers you’re looking at are your EBITDA and your net income; those are the two factors to focus on.”

Hank Walter, who owns 10 laundries in and around Martinsburg, W.V., also has developed a method that works well for him.

“Each of my 10 locations receives the posting of its revenue from the weekly collection to QuickBooks,” Walter noted. “Credit card receipts are posted as they are received at the bank. All direct expenses – such as rent, utilities, repair parts, online security cameras, direct labor, refunds, sales tax, property tax and insurance – are posted when paid. Each location now has a report that is the ‘contribution to margin.’ The total margin then has to absorb overhead expenses from the operation of the office – including repair technician labor, auto expense, professional fees, telephone, advertising, depreciation, interest and so on. What remains is distributed as owner discretionary expense.”

One laundry owner, who wished to remain anonymous, sees profit margin as “the principle metric to operating a successful laundromat.”

“In the laundromat business, it’s easy to calculate margin on products that are vended or sold over the counter, but harder when most of your sales are related to washers and dryers,” the operator explained. “Yes, it can be calculated by determining what it costs to run each machine based on water consumption and power usage, but that’s more complicated than necessary.

“We measure ‘margins’ by using a target net income of 30 percent to 35 percent, meaning we aim for a net income before taxes and depreciation within that range and budget our prices to provide that result. We prepare an annual budget based on the previous year’s turns per day, machine sales and expenses, including all operating costs and all income, including vending, wash-dry-fold and over-the-counter product sales. This is a daunting process that requires maintaining exact bookkeeping.

“When preparing the annual budget, we use a complicated Excel spreadsheet that details historical costs and income tracked by turns per day on machine sales, where many sales and expenses can be calculated as a percentage of machine sales. After nine years of using this process, we have become quite adept at projecting sales and expenses. When the bottom line projections indicate net income will fall below the 30 percent to 35 percent threshold, we increase prices on machine sales, wash-dry-fold, and vending until the threshold is achieved.”

Although a 30 percent to 35 percent margin works for one particular laundry owner, there clearly is no one single “magic number,” as all laundry operations are at least slightly different.

“Each individual is going to have a separate margin for his or her business,” Jaeger said. “If you are in a situation where you have older equipment or very expensive utilities, you might immediately lose 25 percent off of your topline number. Now, if you have more modern equipment or are in an area that doesn’t charge as much for water and other utilities, you might be dealing with just 10 percent off the top.”

Then there’s rent, Jaeger pointed out. If commercial real estate is expensive in your market, you might have another 25 percent or more going to rent. Of course, if you own the building and you’re not charging rent to the business or are in a less-expensive area, this certainly will impact that category positively. Moreover, if you run an unattended store, you’re not going to have deal with various employment costs.

“Each person has to do his or her homework ahead of time,” Jaeger advised. “Say to yourself, ‘When I acquire this new business, I should be able to maintain a margin of ‘blank.’ But it’s not a one-size-fits-all situation, due to three big variables – labor, rent and utility costs.

“Tons of other stuff will work into that as well. For instance, if you offer wash-dry-fold, that’s a high-margin business. Or, if you develop other ancillary incomes, those will give you an opportunity to add more revenue to the business. Managing all of those factors is extremely important.”

Given those variances, Walter said he aims for a margin of 40 percent, while Tim Gill of Baymeadows Coin Laundry in Jacksonville, Fla., is shooting for a 30 percent to 35 percent margin.

“If I couldn’t maintain that margin, I would sell and invest in a different business,” Gill explained.

“I am working toward a 20 percent profit margin,” said Peggy Trent of StarBright Coin Laundry & Services, based in Haslet, Texas. “I’m currently at 15 percent, due to maintenance and increased utility costs. And I also would like to increase my net profit for a personal salary increase.”

For Rick Rome of WashClub in New York City, the sweet spot is between 16 percent and 25 percent.

“As you scale a business, your margins go down as your revenues go higher,” he said. “That’s OK, as long as you level out your costs. I was as high as 32 percent when doing all of the work. When I started, I had fewer employees to pay, so my employee tax was lower, my workers’ compensation was lower, my wages were lower and so on. For every employee I pay $1 to, it costs me $1.30. However, normalized margins should come into play as you scale and execute properly.”

Safeguarding Your Margins

Whether your target is 15 percent or 30 percent or higher, there are a number of key factors and external forces constantly squeezing those margins ever tighter.

Jaeger, who obviously is busy battling labor costs, noted how water and sewer fees are a threat to the health of his margins as well.

“Water is the next big thing,” he said. “My store in Ventura County used to have relatively reasonable water and sewer costs. Then, all of a sudden, they doubled it and they have a schedule of continuing increases. At the end of 2013, I was at $2.91 for water and $1.90 for sewer. Today, I’m at $3.87 for water and $4.20 for sewer. That’s an incredible increase.”

“Water rates continue to go up,” Finkelstein agreed. “And all utility costs – whether that’s electricity, natural gas, propane or gasoline – always significantly impact your laundry business. Plus, it doesn’t look like rent ever goes down, unless perhaps an anchor tenant in your shopping center pulls out, but that might hurt your profit margin even worse.

“Insurance also continues to be a factor that is increasing – whether we’re talking about workers’ compensation insurance, insuring your building or equipment, driver’s insurance, or health insurance. Those affect your business. And, of course, don’t forget labor rates. So, you have all of these factors coming at you every way imaginable.”

Walter said he has seen his sewer rates triple in the last 20 years, due to the mandates of the Clean Water Act on the Potomac River watershed

“Our electric company has gone to what it calls ‘spike’ demand rate schedules, where they charge a premium for keeping the capacity to serve your meter spikes available at all times,” he added. “If you let an electric coil or air conditioning unit cause a spike in your usage, the ‘demand’ rate kicks in permanently.

“Going forward, we expect margins to be squeezed continually by utility expenses. Also, a large issue to watch is sales tax legislation. West Virginia already charges a 6 percent sales tax to the vending companies, and we can’t get rid of it.”

As one laundry owner said, “State and local tax changes and increases are ‘silent killers,’ if ignored or assimilated without regard to how they affect margins.”

Other current and future threats to owners’ margins include such factors as new, highly competitive locations; marketplace saturation; a change to local regulations in your city or town; emerging technology requiring additional capital outlay; and increased competition due to new technologies in wash-dry-fold, pickup and delivery service, payment systems, and laundry equipment. To name just a few.

So, what’s the answer? How should you safeguard your margins and, in turn, the future of your laundry business?

“I constantly review my equipment mix,” Jaeger explained. “In the last couple of years, I’ve removed lower-priced, lower-performing equipment from the store – replacing it with higher-vend-price, better performing equipment. I’ve increased the revenue within those particular footprints.”

Jaeger also has added new revenue by starting a home pickup and delivery business. In addition, he has tweaked staff hours to boost efficiency and eliminate any overtime pay, as well as switching a few employees to salaried status.

“I’ve also increased my vend prices,” he said. “You’ve got to be careful how you do it, so that you don’t chase everybody away to a store that doesn’t have employees and, therefore, doesn’t have those kinds of financial pressures. Despite being a better, full-service store, your higher price might become an issue for some. After all, people only have so much money to spend on laundry. Also, you don’t want to have too angry of a customer base. People might be understanding, but when it comes to their wallets, they can only be so understanding.”

For his part, Finkelstein continues to remodel his locations and do what he can to make his self-service laundries the best they can be in the towns they’re in. And, in so doing, he’s assuring that his machines and services justify any needed price adjustments.

“Clearly, you can’t just be flat-out uncompetitive,” he asserted. “However, your customers will see you remodeling – they’ll see your new equipment, new paint on the walls, new flooring, new windows or whatever else you may do, and they’ll understand.”

He also suggested that owners look into tankless water heaters and any other potential improvements that can make their stores more energy-efficient.

“And shop your insurance,” Finkelstein added. “I just went through all of my insurance for the replacement of equipment. You might have some places where your accessed value is decreasing. You shouldn’t just automatically increase it every year just because it’s a new year.”

Ross Dodds of Wash on Western in Los Angeles raised vend prices on his washers in 2017, and then boosted the price structure on his dryers at the beginning of this year.

“You have to increase prices every year at a minimum,” he said. “Minimum wage has gone up, gas goes up – and Starbucks just increased prices, too. You don’t see people not using their cars because gas prices go up or not drinking coffee because it goes up in price every year, yet this industry has laundry owners who haven’t increased their prices in 10 years. We can be our own worst enemy.”

Trent is definitely not one of those owners, having recently increased her vend prices, as well as developing new revenue streams – including soap sales and a bundle service – to keep her margins healthy.

“To keep my margins up, I regularly raise prices and strive to keep costs down,” said Peter Mayberry of Anytime Laundry in Omaha, Neb. “All of my buildings are ultra-efficient, so the only thing I really have left is to either cut employee pay/hours or to simply raise prices.”

Margin Miscues

As we’ve seen, when margins are being squeezed, laundry owners are faced with three courses of action: (1) increase revenue (raise vend prices, develop new forms of income); (2) lower expenses (utility costs, rent, labor, insurance, etc.); or (3) do both. However, this is where big mistakes can occur.

“The first thing owners do is raise prices a little bit, and then they start trying to lower their expenses,” Jaeger noted. “But you’ve got to be careful what you lower and how you lower it. You don’t want to be penny-wise and pound foolish.”

According to Jaeger, the biggest mistake an operator can make is to start cheating on the maintenance schedule, not keeping the equipment in working order, skimping on cleaning supplies, eliminating effective marketing tools, etc.

“I’ve seen store owners tell their employees to reuse garbage bags,” he laughed. “They’ll shut down the air conditioning system to save on electricity. They’ll stop supplying certain amenities that customers enjoy. I’ve seen operators do all kind of crazy things that I don’t believe are conducive to maintaining their customer base.

“Yes, install LED lighting to save on electricity, but you still have to turn on the lights. And, yes, put timers on your heating and air conditioning units, but don’t eliminate those amenities completely.”

Be sure that the changes you make to your store actually add value to your business – the obvious one being newer, more efficient, higher-margin laundry equipment, according to Jaeger.

“I’ve made three changes in the last few years,” he said. “I removed three toploaders and put in three 20-pounders. Then, I removed those three 20-pounders and installed a 75-pound washer and a 45-pound stack dryer. So, I went from $5.25 per turn to $8.25 per turn to now $14 a turn – all within the same square footage. Plus, the new equipment turns at a greater rate than the previous machines.”

Unfortunately, some operators, when faced with shrinking margins, will go in the opposite direction, according to Mayberry.

“I think most laundry owners are clueless when it comes to keeping margins up,” he said. “A perfect example is, when I open a new store, my competitors typically stop raising prices and most of the time will actually lower prices. So, now they have fewer people and are making less money per turn. They have literally accelerated their own demise.”

When margins dip, another critical mistake, according to Finkelstein, is not questioning your expenses.

“In one instance, where the anchor tenant pulled out of a shopping center where one of my stores was located, the landlord gave me rent relief – because I asked for it,” he explained. “It’s not that he offered it. I said, ‘Hey, my business is down and suffering. The supermarket isn’t here anymore. I’ve got another year or two left on my lease, and I’m going to get out of Dodge if you don’t do something.’”

At another store, Finkelstein noticed that his water bill was way off the mark.

“The town I’m in had a water main break,” he said. “My monthly water bill ended up totaling more than the typical annual cost for water for that store, due to the water main issue. So, I wrote the city a letter to explain the situation, and I’m awaiting a response.

“But, in all cases, you have to watch your expenses and question them.”

Another laundry owner agreed with Finkelstein, adding that the biggest mistake is to ignore, dismiss and absorb changes to costs, due to indifference to the small changes in costs.

“It takes diligence to details and faithful tracking of income and expenses to know where the business is at all times,” the owner noted. “Track everything that’s trackable – customer count, machine sales, turns per day, and turn rate.”

All in all, the key is to actively manage your business and not be passive about it. The best practices are to maintain accurate financial records and do your own financial analysis on the specific areas that are going to mean something for you and the health of your business.

“Some owners’ idea of accounting is making sure they have enough money in their checkbook, and then bringing all of their receipts to an accountant,” Jaeger said. “That doesn’t help you run your business. Owners need to know all of the financial and analytical metrics of their operations.”

“No one is in the business ‘just because,’” Finkelstein said. “At the end of the day, everyone is supposed to be making money. And if you’re not making money, you should be questioning why that is. We have to keep fighting the good fight. Simply, we have to look at our numbers and make sure our revenue is more than our expenses.”

In other words, according to Mayberry, you need to run your business “like you actually care about it and your customers.”

“If you wait until I’m building a new store in your neighborhood to do those two things,” he warned, “you’re already too late.”
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