ARMONK, N.Y. — Before you focus on the headline, let me ask you a few other questions:
- Why did you enter the Laundromat business?
- How much money did you invest?
- What was your expected rate of return on your initial Laundromat investment (ROI)?
Now let me pose some tougher questions:
- Are you still making the same rate of ROI?
- Should you expect the same rate of ROI?
- What has changed from when you acquired your Laundromat?
Raising your vend prices requires careful consideration and some analytical methodology. In following articles, I will detail how I determine if it’s time to raise prices.
Business 101 says that gross income minus your expenses equals your profit or loss. Let’s look at the income-and-expense side of operating a Laundromat. Gross income is the amount of money that ends up in the moneyboxes. Currently, with high unemployment, a portion of the immigrant population has the choice of being unemployed here or unemployed in their home country. Some illegals have decided to go home, which has reduced our pool of customers and reduced our income. This loss may be slightly tempered by the increase in customers who own their own washers and dryers but have decided to forego replacing or repairing this equipment. The bottom line is that Laundromat income has dropped during the recession. How then do you generate the desired financial return?
FOUR CONCERNS
Laundromat expenses are increasing all the time. The four largest expenses are labor, lease, note and utilities.
Labor expenses have been fairly stable, and are probably equal to or have even lagged when compared to inflation. Lease expenses are compounded expenses where the increases are on top of last year’s increases. Lease expenses (especially if they include property taxes) never go down. Note payments, on the other hand, are the cost of equipment loans (or acquiring the business) and are usually the same month to month.
Utility expenses have four components: electricity, gas, water and sewer. The cost of electricity is fairly stable and does not vary much in the marketplace. The cost of electricity is somewhat regulated by the local public-service commission. These rates are also tied to the cost of energy. More and more electrical power plants are using natural gas to generate electricity, thus creating an increased demand for natural gas. More demand equals higher prices. Natural gas is typically the largest component of a store’s utility bill. Natural gas is widely deregulated, and a large number of Laundromats have been “burned” by locking in natural-gas prices at a high rate with energy companies. Some of us have been purchasing deregulated gas at a price above an industry standard (such as the Henry Hub price). Right now, natural-gas prices are historically low. Gas prices spiked during 2005 and 2006. Once the economy turns around, the cost of all energy sources will go up, especially natural gas. Again, it’s a simple case of supply and demand.
Water and sewer rates have increased dramatically during the recent years and show no signs of leveling off. It is commonly more expense to dispose of a gallon of water than to buy the same amount. Financing sewer plants and increased demand for improved water quality have led to skyrocketing sewer costs.
Laundromat expenses increase every year. Armed with this information, Part 2 of this article will focus on Laundromat pricing vs. inflation and what we are really selling.
Check back Wednesday, Feb. 2, for Part 2 of this story.
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].