Laundromat are just like airlines, well sort of

[Anonymous]

I was reading an article in the WSJ today about the structural problems of the airlines and why they keep going into bankruptcy and it struck me that the laundromat industry has very similar problems. Just like two majors airlines were forced to file Chapter 11 last week, so may many laundromats due to the energy shock we are experiencing.

The similarities also tie to the fact of the high cost of the physical equipment. That when things go bad a new owner takes over at a lower capitalized cost, but likely suffers the same scenario down the road as we collectively do not learn. Both industries while having huge costs, have very small incremental costs to serve the next customer. Because of that both feel that the way to profits is to cut prices and try to make it up on volume.

Until mat owners learn to correctly price their products and not worry about what competitors are doing with their prices we are doomed to a similar fate as the airlines.

The moral here is keep up with understanding your full cost of providing your service (not just variable costs) and price accordingly.

[Anonymous]

And on a related note, how do you know when to replace equipment? There has to be a balance between:

1) saving money by running the stuff into the ground, then being screwed with a huge capital upgrade outlay, and

2) constantly pumping all your profits back into new equipment payments.

So how to figure out how to balance that out? Wish I knew!

[Maywood2]

Unfortunately, it's not as simple as "not worry about what competitors are doing with their prices", because the customers do know what the competitors are doing. Particularly once you hit the point of pain on their cost to do their laundry, they'll look around for other (reasonably convenient) laundries. And who knows where their point of pain is, until you've hit it?

The airlines have the same problem with competitor pricing -- anyone with a computer can find the lowest priced seat from New York to Florida... Price too much higher than the other guy, and you lose that customer. At least laundrymats are local in nature, with a limited number of competitors.

On the balance between running the equipment into the ground or never getting out from equipment note payments, I guess the "business school" answer is to replace equipment when it's no longer in your best interest to keep the old stuff running... could be frequent or impending maintenance costs, or lost income from downtime, or a perception that customers have of your old equipment being inferior to your competition, or larger utility costs to run older equipment, or...

(I realize that's no more of a real concrete answer than you had before... : )

[mike]

Another similarity between airlines and laundromats, is that the "marginal cost" of a seat/wash is very little, it is almost all profit once the fixed costs have been paid.


P.S. I'd love to be able to say, after somebody put their money into a machine..."sorry we're overbooked" no wash today, maybe tomorrow.

[pete f]

And on a related note, how do you know when to replace equipment? There has to be a balance between:

1) saving money by running the stuff into the ground, then being screwed with a huge capital upgrade outlay, and

2) constantly pumping all your profits back into new equipment payments.

So how to figure out how to balance that out? Wish I knew!

I figure roughly 10% of real cash flow should be earmarked for further re investment. There are always improvements to be made. Old equipment should be replaced when new equipment will do a much better job. This could be caused by many factors. Efficiency, customers preferences changed, high repairs costs, etc.

[William]

For the first time in a long time, airlines are paying more for fuel (utilities) than people. Also, even though airplanes are wildly expensive, their capital cost is still only the #3 or #4 item on their P&L.

You are right that we are similar. We also have high payroll and utility costs. And our capital costs are high, but easily absorbed over a long period.

Where we have an advantage in some markets is impact fees. They are the devil if you want to build a new laundry, but an angel if you have an existing laundry.

Airlines have to create this barrier to competition with their routes and hubs. We do not. I feel that we will always be a fragmented, mom and pop type operation as a result.

This is a good thing, as none of us (save Ken and Pete F) have the resources to go up against a big player. We are best served by staying local and doing a good job in our small markets.

One quarter at a time...

[Anonymous]

Airlines also have the equivalent of impact fees, its called airport gates. They are in very short supply and if you have them then you are in, if you don't you need to find someone that will sell you one at a very high cost.