The ‘R’ Word

By Bob Nieman | Dec 30, 2009

Want to see the recession’s impact first hand? Hang around the Pizza Hut parking lot in Muskegon, Mich., for a while.

The typically bustling lot has been enjoying less traffic in the last year or so. Although this may in fact serve as barometer for the public’s increasing disdain for below-average pizza, it’s more likely an accurate gauge of how deeply the recession has cut into many American’s wallets – as well as into the bottom line of the Muskegon Laundromat, located just behind said ’Za Hut.

“Many of my customers have chosen to wash less frequently in order to have money for other basic needs,” said Larry Adamski, who owns the Muskegon Laundromat. “The general population has definitely tightened its purse strings, as have I. My business is experiencing the worst economic conditions since I started in business more than 40 years ago. With an unemployment rate running around 15 percent, all businesses in Michigan are struggling to survive, and my business is no exception. Fortunately, I have six figures of cash sitting on the sidelines to ensure my survival; businesses not so well funded are failing almost daily.”

Of course, some self-service laundry businesses are still “up.”

“Overall, business is up year over year, but we contribute some of this to the fact that our store is still in its growth phase, just two and a half years old,” said a Chicago area laundry owner, who wished to remain anonymous. “We are seeing big swings in week-over-week income, sometimes varying by more than 30 percent.

“When speaking with our customers, it is amazing how many are out of work and have been searching for employment for some time,” he added. “Our government might state 10 percent unemployment for Illinois, but the number is definitely higher in our area. Even though the financial markets have made a recovery since its March lows, the net effect to our customers is zero.  Our customers are not invested in the market, so they have not seen their wealth appreciate at all. The only thing they see is the lack of employment in our area.”

“The recession has probably hurt my drop-off business and my ancillary profit centers,” said Keith Griffin of Super Suds Coin Laundries, a chain based in Beebe, Ark. “But it hasn't effected my self-service business. I haven't grown my gross as much as last year, but it isn't shrinking.”

In fact, Griffin has continued to buy and build stores during the recession.

However, many operators are in Adamski’s shoes. In Gloucester, Mass., Jim Whitmore’s WSI Laundry Corp. is off, on average, 15 percent to 20 percent, he said.

“Customers are economizing and shopping price like never before,” Whitmore admitted. “There also seems to be some counter, long-term trending away from larger machines.”

In Illinois, Dion Marcionetti’s laundries were down only between 2 percent and 8 percent at the end of November and the same year-to-date, but the weekly changes have been much more drastic.

“I believe that our customers are trying to get the best value for their money,” said Marcionetti of Laundry Concepts in Addison, Ill. “Our 80-pound washers are producing more income than any other size. I think customers are overloading the washers to try to get the laundry done. I also believe that they are doing laundry less frequently, thus the dramatic weekly gross volume changes.”

“Gross sales are down 5 percent for the year,” said Duane King of LMARIES in Bowling Green, Ohio. “The largest hit in sales is in snack, soda and soap vending, along with entertainment sales, such as my pool table, air hockey and video game. Washer and dryer sales were down just a couple of percentage points for 2009, which may not be attributed to the economy, since I have two competitors who have sold out and the new owners have renovated the stores. Also, the local university has changed to free wash and dry in their dorms.

“In addition to spending less on vending and entertainment, my customers are changing their laundry times – coming in early in the morning to catch my sale prices from 2 a.m. to 9 a.m. I’ve also noticed a slight increase in bonus money issued on cards during the last six months; when customers put $20 on their laundry cards, they receive a $2 bonus.”
 
Business has been no easier on the distributor side. “The main marketing focus of my distributorship is a seminar that I’ve done for 17 years,” said Stephen Bean of Universal Coin Laundry Machinery, LLC, in Royal Oak, Mich. “I’ve noticed that I’m getting less people attending the seminar, but those that do attend are very qualified. There are three ingredients in what I do – you have to find the customer, you have to do the real estate and you have to get them financed. These days, I have the clients, we have the real estate, but the financing is the difficulty.”

Bean also owns a 5,500-square-foot, 24-hour laundry in Detroit that is “continually growing,” he said.

New Ways of Doing Business

Clearly, 2008-09 ushered in some new rules for running a successful self-service laundry.

“The theme for last year was to cut back as hard and fast as possible,” stated Jeffrey Barman of Wonder Wash Family Laundry Centers in California.

“We’ve cut every cost we possibly can,” Bean said. “We’ve gotten rid of every extraneous thing that we bought. I am working more hours per week than ever. When you get into a bad situation, it forces you to sharpen your skills. In the final analysis, in retrospect, it’s not so bad. But we’ve had to cut costs.

“And we’ve added more construction companies to our roster of firms that build our laundries so that they can battle it out between them to get our order,” he added. “We’ve become far more aggressive and demanding, but our basic method of marketing remains the same.”

However, one area in which Adamski avoided cutting back has been marketing and advertising.

“I have increased my advertising budget, began offering limited daily discounts on washers, and set up a "Mother Hubbard's Cupboard" to distribute free food items to customers who need a little help with their budgets,” Adamski explained.

The quality of your customers’ laundry “experience” is another area in which to avoid cutting any corners.

“We have tried not to make any changes,” Marcionetti said. “We believe that reducing the quality of service – such as lowering dry time, lowering hot water heater temperature, lowering dryer temperature – will deteriorate the core of your business. We sell service, and we need to keep that in mind in all our decisions.”

Markets in Trouble

Obviously, some coin laundry businesses are up, while others are down. Similarly, the recession has hit some marketplaces harder than others.

“There have been demographic changes that have occurred, especially in Michigan, where we’ve had auto plants close,” said Bean, citing a strong example. “There had been a million renters near the auto plants, and they’re gone. In Michigan, it’s a mess – big time.”

In addition, states in the South, such as Florida, Georgia and the Carolinas, have flipped during the recession from putting up robust employment numbers envied by other regions to posting many of America's most painful rates, according to Reuters.

Seven southern states now have double-digit unemployment rates, an unusual concentration in a country with a national rate last June of 9.5 percent. The list includes Florida, which two years earlier had one of the lowest jobless rates, at 4 percent.

"This recession has walloped the Sun Belt in ways that previous recessions have not," said economist James Diffley, managing director for regional services at IHS Global Insight in Philadelphia.

Georgia, where unemployment punched into double digits for the first time ever last June with a 10.1 percent rate, two years earlier had a jobless reading of 4.5 percent, according to data from the U.S. Bureau of Labor Statistics.

Now with an 11 percent rate, North Carolina in June 2007 had a jobless rate of 4.7 percent. Neighboring South Carolina reported unemployment in June 2007 of 5.5 percent; last June it held the region's highest unemployment level, 12.1 percent.

The pace of job losses in the region has been startling, with jumps in unemployment rates in southern states of 4 and even 5 percentage points in the year through last June, even as the national unemployment rate rose 3.9 percentage points.

Even southern states short of the 10 percent level, such as Mississippi at 9 percent, West Virginia at 9.2 percent and Arkansas at 7.1, have endured big jumps in unemployment.

Alabama's jobless rate doubled in the year through last June to 10.1 percent.

Other states scattered throughout the country, such as Michigan, California, Nevada and Rhode Island, have also posted unemployment rates over 10 percent.

Some economists blame America's housing crisis for much of the South's severe jobs downturn, a trend that has sharply lowered tax collections just as cities, counties and states in the region wrestle with higher spending for healthcare, unemployment insurance and other services.

Eye-popping declines in home construction also hurt building materials firms in southern states such as Florida and Georgia. Manufacturing cutbacks, including those at car plants in Kentucky and Alabama, also hit the region's employment rolls.

Immigrant Population Drops

Another negative trend for laundry owners has centered on immigration statistics. The share of the U.S. population composed of immigrants dropped slightly in 2008, reversing a 40-year trend that helped fuel the nation's explosive growth and diversity.

The foreign-born dropped from 12.6 percent in 2007 to 12.5 percent, according to recent Census data. The share had been rising every decade since 1970, when it hit a low of 4.7 percent.

The dip is more pronounced in areas that have taken a big economic hit in the recession, such as Los Angeles and Phoenix. Areas doing better such as Houston and Dallas did not experience as large a drop – an indication that immigrant numbers could rise again as soon as the economy rebounds.

"It's short-term, but it's a real marker in terms of immigration slowdown," said William Frey, demographer at the Brookings Institution.

Since 2000, every state has shown growth in immigrant populations, he added. From 2007 to 2008, however, the share of the foreign-born dropped in 25 states and in 54 of the 102 largest metro areas.

Mexican immigrants, who held a significant share of jobs in the hard-hit construction industry, showed the largest overall decline among the foreign-born: down about 300,000 to 11.4 million.

Arrivals of undocumented workers "are way down," said Jeffrey Passel, demographer at the Pew Hispanic Center.

Research based on other Census surveys indicates that the foreign-born who are leaving tend to be less-educated Hispanics ages 18 to 40, says Steven Camarota, research director for the Center for Immigration Studies.

"What that implies very strongly is that it's a significant decline in the illegal population," he said, attributing the drop to stricter border enforcement and a poor job market.

What’s more, arrests of illegal immigrants along the California-Mexico border declined 25 percent this year as a weak economy and bolstered enforcement efforts appear to be discouraging treks north, U.S. Customs and Border Protection officials said.

The downward trend is evident across the Southwest border as apprehensions fell to levels not seen since the early 1970s. The U.S. Border Patrol arrested 556,000 people last year, 152,200 of them in California, according to statistics released for the federal fiscal year ending September 30.

Apprehension levels, considered the best available indicator of illegal crossing activity, have fluctuated for decades, but have steadily declined since 2000, when there were 1.6 million arrests.

The primary factor driving down illegal crossings is the economy, most experts say. With the disappearance of once-plentiful jobs in the construction and service industries, immigrants have fewer reasons to leave their towns.

Apartment Vacancy Rate Skyrockets

Another industry bellwether has been apartment vacancy rates, given the fact that the traditional coin laundry customers are often apartment dwellers. The news here isn’t very positive either.

The U.S. apartment market in the third quarter turned in one of its weakest performances ever as the national vacancy rate hit a 23-year high despite being propped up by landlords willing to take lower rent to keep tenants, according to real estate research firm Reis, Inc.

The U.S. apartment vacancy rate rose to 7.8 percent in the third quarter, its highest since 1986, according to the report. Vacancies have been rising since the third quarter of 2007, according to Reis.

The U.S. apartment market has been reeling for more than a year as its main demand driver, job growth, disappeared in the recession.

In fact, the record level of apartment vacancies was blamed for a third quarter fall in revenue for Mac-Gray Corp. The company said revenue from its core laundry facilities management business fell by 4.6 percent for the quarter ended last September 30, compared with the same period in 2008.

“Apartment vacancies nationwide are at their highest levels since 1986,” said CEO Stewart G MacDonald. “It appears that overall apartment occupancy will not begin to increase until employment levels begin to improve.”

MacDonald attributed the downturn in Mac-Gray's commercial laundry equipment sales to a lack of laundromat openings and a slow-down in equipment replacement by both laundromats and multi-housing operations.

Less Laundering to Go Around

Another effect of the recession is the fact that some people are simply washing their clothes less often – or least less often at the local laundromat.

“Laundry is a nondiscretionary product – you have to do your wash,” Bean noted. “But some people can go to a neighbor or relative to wash. And some people, although it’s extreme, will do their wash in their bathtubs.”

“They are making due with less,” Whitmore agreed. “Visiting less often, overloading machines more often, avoiding impulse buys and convenience purchases of expensive, small-packaged detergents.”

Perhaps partially in response to this trend, Procter & Gamble has jumped into the so-called “laundry convenience” category by taking its Tide Swash – a product aimed at consumers trying to put off doing laundry – national this month via e-retailers Amazon and Drugstore.com.

The move follows P&G’s test market of the products in Columbus, Ohio, and Lexington, Ky. Swash, which carries the tagline, “Swash It Out,” targets both young professionals and college students by providing a way to instantly refresh and remove wrinkles from previously worn pieces of clothing without going to the laundromat.

Small-Business Credit Cards

Another sign of the times – plastic. That's about all banks are going to offer – and the terms are much less favorable than traditional lines of credit, according to a CNNMoney.com report.

In one notable example, JPMorgan Chase recently its Ink suite of four new small-business credit cards, with interest rates as high as 30 percent. Meanwhile, the bank has slashed other small-business lending. Its lending through the Small Business Administration's primary loan program fell 80 percent last year, from 6,100 loans in 2008 to 1,250 loans in the SBA's 2009 fiscal year, which ended Sept. 30.

Unlike credit cards, which carry variable interest rates and credit limits that can be cut or changed at the bank's whim, SBA loans offer a fixed amount of money at an interest rate capped by the government. They're safer than credit cards, but these kinds of traditional loans have dried up throughout the recession.

What credit remains is coming most often from credit cards. Almost 60 percent of small-business owners have used a credit card in the past year for business capital, according to a recent survey by the National Small Business Association, an industry trade group. In contrast, 45 percent of those polled had a bank loan.

"Today's entrepreneurs are severely limited in their ability to finance new business ventures by leveraging the value of their home, borrowing from friends and family, or securing a traditional loan," NSBA Chair Keith Ashmus wrote in an accompanying report. "This leaves one clear, often unattractive option: credit cards."

The number of small-business loans for $100,000 to $1 million fell 23 percent in 2008, according to an SBA analysis released last May. But the number of loans under $100,000 rose 16 percent. Charles Ou, the report's author, attributes most of that increase to an increase in credit card accounts.

Possible Good News?

At press time, President Obama had announced a proposal to help reinvigorate job growth in the U.S. with a key focus on small business – emphasizing the role of small businesses in job creation.

During the address, four key tax provisions were highlighted, three of which would expand on provisions passed in American Recovery and Reinvestment Act of 2009. Those three provisions would provide:

• A one-year elimination of the tax on capital gains, up from the current – but temporary – 75 percent exclusion.

• A one-year extension on enhanced Section 179 expensing of up to $250,000 in 2010.

• A one-year extension allowing for accelerated bonus depreciation through 2010.

These relatively moderate expansions of ARRA tax provisions should help small-business owners reinvest in their business and have more cash on-hand.

The fourth tax proposal would provide a short-term employment tax credit. Though no specifics were outlined, Obama stated that such a credit would be available to help small businesses add and keep employees. The two leading proposals in this line of thinking are a hiring tax credit, which would be a temporary elimination of payroll taxes on new employees, and the other is a payroll tax holiday on all employees. While both proposals certainly can help small-business owners, it is doubtful either would be enough incentive alone for a small-business owner to hire a new employee, unless that owner had already been considering a new hire.

Obama also proposed critical funding to extend SBA lending provisions passed under ARRA, which recently ran out of money, forcing many small businesses to hold off on growth plans. Under the ARRA proposal, SBA 7(a) loans were given a 90 percent guarantee, and upfront borrower fees were eliminated. The final key provision Obama outlined was a possible mechanism to use TARP funds to support small-business lending.

A Few Silver Linings?

• Natural Gas: The American Gas Association recently announced that natural gas customers can expect lower bills on average this winter compared to last year. Plentiful domestic natural gas supplies and lower wellhead prices will drive bills down this winter and provide relief for natural gas customers struggling in a troubled economy, according to the trade organization. This is certainly good news to many laundry owners.

Some factors, particularly severe weather, could affect the demand for, and price of, natural gas. But because utilities purchase natural gas from suppliers throughout the year and store it in underground facilities for winter delivery, barring extreme temperatures for extended periods natural gas prices will likely remain low this year.

• Back to the Bargaining Table: “I've never seen a better time to negotiate or re-negotiate a commercial lease,” Adamski said. “However, I own my building, so that fact holds no direct benefit for me. In fact, I'm increasing my rent to myself by 10 percent in 2010.”

“Landlord renegotiating is a great theory, but I wonder how many people really do it,” Barman mused.

Stephen Bean, for one, isn’t afraid to lean on his landlords. “We’ve put a lot of pressure on landlords,” he said. “We want them to pay a certain percentage of the build out for the honor and privilege of our client being there. Five years ago, they would have said, ‘Are you nuts?’ Now, they’re happy to do that.

“The path of least resistance is the landlord. When you leased space five years ago, you leased it under certain demographic and economic scenarios. That’s all changed. People are going back to the landlord and saying, ‘The bottom line is that the demographics have changed and the economy has changed, so I can’t really justify paying you the rent I paid before based on the previous set of conditions.’ That’s a fact. And, in many instances, the landlord doesn’t have a choice. You’re already there. You’ve got this big laundry in there – what are they going to do, move it?”

• Cost-Effective Advertising: “If you run radio and TV ads, you can negotiate,” Bean said. “I find that it’s very difficult to negotiate very much with print ads, although it’s certainly worth a try. We’ve become much more of a negotiating economy and a couponing economy.”

“Some advertising rates have been favorable, and I have taken advantage of those situations,” King added.


• Deals from Manufacturers and Distributors: “Cash is king,” Whitmore said. “As a buyer, distributors sharpen their pencils a little better than during boom times.”

And, certainly, industry manufacturers are offering a number of incentives and financing specials for qualified buyers.

Turning It Around

So, when will the economy turn around?

“In Michigan, it’s going to be a long time before it turns around,” Bean said. “I don’t think the federal government does anything for the small-business owner. They do a lot for the big banks and the Wall Street types, but I don’t see anybody doing anything for me.”

Barman concurred. “Economic recovery for our industry, especially smaller operators, will lag behind the general recovery,” he said. “I expect more of the same as 2009, though perhaps not as bad as the second half of 2008. However, if there is a spike in natural gas, look out below for failing stores. Store values will be diminished until small-business financing opens up again. A big theme for 2010 will be the slow rollout of credit card processing for the equipment, and new store construction will be quite low.”

“Honestly, the turnaround is years away,” added one Midwestern laundry owner. “Until employment turns around, our customers will continue to suffer. Some rather large manufactures in the area have laid many people off. If those jobs become outsourced – as is the ‘American greed way’ – we will never have the customer base that once was here.”

Permanent Changes: Good or Bad?

Will the coin laundry industry ever be the same again?

“The laundry owner is going to have to be more proactive and less reactive,” Bean explained. “They cannot operate on the assumption that, just because people live within a certain proximity to the laundry, they’re going to go there, regardless of the condition of the laundry. Owners are going to have to be better at what they do. They’re going to have to far more respectful to the customer and they’re going to have to be much more focused on proactively running the business, rather than just ‘owning’ it. Owning it is not enough anymore.”

And those “owners” simply may not survive.

“I think the industry will have more opportunities than we’ve had before slowdown,” said Griffin, who anticipates a two- to five-year recovery period. “In the long run, it has put some inefficient operators out of business and has slowed development of new stores, which should have a positive effect on existing operators”

“I still believe that the industry fulfills a need that has to be addressed,” Marcionetti said. “I think you will see more large-capacity, energy-saving laundries being built, and the smaller antiquated laundries will close.”

“Our industry is always progressing, whether we are in recession or not,” Adamski concluded. “I expect this recession will continue to weed out the weak and strengthen the survivors in the long run. Hopefully, there will always be a place for well-run, progressive laundromats.”