Taking Stock of the Coin Laundry Business

By | Apr 27, 2009

Fred Collins is a former stockbroker who also has been a self-service laundry operator since 1982. Today, Collins owns four smaller stores in northern California, ranging in size from 1,250 square feet to about 1,400 square feet.

How did you get involved in the laundry business?

I was attracted to the write-off. I was working as a stockbroker, and I had a really good year in 1982, so I needed a tax deduction.

In addition, I had helped a friend get into the laundry business a couple of years before that. And he kept telling me that it was a great business to get into.

However, when he got into the business, he hadn’t told me the full story. When he bought his place, I asked him how much the seller wanted. He gave me a number, and I said, for that price, it’s a good deal. Only later did I find out that number was only the down payment.

But in those days, you could get a 10 percent investment tax credit on the whole purchase price. A few years after that, Wall Street was doing what they called leveraged buyouts. It was the rage. And I thought that might work in the laundry business. After all, I just couldn’t see how one could make any significant kind of money with a small laundry.

I came up with a formula for buying laundries, and the stores had to be within a certain area because at the time I still had my own business as a stockbroker to attend to. The laundries had to be within my county.

At the time, there were about 12 laundries in the area. As they started coming up for sale, I started buying. In September 1982, I bought the first one. In June 1985, I bought my second store. Both of them were kind of distressed businesses. They were on the verge of going out of business.

In 1999, I built a Laundromat. Then, about two years later, I exchanged my first laundry for two stores, using my first one as a down payment. It was a strange situation. The seller owned two stores in the southern part of the county, where I lived – and he lived in the northern part of the county, where I had my laundry.

I had been thinking about getting rid of that store because it wasn’t meeting my expectations, and he wanted it because it would give him three stores in that area. So we worked out a deal.

What is the largest number of laundries you’ve ever owned at one time?

Five.

The laundry business is a full-time business for you these days. Correct?

I like to tell people I am retired but that I have four great part-time businesses.

What are the keys to running a successful coin laundry business?

In my opinion, you’ve got to pay attention to the financial details. Those details can tell you a lot about how the business is running. It gives you an idea of where you need to attack to keep the business going.

Years ago, before I became a stockbroker, I worked for a management consulting firm. And one of the things we used to tell our customers was that you can make more money by reducing your expenses than by trying to increase your sales.

You know how much sales income you’re getting. Now, look around for ways to reduce expenses. At the time, in 1982, there were a lot of ways you could reduce expenses, most of them being energy-related.

Part of my method of operation is to try to minimize the amount of time I spend collecting quarters and maximize the amount of time I spend thinking about how to improve the business.

Unfortunately, many store owners just look at how much money they have coming in, and they don’t realize that this might not be enough to sustain their ability to reinvest in the business. If you don’t have a good profit margin, cash on cash – a good, positive cash flow in the area of about 30 percent to 35 percent – you don’t have enough money to reinvest in new equipment to stay current.

Also, you’ve got to start with enough capital. Don’t get too leveraged. Another key to success is to buy a laundry the right way – you can’t overpay for it. If you overpay for it, you’re just going to be paying money out to somebody else and not taking care of yourself.

Of course, you’ve got to be sure to keep the place clean. Some laundry owners have a tendency to let things go.

I pay the people who work for me well to keep it clean. I pay way above what people might think they should get paid. I don’t worry about the minimum wage, because I’m way over the minimum wage.

What are some of the hot-button issues for laundry operators in your area?

The three issues I see are rent, energy and water. The main issue in this area is rent.

My rents, in terms of percentage, run in the area of 40 percent of gross. I know that some other laundry owners around the country pay a much lower percentage in rent of their gross, even though their prices are sometimes a lot lower. However, their energy cost percentages are high, so they’re going to have a tough time unless they get the most efficient equipment. If not, they’re going to have difficulty reducing those energy price percentages.

Overall, if you’re getting 30 percent to 35 percent net cash flow, you’re OK. It doesn’t matter where your prices are. If you get that, it should be sufficient.

In addition, water is going to be much more important in the future because, with the increase in population, we will need to use water more efficiently.

The fact that frontloading washers have become more efficient provides a way to handle that water problem. Of course, you can’t control the rent; those are expenses you’re going to have to absorb. So you better pay attention to how this affects your profit-and-loss statement and, eventually, your balance sheet.

Do you lease your stores?

Yes. I wish I could buy. I would build a major laundry about 4,000 to 5,000 square feet.

What major trends are you noticing in this industry, particularly in your marketplace?

I see a trend toward large machines. I bought my most recent store about four years ago. Again, it was another distressed store. I think the owner probably would have closed it up. In fact, I eventually bought it for half of what he originally advertised it for. It stayed on the market for about a year and a half and I didn’t even look at it, because I knew that it was way overpriced.

When it became listed, I gave him a lowball offer, and he accepted it. As it turned out, once I really looked at the store, I think I actually overpaid for it.

However, this store had the room and the design to expand, so I started installing larger machines – and the more I put in the more business came in. That small store, which is only about 1,350 square feet, now has two 50-pound washers, four 40-pound machines and three 25-pound frontloaders.

Now the bottleneck in that store is the drying capacity. I’ve got to remodel in order to get to the point where, during the peak hours on Saturday and Sunday, I won’t have customer waiting in line.

Are you noticing any other trends in your market?

I think there is also a trend toward larger stores and card systems. With card technology, you can manage those bigger stores from a distance. If you have a 50- to 100-washer store, you may be earning enough income to hire a manager; and with a card system, you know that the money is there. You don’t have to worry about somebody stealing from you. You’ve got to control the business, and one of the trends I see is the move toward card systems to keep everything under control.

What is the biggest concern you hear from the customers in your area?

Pricing is always an issue for customers, but my pricing is handled in terms of water temperature, just like at a gas station. For instance, you can’t get premium gasoline for the regular price. Customers understand that concept.

However, I give them a break. On a cold water wash, my price is low. But on a hot water wash, it’s high. So there is quite a variation there. I got a lot of compliments from customers, thanking me for that type of pricing. They are happy to pay for the hot water, but they get kind of irritated to have to pay the same price for cold water. They don’t look at a wash as just a wash; they look at what they are really getting for that money they’re paying.

Basically, my system is tiered pricing, and I’ve been doing for about seven or eight years now. I used it to introduce small frontloaders into my store. I used it as a marketing tool. I lowballed it, and it made all the difference in the world.

Plus, I found that it is one of the keys to getting my energy percentage low. For example, if it takes $1.50 to run your laundry profitably if you had flat pricing, let’s say that you priced cold water washes at $1.25, warm water washes at $1.75 and hot water washes at $2. You’ll discover that you’ll get a higher average price than you will at a flat price of $1.50.

I kept track of turns. I set up the machines to count the turns – and that indeed was the case. I received a higher average price. And customers were willing to pay for it. They didn’t complain.

What’s the greatest technological advancement you’ve seen since you’ve been in the laundry business?

One of those things has been more energy-efficient water heating and the ability to get a high conversion rate of input to output BTUs. The energy savings have been very helpful. I put a new water heating system in one of my stores, and that store is now one of my lowest energy percentage laundries. Based on the income coming in, the electricity and gas are below 10 percent.

Of course, the card systems have been a great advancement. But in order to get the retrofits, they need to get the prices down.

Also, the frontloading washers that let you decrease the amount of energy and decrease the amount of water you need have been a great help. That’s one of the best things to happen in this industry. In addition, I see that some of the washers are designed with no sump, which saves many gallons of water. In all, frontloading machines are water-savers and energy-savers.

Moreover, another technological advance are variable frequency drives, which save energy because you don’t have that big surge of energy coming in when you start a motor.

Do you have a business philosophy that guides your decisions?

I ask myself, “What do the customers want?” There are many times I used to do my own laundry in the laundromats just to find out how it feels. What does that store feel like? I wanted to see the problems the customers ran into and see if I could discover how I could make the experience better for them.

My basic philosophy is that I want the best laundromat in the world that I can provide my customers for the money. This way the stores will serve me and my customers well.

What are your thoughts on vend pricing in your area?

I think the pricing is correct. This is because everybody here sort of follows my lead. Of course, there is no collusion; I don’t talk to any of the other laundry owners. But they do kind of follow my lead. I am the price leader. When I feel it’s necessary to raise prices, I do.

I’ve kept my cold water prices flat for a number of years. For toploaders, I’m at $2.25 for cold water, $2.75 for warm water and $3 for hot. I don’t have many toploaders, but people use them – and they pay the price. What I want to do is get them into the frontloaders.

My Neptunes are at $1.75, $2.25 and $2.75. For my 20-pounders, it’s a flat price of $2.50. The 25-pounders are $4. The 40-pounders are at $5. And the 55-pounders are at $6.

In terms of drying, with the fast-drying machines I use, I’m at five minutes for a quarter. I follow energy prices very closely, and I thought I was going to have to raise the price and find some way to do that, such as with a multi-coin start.

But that doesn’t sit well with me. Customers come in and try to figure out how much they need to dry; when they get to the end of the cycle, if they need to do one more cycle, they’ll put in another quarter. However, having to pop in two more quarters will be very distasteful.

I guess, if I have to, I’ll go to four and a half minutes of drying time for a quarter.

Also, regarding vending pricing and utilities, we use natural gas and electricity here, and one of the other energy-saving things I did years ago was to get time-of-use meters. And I discovered that 55 percent of my business comes at off-peak times; there was a great savings in that.

Of course, the utility company has now found a way to take away most of the savings. They have doubled the peak usage prices. Today, there is very little savings. Of course, if you can get your customers to wash during off-peak hours, that’s great.

Another thing I’ve looked into are solar panels, but the payback is too long. Despite the tax credits and rebates for businesses that install such systems, it’s a long payback.

Do you do a lot of marketing and advertising for your laundry business?

I’m located just north of San Francisco, and there are so few laundries here that I don’t really need to advertise. If I was in a different area or marketplace, I would have a different opinion.

In your experience, when a coin laundry fails, what is the most common reason for that failure?

Most of the stores I’ve seen go out of business here failed because they were either too small to keep up and compete, or their owners didn’t keep the businesses current and up to date.

Another issue is finding suitable rental space or finding a location that you can buy affordably. Real estate in this area is huge, and there is a major problem with rents in this area.

I don’t think there are any bad locations for Laundromats, as long as you have ample parking space. I was looking at all of my stores recently, and every one of them has a parking problem. But if you’ve got the space, even if you’re located out of the way, you will attract customers. And if don’t get enough customers without advertising, start advertising.

What is the biggest mistake you’ve ever made in this business?

Maybe not my biggest but certainly my most recent mistake was probably in not finding some outside advice in my negotiations with my landlord.

He was willing to give me a 10-year extension on the lease, but he wanted a buyout in the event that he sold the building and the new owner wanted to put a different business in.

The word I got back was that I refused to negotiate. But I laid out the parameters of what I wanted, and he refused to listen. I can’t talk with somebody who refuses to give an inch, even a little bit.

They almost ended up with an empty space, but they did lease it to someone in December. I think I might have been able to negotiate something better, if I could have found somebody to help me.

What are your business goals for 2008?

My goal is to retire – not retire, but get away from the daily management of the business. One of my future goals is to become an independent laundry consultant.

I think I know enough about the industry, but I also know my limitations. I can help somebody with the basics of negotiating a lease. I have worked with a couple of prospective laundry owners out here already. I’ve shown them how to buy a laundry. I can go in and look at a store. I can evaluate a profit-and-loss statement and look at the percentages. I know what kind of percentages a successful laundry should have. And I can suggest where they can make improvements to reduce the expenses.

Currently, I’m in the process of selling my stores. I’m not against buying again, but it would be a bigger store, and I would likely get other investors involved in it.

What advice would you give a new laundry owner just starting out in the business?

I would tell them that most of the salesmen in this industry are good, honest people – but they’re here to sell that business. Therefore, you’ve got to do your own analysis, and most people need help with that. Most people are not numbers people.

In your market, is the coin laundry business still a good business to get into?

In my point of view, this is the greatest business in the world. Yes, it’s still a good business to get into, without question. With all of the technological advances that we’ve had to make stores more efficient, it’s more expensive to get into the business and laundries are fairly high-priced. But if you have the right location, even if you pay a big price, the numbers will work out.

When potential store owners ask me about high rents, I tell them that rents are running about $2.50 to $3 a foot. For 1,500 square feet at $3, the rent would be $4,500.

But what difference does that make, if you’re able to make money. If you could pay $1 million for the square foot you’re standing on and sell it for $2 million, would you do it? Well, that’s the principle.